CHINA GREEN AGRICULTURE, INC. 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 contain forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as the slow-down of the macro-economic environment inChina 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. In light of 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 byU.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 ("GreenNew Jersey "), a wholly-owned subsidiary of Green Nevada incorporated in theState 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'anHu 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)Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd. ("Wangtian"), a VIE controlled by Jinong through contractual agreements; (vii)Aksu Xindeguo Agricultural Materials Co., Ltd. ("Xindeguo"), a VIE controlled by Jinong through contractual agreements; (vii)Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd ("Xinyulei"), a VIE controlled by Jinong through contractual agreements; (ix)Sunwu County Xiangrong Agricultural Materials Co., Ltd. ("Xiangrong"), a VIE controlled by Jinong through contractual agreements; (x)Anhui Fengnong Seed Co., Ltd. ("Fengnong"), a VIE controlled by Jinong through contractual agreements; (xi)Beijing Gufeng Chemical Products Co., Ltd. , a wholly-owned subsidiary of Jinong in the PRC ("Gufeng"); and (xii)Beijing Tianjuyuan Fertilizer Co., Ltd. , Gufeng's wholly-owned subsidiary in the PRC ("Tianjuyuan"). Yuxing, Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the "the VIE Companies"; Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as "the sales VIEs" or "the sales VIE companies". Unless the context otherwise requires, all references to (i) "PRC" and "China" are tothe People's Republic of China ; (ii) "U.S. dollar," "$" and "US$" are toUnited States dollars; and (iii) "RMB", "Yuan" and Renminbi are to the currency of the PRC orChina . 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, Yuxing. Our primary business is fertilizer products, specifically 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. 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 79.6% and 82.5% of our total revenues for the Nine Months EndedMarch 31, 2020 and 2019, respectively. The sales VIEs generated 18.0% and 14.9% of our revenues for the Nine Months EndedMarch 31, 2020 and 2019, respectively. Yuxing serves as a research and development base for our fertilizer products. COVID-19 Update The novel coronavirus ("COVID-19") spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by theWorld Health Organization . The government and private sector responses to contain its spread began to significantly affect our operating businesses in February and March and will likely adversely affect nearly all of our operations in the second quarter, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic that may affect our future earnings, cash flows and financial condition include the closure of our various office buildings and facilities and the long-term effect on the demand for our products and services. Accordingly, significant estimates used in the preparation of our financial statements including the evaluations of bad debts expense. More information concerning effects of COVID-19 is included in Note 18. 24 Fertilizer Products As ofMarch 31, 2020 , we had developed and produced a total of 730 different fertilizer products in use, of which 145 were developed and produced by Jinong, 334 by Gufeng, and 251 by the VIE Companies.
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:
Three Months Ended
March 31, Change 2019 to 2020
2020 2019 Amount %
(metric tons)
Jinong 14,350 17,014 (2,664 ) (15.7 )%
Gufeng 167,125 190,691 (23,566 ) (12.4 )%
181,475 207,705 (26,230 ) (12.6 )%
Three Months Ended
March 31,
2020 2019
(revenue per tons)
Jinong $ 793 $ 1,324
Gufeng 341 357
Nine Months Ended
March 31, Change 2019 to 2020
2020 2019 Amount %
(metric tons)
Jinong 55,059 53,008 2,051 3.9 %
Gufeng 285,060 305,288 (20,228 ) (6.6 )%
340,118 358,296 (18,178 ) (5.1 )%
Nine Months Ended
March 31,
2020 2019
(revenue per tons)
Jinong $ 817 $ 1,209
Gufeng 332 349
For the three months ended March 31, 2020 , we sold approximately 181,475 tons of
fertilizer products, as compared to 207,705 metric tons for the three months
ended March 31, 2019 . For the three months ended March 31, 2020 , Jinong sold
approximately 14,350 metric tons of fertilizer products, a decrease of 2,664
metric tons, or 15.7%, as compared to 17,014 metric tons for the three months
ended March 31, 2019 . For the three months ended March 31, 2020 , Gufeng sold
approximately 167,125 metric tons of fertilizer products, a decrease of 23,566
metric tons, or 12.4% as compared to 190,691 metric tons for the three months
ended March 31, 2019 .
For the Nine Months ended March 31, 2020 , we sold approximately 340,118 metric
tons of fertilizer products, as compared to 358,296 metric tons for the Nine
Months ended March 31, 2019 . For the Nine Months ended March 31, 2020 , Jinong
sold approximately 55,059 metric tons of fertilizer products, an increase of
2,051 metric tons, or 3.9%, as compared to 53,008 metric tons for the Nine
Months ended March 31, 2019 . For the Nine Months ended March 31, 2020 , Gufeng
sold approximately 285,060 metric tons of fertilizer products, a decrease of
20,228 metric tons, or 6.6% as compared to 305,288 metric tons for the NineMonths endedMarch 31, 2019 . 25 Our sales of fertilizer products to customers in five provinces withinChina accounted for approximately 56.7% of our fertilizer revenue for the three months endedMarch 31, 2020 . Specifically, the provinces and their respective percentage contributing to our fertilizer revenues were:Hebei (25.9%),Heilongjiang (10.9%),Inner Mongolia (9.0%),Liaoning (6.8%) andShaanxi (4.1%). As ofMarch 31, 2020 , we had a total of 1,983 distributors covering 22 provinces, 4 autonomous regions and 4 central government-controlled municipalities inChina . Jinong had 1,157 distributors inChina . Jinong's sales are not dependent on any single distributor or any group of distributors. Jinong's top five distributors accounted for 4.9% of its fertilizer revenues for the three months endedMarch 31, 2020 . Gufeng had 328 distributors, including some large state-owned enterprises. Gufeng's top five distributors accounted for 81.7% of its revenues for the three months endedMarch 31, 2020 . 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 and municipalities that accounted for 94.1% of our agricultural products revenue for the three months endedMarch 31, 2020 wereShaanxi (88.3%),Shanghai (4.3%), andShenzhen (1.4%). Recent Developments New Products
During the three months ended
Strategic Acquisitions
On
26
June 30, 2016:
Cash Principal of
Payment for Notes for
Acquisition Acquisition
Company Name Business Scope (RMB[1]) (RMB)
Shaanxi Lishijie Sales of pesticides, agricultural
Agrochemical chemicals, chemical fertilizers,
Co., Ltd. agricultural materials; Manufacture and
sales of mulches. 10,000,000 3,000,000
Songyuan Promotion and consulting services regarding
Jinyangguang agricultural technologies; Retail sales of
Sannong Service chemical fertilizers (including compound
Co., Ltd. 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 Cultivation of crops; Storage, sales,
Zhenbai preliminary processing and logistics
Agriculture Co., distribution of agricultural by-products;
Ltd. Promotion and application of agricultural
technologies; Purchase and sales of
agricultural materials; Electronic
commerce. 3,000,000 12,000,000
Weinan City Promotion and application of new
Linwei District agricultural technologies; Professional
Wangtian prevention of plant diseases and insect
Agricultural pests; Sales of plant protection products,
Materials Co., plastic mulches, material, chemical
Ltd. fertilizers, pesticides, agricultural
medicines, micronutrient fertilizers,
hormones, agricultural machinery and
medicines, and gardening tools. 6,000,000 12,000,000
Aksu Xindeguo Wholesale and retail sales of pesticides;
Agricultural Sales of chemical fertilizers, packaged
Materials Co., seeds, agricultural mulches, micronutrient
Ltd. 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 Sales of chemical fertilizers, packaged
Xinyulei seeds, agricultural mulches, micronutrient
Eco-agriculture fertilizers, organic fertilizers, plant
Science and growth regulators, agricultural
Technology Co., machineries, and water economizers;
Ltd 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
(2) On
Jinong, discontinued the strategic acquisition agreements and the series of
contractual agreements with the shareholders of Zhenbai. In return, the
shareholders of Zhenbai agreed to tender the whole payment consideration in
the SAA back to the Company with early termination penalties. The convertible
notes paid to Zhenbai's shareholders and the accrued interest has been
forfeited.
27
January 1, 2017:
Cash Principal of
Payment for Notes for
Acquisition Acquisition
Company Name Business Scope (RMB[1]) (RMB)
Sunwu County Sales of pesticides, agricultural
Xiangrong chemicals, chemical fertilizers,
Agricultural agricultural materials;
4,000,000 6,000,000
Anhui Fengnong Wholesale and retail sales of pesticides; Seed Co., Ltd. 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
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 ofRMB45,000,000 (approximately$6349,500 ) 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 ofRMB 63,000,000 (approximately$8,889,300 ) 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 inChina . 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 regulation in the PRC, has lately become a sales 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 theChina Securities Regulatory Commission (the "CSRC") prior to the listing and trading of such special purpose vehicle's securities on an overseas stock exchange. OnSeptember 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 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 a third party under the exclusive option agreements. If necessary, they may transfer shares to our company without consideration. 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. 28 Results of Operations Three Months endedMarch 31, 2020 Compared to the Three Months endedMarch 31, 2019 . 2020 2019 Change $ Change % Sales Jinong 11,266,437 22,077,336 (10,810,899 ) -49.0 % Gufeng 57,094,310 67,167,427 (10,073,117 ) -15.0 % Yuxing 2,014,987 2,817,942 (802,955 ) -28.5 % Sales VIEs 15,450,955 16,057,865 (606,910 ) -3.8 % Net sales 85,826,689 108,120,570 (22,293,881 ) -20.6 % Cost of goods sold Jinong 8,193,579 11,091,419 (2,897,840 ) -26.1 % Gufeng 50,097,056 59,475,263 (9,378,207 ) -15.8 % Yuxing 1,847,112 2,445,246 (598,134 ) -24.5 % Sales VIEs 13,071,508 13,951,667 (880,159 ) -6.3 % Cost of goods sold 73,209,255 86,963,595 (13,754,340 ) -15.8 % Gross profit 12,617,434 21,156,975 (8,539,541 ) -40.4 % Operating expenses Selling expenses 2,273,818 6,880,994 (4,607,176 ) -67.0 %
General and administrative expenses 58,807,987 6,826,669 51,981,318 761.4 % Total operating expenses 61,081,805 13,707,663
47,374,142 345.6 %
Income from operations (48,464,371 ) 7,449,312 (55,913,683 ) -750.6 %
Other income (expense)
Other income (expense) (18,558 ) (101,350 ) 82,792 -81.7 %
Interest income 53,943 55,168 (1,225 ) -2.2 %
Interest expense (76,306 ) (145,621 ) 69,315 -47.6 %Total other income (expense) (40,921 ) (191,803 ) 150,882 -78.7 % Income before income taxes (48,505,292 ) 7,257,509 (55,762,801 ) -768.3 % Provision for income taxes 1,717,017 2,139,610 (422,593 ) -19.8 % Net income (50,222,309 ) 5,117,899 (55,340,208 ) -1081.3 % Other comprehensive income (loss) Foreign currency translation gain (loss) (6,753,216 ) 10,564,053 (17,317,269 ) -163.9 % Comprehensive income (loss) (56,975,525 ) 15,681,952
(72,657,477 ) -463.3 %
29
Net Sales Total net sales for the three months endedMarch 31, 2020 were$85,826,689 , a decrease of$22,293,881 or 20.6%, from$108,120,570 for the three months endedMarch 31, 2019 . This decrease was principally a result of the negative impact on sales volumes of the COVID-19 pandemic in the first quarter of 2020, especially for Jinong's and Gufeng's net sales. For the three months endedMarch 31, 2020 , Jinong's net sales decreased$10,810,899 , or 49%, to$11,266,437 from$22,077,336 for the three months endedMarch 31, 2019 . This decrease was mainly due to the effects of COVID-19 pandemic in the last three months. For the three months endedMarch 31, 2020 , Gufeng's net sales were$57,094,310 , a decrease of$10,073,117 , or 15.0%, from$67,167,427 for the three months endedMarch 31, 2019 . This decrease was mainly due to the effects of COVID-19 pandemic in the last three months. For the three months endedMarch 31, 2020 , Yuxing's net sales were$2,014,987 , a decrease of$802,955 or 28.5%, from$2,817,942 for the three months endedMarch 31, 2019 . The decrease was mainly due to the effects of COVID-19 pandemic in the last three months. For the three months endedMarch 31, 2020 , VIEs' net sales were$15,450,955 , a decrease of$606,910 or 3.8%, from$16,057,865 for the three months endedMarch 31, 2019 . The decrease was mainly due to the effects of COVID-19 pandemic in the last three months. Cost of Goods Sold
Total cost of goods sold for the three months ended
Cost of goods sold by Jinong for the three months endedMarch 31, 2020 was$8,193,579 , a decrease of$2,897,840 , or 26.1%, from$11,091,419 for the three months endedMarch 31, 2019 . The decrease in cost of goods was primarily due to the decrease in sale volume during the last three months primarily attributable to COVID-19.
Cost of goods sold by Gufeng for the three months endedMarch 31, 2020 was$50,097,056 , a decrease of$9,378,207 , or 15.8%, from$59,475,263 for the three months endedMarch 31, 2019 . This decrease was mainly due to the decrease in Gufeng's net sales during the last three months primarily attributable to COVID-19.
For three months ended
Gross Profit Total gross profit for the three months endedMarch 31, 2020 decreased by$8,539,541 , or 40.4%, to$12,617,434 , as compared to$21,156,975 for the three months endedMarch 31, 2019 . Gross profit margin was 14.7% and 19.6% for the three Months EndedMarch 31, 2020 and 2019, respectively. Gross profit generated by Jinong decreased by$7,913,059 , or 72.0%, to$3,072,858 for the three months endedMarch 31, 2020 from$10,985,917 for the three months endedMarch 31, 2019 . Gross profit margin from Jinong's sales was approximately 27.3% and 49.8% for the three Months EndedMarch 31, 2020 and 2019, respectively. The decrease in gross profit margin was mainly due to the lower sales prices.
For the three months endedMarch 31, 2020 , gross profit generated by Gufeng was$6,997,254 , a decrease of$694,910 , or 9.0%, from$7,692,164 for the three months endedMarch 31, 2019 . Gross profit margin from Gufeng's sales was approximately 12.3% and 11.5% for the three Months EndedMarch 31, 2020 and 2019, respectively. The decrease in gross profit was mainly due to the decrease in Gufeng's net sales during the last three months. 30
For the three months endedMarch 31, 2020 , gross profit generated by Yuxing was$167,875 , a decrease of$204,821 , or 55% from$372,696 for the three months endedMarch 31, 2019 . The gross profit margin was approximately 8.3% and 13.2% for the three months EndedMarch 31, 2020 and 2019, respectively. The decrease in gross profit percentage was mainly due to the increase in product costs. The increased production costs were due to manufacturing inefficiencies primarily attributable to COVID-19. Gross profit generated by VIEs increased by$273,249 , or 13.0%, to$2,379,447 for the three months endedMarch 31, 2020 from$2,106,198 for the three months endedMarch 31, 2019 . Gross profit margin from VIE's sales was approximately 15.4% and 13.1% for the three months EndedMarch 31, 2020 and 2019, respectively. The increase in gross profit percentage was mainly due to the
decrease in product costs. 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$2,273,818 , or 2.6%, of net sales for the three months endedMarch 31, 2020 , as compared to$6,880,994 , or 6.4%, of net sales for the three months endedMarch 31, 2019 , a decrease of$4,607,176 , or 67.0%. The selling expenses of Jinong for the three months endedMarch 31, 2020 were$1,899,000 or 16.9% of Jinong's net sales, as compared to selling expenses of$6,480,278 , or 29.4% of Jinong's net sales for the three months endedMarch 31 , 2019.The selling expenses of Yuxing were$11,235 or 0.6% of Yuxing's net sales for the three months endedMarch 31, 2020 , as compared to$14,779 , or 0.5% of Yuxing's net sales for the three months endedMarch 31, 2019 . The selling expenses of Gufeng were$67,190 or 0.1% of Gufeng's net sales for the three months endedMarch 31, 2020 , as compared to$46,228 , or 0.1% of Gufeng's net sales for the three months endedMarch 31, 2019 .
Selling Expenses - amortization of deferred assets
Our selling expenses - amortization of our deferred assets were 0 for the three
months ended
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$58,807,987 , or 68.5% of net sales for the three months endedMarch 31, 2020 , as compared to$6,826,669 , or 6.3% of net sales for the three months endedMarch 31, 2019 , an increase of$51,981,318 , or 761.4%. 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 three months endedMarch 31, 2020 was$18,558 , as compared to$101,350 for the three months endedMarch 31, 2019 , a decrease in expense of$82,792 , or 81.7%. The decrease in total other expense mainly resulted from the decrease in accretion expenses. Income Taxes Jinong is subject to a preferred tax rate of 15% as a result of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law ("EIT") that became effective onJanuary 1, 2008 . Jinong incurred income tax expenses of$0 for the three months endedMarch 31, 2020 , as compared to$0 for the three months endedMarch 31, 2019 . 31
Gufeng is subject to a tax rate of 25%, incurred income tax expenses of$0 for the three months endedMarch 31, 2020 , as compared to$1,775,037 for the three months endedMarch 31, 2019 , a decrease of$1,775,037 , or 100.0%, which was primarily due to Gufeng's decreased net income. Yuxing has no income tax for the three months EndedMarch 31, 2020 and 2019 as a result of being exempted from paying income tax due to its products fall into the tax exemption list set out in the EIT. Net Income (loss) Net income (loss) for the three months endedMarch 31, 2020 was$(50,222,309) , a decrease of$55,340,208 , or 1081.3%, compared to$5,117,899 for the three months endedMarch 31, 2019 . Net income as a percentage of total net sales was approximately -58.5% and 4.7% for the three months EndedMarch 31, 2020 and 2019, respectively. Nine Months endedMarch 31, 2020 Compared to the Nine Months endedMarch 31, 2019 . 2020 2019 Change $ Change % Sales Jinong 44,842,738 61,561,229 (16,718,491 ) -27.2 % Gufeng 95,684,076 106,996,368 (11,312,292 ) -10.6 % Yuxing 7,016,208 7,828,981 (812,773 ) -10.4 % Sales VIEs 38,670,247 41,943,261 (3,273,014 ) -7.8 % Net sales 186,213,269 218,329,839 (32,116,570 ) -14.7 % Cost of goods sold Jinong 28,814,001 31,289,473 (2,475,472 ) -7.9 % Gufeng 84,307,031 94,544,943 (10,237,912 ) -10.8 % Yuxing 6,009,429 6,658,975 (649,546 ) -9.8 % Sales VIEs 32,485,642 35,965,608 (3,479,966 ) -9.7 % Cost of goods sold 151,616,103 168,458,999 (16,842,896 ) -10.0 % Gross profit 34,597,166 49,870,840 (15,273,674 ) -30.6 % Operating expenses Selling expenses 9,761,145 18,370,524 (8,609,379 ) -46.9 %
General and administrative expenses 107,911,310 9,036,397 98,874,913 1094.2 % Total operating expenses 117,672,455 27,406,921
90,265,534 329.4 %
Income from operations (83,075,289 ) 22,463,919 (105,539,208 ) -469.8 %
Other income (expense)
Other income (expense) (122,012 ) (327,433 ) 205,421 -62.7 %
Interest income 160,829 278,509 (117,680 ) -42.3 %
Interest expense (241,004 ) (457,885 ) 216,881 -47.4 %Total other income (expense) (202,187 ) (506,809 ) 304,622 -60.1 % Income before income taxes (83,277,476 ) 21,957,110 (105,234,586 ) -479.3 % Provision for income taxes 1,341,513 5,321,671 (3,980,158 ) -74.8 % Net income (84,618,989 ) 16,635,439 (101,254,428 ) -608.7 % Other comprehensive income (loss) Foreign currency translation gain (loss) (13,789,719 ) (5,895,808 ) (7,893,911 ) 133.9 % Comprehensive income (loss) (98,408,708 ) 10,739,631
(109,148,339 ) -1016.3 %
32
Net Sales Total net sales for the Nine Months endedMarch 31, 2020 were$186,213,269 a decrease of$32,116,570 or 14.7%, from$218,329,839 for the Nine Months endedMarch 31, 2019 . This decrease was principally a result of the negative impact on sales volumes of the COVID-19 pandemic in the first quarter of 2020, especially for Jinong's and Gufeng's net sales. For the Nine Months endedMarch 31, 2020 , Jinong's net sales decreased$16,718,491 , or 27.2%, to$44,842,738 from$61,561,229 for the Nine Months endedMarch 31, 2019 . This decrease was mainly due to the effects of COVID-19 pandemic in the last three months. For the Nine Months endedMarch 31, 2020 , Gufeng's net sales were$95,684,076 , a decrease of$11,312,292 , or 10.6%, from$106,996,368 for the Nine Months endedMarch 31, 2019 . This decrease was mainly due to the effects of COVID-19 pandemic in the last three months. For the Nine Months endedMarch 31, 2020 , Yuxing's net sales were$7,016,208 , a decrease of$812,773 or 10.4%, from$7,828,981 for the Nine Months endedMarch 31, 2019 . This decrease was mainly due to the effects of COVID-19 pandemic
in the last three months.
For the Nine Months endedMarch 31, 2020 , VIEs' net sales were$38,670,247 , a decrease of$3,273,014 , or 7.8%, from$41,943,261 for the Nine Months endedMarch 31, 2019 . This decrease was mainly due to the effects of COVID-19 pandemic in the last three months. Cost of Goods Sold Total cost of goods sold for the Nine Months endedMarch 31, 2020 was$151,616,103 , a decrease of$16,842,896 , or 10.0%, from$168,458,999 for the Nine Months endedMarch 31, 2019 . The decrease was mainly due to the decrease in Gufeng's and VIEs' cost of goods sold which decreased 10.8% and 9.7% respectively. Cost of goods sold by Jinong for the Nine Months endedMarch 31, 2020 was$28,814,001 , a decrease of$2,475,472 , or 7.9%, from$31,289,473 for the Nine Months endedMarch 31, 2019 . The decrease in cost of goods was primarily due to the decrease in sales volume during the last Nine Months primarily attributable to COVID-19.
Cost of goods sold by Gufeng for the Nine Months ended
For Nine Months endedMarch 31, 2020 , cost of goods sold by Yuxing was$6,009,429 , a decrease of$649,546 , or 9.8%, from$6,658,975 for the Nine Months endedMarch 31, 2019 . This decrease was mainly due to the decrease in Yuxing's net sales during the last Nine Months primarily attributable to COVID-19. For Nine Months endedMarch 31, 2020 , cost of goods sold by VIEs was$32,485,642 , a decrease of$3,479,966 , or 9.7%, from$35,965,608 for the Nine Months endedMarch 31, 2019 . This decrease was mainly due to the decrease in VIEs' net sales during the last Nine Months primarily attributable to COVID-19. Gross Profit Total gross profit for the Nine Months endedMarch 31, 2020 decreased by$15,273,674 , or 30.6%, to$34,597,166 , as compared to$49,870,840 for the Nine Months endedMarch 31, 2019 . Gross profit margin was 18.6% and 22.8% for the Nine Months EndedMarch 31, 2020 and 2019, respectively. Gross profit generated by Jinong decreased by$14,243,019 , or 47.1%, to$16,028,737 for the Nine Months endedMarch 31, 2020 from$30,271,756 for the Nine Months endedMarch 31, 2019 . Gross profit margin from Jinong's sales was approximately 35.7% and 49.2% for the Nine Months EndedMarch 31, 2020 and 2019, respectively. The decrease in gross profit margin was mainly due to the lower sales prices.
For the Nine Months endedMarch 31, 2020 , gross profit generated by Gufeng was$11,377,045 , a decrease of$1,074,380 , or 8.6%, from$12,451,425 for the Nine Months endedMarch 31, 2019 . Gross profit margin from Gufeng's sales was approximately 11.9% and 11.6% for the Nine Months EndedMarch 31, 2020 and 2019, respectively. The decrease in gross profit was mainly due to the decrease in net sales. 33
For the Nine Months endedMarch 31, 2020 , gross profit generated by Yuxing was$1,006,779 , a decrease of$163,227 , or 14.0% from$1,170,006 for the Nine Months endedMarch 31, 2019 . The gross profit margin was approximately 14.3% and 14.9% for the Nine Months EndedMarch 31, 2020 and 2019, respectively. The decrease in gross profit percentage was mainly due to the increase in product costs. Gross profit generated by VIEs increased by$206,952 , or 3.5%, to$6,184,605 for the Nine Months endedMarch 31, 2020 from$5,977,653 for the Nine Months endedMarch 31, 2019 . Gross profit margin from VIE's sales was approximately 16.0% and 14.3% for the Nine Months EndedMarch 31, 2020 and 2019, respectively. The increase in gross profit percentage was mainly due to the decrease in product costs. 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$9,761,145 , or 5.2%, of net sales for the Nine Months endedMarch 31, 2020 , as compared to$18,370,524 , or 8.4%, of net sales for the Nine Months endedMarch 31, 2019 , a decrease of$8,609,379 or 46.9%. The selling expenses of Jinong for the Nine Months endedMarch 31, 2020 were$8,726,383 or 19.5% of Jinong's net sales, as compared to selling expenses of$16,538,328 , or 26.9% of Jinong's net sales for the Nine Months endedMarch 31, 2019 . The selling expenses of Yuxing were$29,459 or 0.4% of Yuxing's net sales for the Nine Months endedMarch 31, 2020 , as compared to$42,952 or 0.5% of Yuxing's net sales for the Nine Months endedMarch 31, 2019 . The selling expenses of Gufeng were$217,074 or 0.2% of Gufeng's net sales for the Nine Months endedMarch 31, 2020 , as compared to$331,949 or 0.3% of Gufeng's net sales for the Nine Months endedMarch 31, 2019 .
Selling Expenses - amortization of deferred assets
Our selling expenses - amortization of our deferred assets were 0 for the Nine
Months ended
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$107,911,310 , or 58.0% of net sales for the Nine Months endedMarch 31, 2020 , as compared to$9,036,397 , or 4.1% of net sales for the Nine Months endedMarch 31, 2019 , an increase of$98,874,913 ,
or 1094.2%. 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 Nine Months endedMarch 31, 2020 was$122,012 , as compared to$327,433 for the Nine Months endedMarch 31, 2019 , a decrease in expense of$205,421 , or 62.7%. The decrease in total other expense resulted from the decrease in accretion expenses. Income Taxes Jinong is subject to a preferred tax rate of 15% as a result of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law ("EIT") that became effective onJanuary 1, 2008 . Jinong incurred income tax expenses of$0 for the Nine Months endedMarch 31, 2020 , as compared to$ 1,007,503 for the Nine Months endedMarch 31, 2019 , a decrease of 1,007,503, or 100.0%.
Gufeng is subject to a tax rate of 25%, incurred income tax expenses of$0 for the Nine Months endedMarch 31, 2020 , as compared to$2,768,465 for the Nine Months endedMarch 31, 2019 , a decrease of$2,768,465 , or 100.0%, which was primarily due to Gufeng's decreased net income. Yuxing has no income tax for the Nine Months EndedMarch 31, 2020 and 2019 as a result of being exempted from paying income tax due to its products fall into the tax exemption list set out in the EIT. Net Income (loss) Net income (loss) for the Nine Months endedMarch 31, 2020 was$(84,618,989) , a decrease of$101,254,428 , or 608.7%, compared to$16,635,439 for the Nine Months endedMarch 31, 2019 . Net income as a percentage of total net sales was approximately -45.4% and 7.6% for the Nine Months EndedMarch 31, 2020 and
2019, respectively.
Discussion of Segment Profitability Measures
As ofMarch 31, 2020 , 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.
34
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 by $15,954,984 , or 279.5%, to $(10,245,799)
for Nine Months ended March 31, 2020 , from $5,709,185 for the Nine Months ended
March 31, 2019 . The decrease was principally due to the increase in generaland administrative expense.
For Gufeng, the net income decreased by
For Yuxing, the net income decreased$3,178,387 , or 91.4%, to$299,702 for Nine Months endedMarch 31, 2020 from$3,478,089 for Nine Months endedMarch 31, 2019 . The decrease was mainly due to the increase in general and administrative expense. For the sales VIEs, the net income was$4,312,973 for period endedMarch 31, 2020 , decreased by$3,355,307 , or 43.8%, from$7,668,280 for Nine Months endedMarch 31, 2019 . The decrease was mainly due to the increase in general and administrative expenses for the sales VIEs.
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.
As of
We intend to use some of the remaining net proceeds from our securities offerings, as well as other working capital if required, to acquire new businesses, 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 ofXi'an city. Yuxing purchased a set of agricultural products testing 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: Nine Months Ended March 31, 2020 2019 Net cash provided by (used in) operating activities (38,676,884 ) (77,964,267 ) Net cash provided by (used in) investing activities (66,210 ) (42,880 ) Net cash provided by (used in) financing activities 11,134,200 218,694
Effect of exchange rate change on cash and cash equivalents (3,339,772 ) (3,775,148 ) Net increase (decrease) in cash and cash equivalents
(30,948,665 ) (81,563,601 )
Cash and cash equivalents, beginning balance 72,259,804 150,805,639
Cash and cash equivalents, ending balance $ 41,311,138 $ 69,242,037
Operating Activities
Net cash used in operating activities was $38,676,884 for the Nine Months ended
March 31, 2020 , a decrease of $39,287,383 , or 50.4%, from cash provided by
operating activities of $77,964,267 for the Nine Months ended March 31, 2019 .
The decrease was mainly due to decrease in inventories during the Nine Months
ended March 31, 2020 as compared to the same period in 2019.
35
Investing Activities
Net cash used in investing activities for the Nine Months ended March 31, 2020
was $66,210 , compared to cash used in investing activities of $42,880 for the
Nine Months ended March 31, 2019 . The difference was due to the company had less
change in construction in process during the last Nine Months compared to the
same period last year.
Financing Activities
Net cash provided by financing activities for the Nine Months ended March 31,
2020 was $11,134,200 , compared to $218,694 net cash used in financing activities
for the Nine Months ended March 31, 2019 , which was largely attribute to
$10,252,000 proceeds from the sale of common stock for the Nine Months ended
March 31, 2020 , compared to 0 in the same period last year.
As of March 31, 2020 , and June 30, 2019 , our loans payable was as follows:
March 31, June 30,
2020 2019
Short term loans payable: $ 3,809,700 $ 3,640,000
Total $ 3,809,700 $ 3,640,000
Accounts Receivable
We had accounts receivable of $166,452,189 as of March 31, 2020 , as compared to
$145,190,160 as of June 30, 2019 , an increase of $21,262,029 , or 14.6%. The
increase was primarily attributable to Gufeng's accounts receivable. As of March
31, 2020 , Gufeng's accounts receivable was $101,718,824 , an increase of
$16,286,661 , or 19.1%, compared to $85,432,163 as of June 30, 2019 .
Allowance for doubtful accounts in accounts receivable as of March 31, 2020 was
$34,494,969 , an increase of $979,559 , or 2.9%, from $33,515,410 as of June 30,
2019 . The increase in allowance for doubtful accounts was primarily related to
COVID-19. And the allowance for doubtful accounts as a percentage of accounts
receivable was 17.2% as of March 31, 2020 and 18.8% as of June 30, 2019 .
Deferred assets
We had no deferred assets as of March 31, 2020 and June 30, 2019 . During the
Nine 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 deferred assets had been fully amortizedas ofMarch 31, 2020 . Inventories
We had inventories of
Advances to Suppliers We had advances to suppliers of$62,935,130 as ofMarch 31, 2020 as compared to$32,713,817 as ofJune 30, 2019 , representing an increase of$30,221,313 , or 92.4%. Our inventory level may fluctuate from time to time, depending how quickly the raw material is consumed and replenished during the production process, and how soon the finished goods are sold. The replenishment of raw material relies on management's estimate of numerous factors, including but not limited to, the raw materials future price, and spot price along with its 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 times of slow sales and insufficient inventories in peak times. 36 Accounts Payable
We had accounts payable of$20,310,699 as ofMarch 31, 2020 as compared to$19,004,548 as ofJune 30, 2019 , representing an increase of$1,306,151 , or 6.9%. The increase was primarily due to the increase of accounts payable for VIEs. They have accounts payable of$18,669,353 as ofMarch 31, 2020 as compared to$17,073,229 as ofJune 30, 2019 , representing an increase of$1,596,124 ,
or 9.3%.
Unearned Revenue (Customer Deposits)
We had customer deposits of$7,713,614 as ofMarch 31, 2020 as compared to$6,514,619 as ofJune 30, 2019 , representing an increase of$1,198,995 , or 18.4%. The increase was mainly attributable to Gufeng's$5,668,824 unearned revenue as ofMarch 31, 2020 , compared to$4,668,972 unearned revenue as ofJune 30, 2019 , increased$999,852 , or 21.4%, caused by the advance deposits made by clients. This increase was due to seasonal fluctuation and we expect to deliver products to our customers during the next three months at which time we will recognize the revenue.
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 withUnited 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 most 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 inthe 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 due to the risks and uncertainties, including uncertainty in the current economic environment due to the recent outbreak of novel strain of the coronavirus ("COVID-19"). 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 of 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.
37
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 deferred assets had been fully amortized as ofMarch 31, 2020 . 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 ofMarch 31, 2020 , we were organized into ten main business units: Jinong (fertilizer production), Gufeng (fertilizer production), Yuxing (agricultural products production), Lishijie (agriculture sales), Jinyangguang (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.
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