CHINA GREEN AGRICULTURE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed 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. With 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 68.7% and 69.6% of our total revenues for the three months EndedSeptember 30, 2020 and 2019, respectively. The sales VIEs generated 25.8% and 25.4% of our revenues for the three months EndedSeptember 30, 2020 and 2019, respectively. Yuxing serves as a research and development base for our fertilizer products. 25 Fertilizer Products As ofSeptember 30, 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
September 30, Change 2019 to 2020
2020 2019 Amount %
(metric tons)
Jinong 15,871 18,623 (2,752 ) -14.8 %
Gufeng 44,824 52,451 (7,627 ) -14.5 %
60,695 71,074 (10,379 ) -14.6 %
Three Months Ended
September 30,
2020 2019
(revenue per tons)
Jinong $ 930 $ 1,035
Gufeng 345 311
For the three months endedSeptember 30, 2020 , we sold approximately 60,695 tons of fertilizer products, as compared to 71,704 metric tons for the three months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , Jinong sold approximately 15,871 metric tons of fertilizer products, as compared to 18,623 metric tons for the three months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , Gufeng sold approximately 44,824 metric tons of fertilizer products, as compared to52, 451 metric tons for the three months endedSeptember 30, 2019 . Our sales of fertilizer products to customers in five provinces withinChina accounted for approximately 59.7% of our fertilizer revenue for the three months endedSeptember 30, 2020 . Specifically, the provinces and their respective percentage contributing to our fertilizer revenues wereHebei (26.2%),Heilongjiang (10.9%),Inner Mongolia (9.1%),Liaoning (8.5%) andShaanxi (4.9%). As ofSeptember 30, 2020 , we had a total of 1,924 distributors covering 22 provinces, 4 autonomous regions and 4 central government-controlled municipalities inChina . Jinong had 1,096 distributors inChina . Jinong's sales are not dependent on any single distributor or any group of distributors. Jinong's top five distributors accounted for 5.2% of its fertilizer revenues for the three months endedSeptember 30, 2020 . Gufeng had 330 distributors, including some large state-owned enterprises. Gufeng's top five distributors accounted for 81.0% of its revenues for the three months endedSeptember 30, 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 95.2% of our agricultural products revenue for the three months endedSeptember 30, 2020 wereShaanxi (87.8%),Shanghai (5.7%), andBeijing (1.7%). Recent Developments New Products
During the three months endedSeptember 30, 2020 , Jinong did not launch any new fertilizer product and added 101 new distributors. During the three months endedSeptember 30, 2020 , Gufeng did not launch any new fertilizer products and did not add any new distributor. Strategic Acquisitions OnJune 30, 2016 andJanuary 1, 2017 , through Jinong, we entered (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"). 26June 30, 2016 : Cash Principal of Payment for Notes for Acquisition Acquisition
Company Name Business Scope (RMB[1])
(RMB)
Sales of pesticides, agricultural
Shaanxi Lishijie chemicals, chemical fertilizers,
Agrochemical agricultural materials; Manufacture and
Co., Ltd. sales of mulches. 10,000,000 3,000,000
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;
Songyuan Recycling and complex utilization of straw
Jinyangguang and stalk; Technology transfer and
Sannong Service training; Recycling of agricultural
Co., Ltd. materials ; Ecological industry planning. 8,000,000 12,000,000
Cultivation of crops; Storage, sales,
preliminary processing and logistics
distribution of agricultural by-products;
Shenqiu County Promotion and application of agricultural
Zhenbai technologies; Purchase and sales of
Agriculture Co., agricultural materials; Electronic
Ltd. commerce. 3,000,000 12,000,000
Promotion and application of new
agricultural technologies; Professional
prevention of plant diseases and insect
Weinan City pests; Sales of plant protection products,
Linwei District plastic mulches, material, chemical
Wangtian fertilizers, pesticides, agricultural
Agricultural medicines, micronutrient fertilizers,
Materials Co., hormones, agricultural machinery and
Ltd. 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 AcquisitionCompany Name Business Scope (RMB[1])
(RMB)
Sunwu County
Xiangrong Sales of pesticides, agricultural
Agricultural chemicals, chemical fertilizers,
sales of mulches. 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 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$6,291,000 ) 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$8,807,400 ) 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, farmland 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 endedSeptember 30, 2020 Compared to the Three Months endedSeptember 30, 2019 . 2020 2019 Change $ Change % Sales Jinong$ 14,529,312 $ 19,054,816 (4,525,504 ) -23.7 % Gufeng 15,828,203 16,323,217 (495,014 ) -3.0 % Yuxing 2,423,488 2,539,711 (116,223 ) -4.6 % Sales VIEs 11,377,229 12,903,827 (1,526,598 ) -11.8 % Net sales 44,158,232 50,821,571 (6,663,339 ) -13.1 % Cost of goods sold Jinong 10,685,464 10,492,530 192,934 1.8 % Gufeng 13,977,817 14,454,008 (476,191 ) -3.3 % Yuxing 2,042,072 2,051,996 (9,924 ) -0.5 % Sales VIEs 9,141,210 10,663,790 (1,522,580 ) -14.3 % Cost of goods sold 35,846,563 37,662,324 (1,815,761 ) -4.8 % Gross profit 8,311,669 13,159,247 (4,847,578 ) -36.8 % Operating expenses Selling expenses 4,711,956 3,630,355 1,081,601 29.8 %
General and administrative expenses 32,944,096 16,341,792 16,602,304 101.6 % Total operating expenses 37,656,052 19,972,147 17,683,905 88.5 % Income (loss) from operations (29,344,383 ) (6,812,900
) (22,531,483 ) 330.7 % Other income (expense) Other income (expense) (5,165 ) (30,191 ) 25,026 -82.9 % Interest income 22,405 53,624 (31,219 ) -58.2 % Interest expense (56,768 ) (77,202 ) 20,434 -26.5 %
Total other income (expense) (39,528 ) (53,769 ) 14,241 -26.5 % Income (loss) before income taxes (29,383,911 ) (6,866,668 ) (22,517,242 ) 327.9 % Provision for income taxes 1,569,003 449,131 1,119,872 249.3 % Net income (loss)$ (30,952,914 ) $ (7,315,799 ) (23,637,114 ) 323.1 % Other comprehensive income (loss) Foreign currency translation gain (loss) 13,467,844 (17,367,485 ) 30,835,329 -177.5 % Comprehensive income (loss)$ (17,485,070 ) $ (24,683,284
) 7,198,125 -29.2 %
29
Net Sales
Total net sales for the three months ended September 30, 2020 were $44,158,232 a
decrease of $6,663,339 or 13.1%, from $50,821,571 for the three months ended
September 30, 2019 . This decrease was principally a result of the negative
impact on sales volumes due to the COVID-19 pandemic, especially for Jinong's
and VIEs' net sales.
For the three months endedSeptember 30, 2020 , Jinong's net sales decreased$4,525,504 , or 23.7%, to$14,529,312 from$19,054,816 for the three months endedSeptember 30, 2019 . This decrease was mainly due to Jinong's lower sales volume in the last three months. Jinong sold approximately 15,871 metric tons of fertilizer products for the three months endedSeptember 30, 2020 , decreased 2,752 tons or 14.8%, as compared to 18,623 metric tons for the three months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , Gufeng's net sales were$15,828,203 , a decrease of$495,014 , or 3.0%, from$16,323,217 for the three months endedSeptember 30, 2019 . This decrease was mainly due to Gufeng's lower sales volume in the last three months. Gufeng sold approximately 44,824 metric tons of fertilizer products for the three months endedSeptember 30, 2020 , decreased 7,627 tons or 14.5%, as compared to 52,451 metric tons for the three months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , Yuxing's net sales were$2,423,488 , a decrease of$116,223 or 4.6%, from$2,539,711 for the three months endedSeptember 30, 2019 . The decrease was mainly due to the decrease in market demand during the three months endedSeptember 30, 2020 . Cost of Goods Sold
Total cost of goods sold for the three months endedSeptember 30, 2020 was$35,846,563 , a decrease of$1,815,761 , or 4.8%, from$37,662,324 for the three months endedSeptember 30, 2019 . The decrease was mainly due to 14.3% decrease in VIEs' cost of goods sold.
Cost of goods sold by Jinong for the three months endedSeptember 30, 2020 was$10,685,464 , an increase of$192,934 , or 1.8%, from$10,492,530 for the three months endedSeptember 30, 2019 . The increase in cost of goods was primarily due to higher product cost in the fiscal year 2021. Cost of goods sold by Gufeng for the three months endedSeptember 30, 2020 was$13,977,817 , a decrease of$476,191 , or 3.3%, from$14,454,008 for the three months endedSeptember 30, 2019 . This decrease was primarily due to the 3.0% decrease in net sale in the fiscal year 2021. For three months endedSeptember 30, 2020 , cost of goods sold by Yuxing was$2,042,072 , a decrease of$9,924 , or 0.5%, from$2,051,996 for the three months endedSeptember 30, 2019 . This decrease was mainly due to Yuxing's lower net sales in the fiscal year 2021. Gross Profit
Total gross profit for the three months endedSeptember 30, 2020 decreased by$4,847,578 , or 36.8%, to$8,311,669 , as compared to$13,159,247 for the three months endedSeptember 30, 2019 . Gross profit margin was 18.8% and 25.9% for the three Months EndedSeptember 30, 2020 and 2019, respectively. Gross profit generated by Jinong decreased by$4,718,438 , or 55.1%, to$3,843,848 for the three months endedSeptember 30, 2020 from$8,562,286 for the three months endedSeptember 30, 2019 . Gross profit margin from Jinong's sales was approximately 26.5% and 44.9% for the three Months EndedSeptember 30, 2020 and 2019, respectively. The decrease in gross profit margin was mainly due to the lower sales prices and higher product cost for Jinong in the fiscal year 2021. Jinong's revenue per ton was$930 for three months endedSeptember 30, 2020 , decreased$106 or 10.2%, compared to$1,035 for three months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , gross profit generated by Gufeng was$1,850,386 , a decrease of$18,823 , or 1.0%, from$1,869,209 for the three months endedSeptember 30, 2019 . Gross profit margin from Gufeng's sales was approximately 11.7% and 11.5% for the three Months EndedSeptember 30, 2020 and 2019, respectively. The increase in gross profit percentage was mainly due to the increase in unit sales price. Gufeng's revenue per ton was$345 for three months endedSeptember 30, 2020 , increased$34 or 11.0%, compared to$311 for three months endedSeptember 30, 2019 . 30 For the three months endedSeptember 30, 2020 , gross profit generated by Yuxing was$381,416 , a decrease of$106,299 , or 21.8% from$487,715 for the three months endedSeptember 30, 2019 . The gross profit margin was approximately 15.7% and 19.2% for the three months EndedSeptember 30, 2020 and 2019, respectively. The decrease in gross profit percentage was mainly due to the increase in product costs. Gross profit generated by VIEs decreased by$4,017 , or 0.2%, to$2,236,020 for the three months endedSeptember 30, 2020 from$2,240,037 for the three months endedSeptember 30, 2019 . Gross profit margin from VIE's sales was approximately 19.7% and 17.4% for the three months EndedSeptember 30, 2020 and 2019, respectively, which was slightly increased. 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$4,711,956 , or 10.7%, of net sales for the three months endedSeptember 30, 2020 , as compared to$3,630,355 , or 7.1%, of net sales for the three months endedSeptember 30, 2019 , an increase of$1,081,601 , or 29.8%. The increase was mainly due to$907,840 increase in advertising and promotion expense for Jinong to respond lower market demand in the fiscal year 2021. The selling expenses of Jinong for the three months endedSeptember 30, 2020 were$4,256,637 or 29.3% of Jinong's net sales, as compared to selling expenses of$3,300,195 or 17.3% of Jinong's net sales for the three months endedSeptember 30, 2019 . The selling expenses of Yuxing were$11,817 or 0.5% of Yuxing's net sales for the three months endedSeptember 30, 2020 , as compared to$9,352 or 0.4% of Yuxing's net sales for the three months endedSeptember 30, 2019 . The selling expenses of Gufeng were$67,481 or 0.4% of Gufeng's net sales for the three months endedSeptember 30, 2020 , as compared to$69,291 or 0.4% of Gufeng's net sales for the three months endedSeptember 30, 2019 .
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$32,944,096 , or 74.6% of net sales for the three months endedSeptember 30, 2020 , as compared to$16,341,792 , or 32.2% of net sales for the three months endedSeptember 30, 2019 , an increase of$16,602,304 , or 101.6%. The increase in general and administrative expenses was mainly due to higher bad debts expense for Gufeng. Gufeng's bad debts expense increased$19,648,882 for the three months endedSeptember 30, 2020 comparing with same period last year. With the impact of COVID-19 pandemic, the overdue outstanding accounts receivable increased significantly comparing with the previous years. Numerous distributors encountered significant difficulties and/or hardships in their business amid the pandemic. The company accrued bad debts expense based on the principle of conservatism, which increased the General and Administrative Expenses. 31
Total Other Income (Expenses)
Total other income (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 endedSeptember 30, 2020 was$39,528 , as compared to$53,769 for the three months endedSeptember 30, 2019 , a decrease in expense of$14,241 or 26.5%. The decrease in total other expense resulted from lower accretion expense. Accretion expense decreased due primarily to the expiration of convertible notes onDecember 2019 and no accretion expense for fiscal year 2021. 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 onJanuary 1, 2008 . Jinong incurred income tax expenses of$267,890 for the three months endedSeptember 30, 2020 , as compared to$92,488 for the three months endedSeptember 30, 2019 , an increase of$175,402 , or 189.6%. Gufeng is subject to a tax rate of 25%, incurred 0 income tax expenses for the three months endedSeptember 30, 2020 , as compared to$(68,276) for the three months endedSeptember 30, 2019 , an increase of$68,276 , or 100.0%. Yuxing has no income tax for the three months EndedSeptember 30, 2020 and 2019 because 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 loss for the three months endedSeptember 30, 2020 was$30,952,914 , an increase in loss of$23,637,114 , or 323.1%, compared to net loss of$7,315,799 for the three months endedSeptember 30, 2019 . Net loss as a percentage of total net sales was approximately -70.1% and -14.4% for the three months EndedSeptember 30, 2020 and 2019, respectively.
Discussion of Segment Profitability Measures
As ofSeptember 30, 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.
32
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 (loss) produced from the various general ledger systems; however, net
income (loss) by segment is the principal benchmark to measure profit or loss
adopted by the CODM.
For Jinong, the net income increased by$993,942 , or 189.6%, to$1,518,043 for three months endedSeptember 30, 2020 , from$524,101 for the three months endedSeptember 30, 2019 . The increase was principally due to lower general and administrative expense. For Gufeng, the net loss increased by$19,681,716 , or 171.0%, to$(31,193,670) for three months endedSeptember 30, 2020 from$(11,511,954) for three months endedSeptember 30, 2019 . The increase was principally due to the increase in general and administrative expense. For Yuxing, the net income decreased$17,646 , or 11.4%, to$136,909 for three months endedSeptember 30, 2020 from$154,555 for three months endedSeptember 30, 2019 . The decrease was mainly due to lower sales.
For the sales VIEs, the net income (loss) was
Liquidity and Capital Resources
Our principal sources of liquidity include cash from operations, borrowings from local commercial banks and net proceeds of offerings of our securities.
As of
We intend to use some of the remaining net proceeds from our securities offerings, as well as other working capital if required, to acquire new businesses, upgrade production lines and complete Yuxing's new greenhouse facilities for agriculture products located on 88 acres of land in Hu County, 18 kilometers southeast ofXi'an city. Yuxing purchased a set of agricultural products testing equipment for the year of 2016. We believe that we have sufficient cash on hand and positive projected cash flow from operations to support our business growth for the next twelve months to the extent we do not have further significant acquisitions or expansions. However, if events or circumstances occur and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing as necessary for expansion purposes and when we believe market conditions are most advantageous, which may include additional debt and/or equity financings. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants. The following table sets forth a summary of our cash flows for the periods indicated: Three Months EndedSeptember 30, 2020 2019
Net cash provided by (used in) operating activities$ (1,653,512 ) $ 3,079,634 Net cash provided by (used in) investing activities (29,967 ) (18,596 ) Net cash provided by (used in) financing activities 294,400
10,731,600
Effect of exchange rate change on cash and cash equivalents 2,286,224
(3,098,502 )
Net increase in cash and cash equivalents 897,14510,694,136
Cash and cash equivalents, beginning balance 11,934,778
72,259,804
Cash and cash equivalents, ending balance$ 12,831,923
$ 82,953,940 Operating Activities Net cash used in operating activities was$1,653,512 for the three months endedSeptember 30, 2020 , a decrease of$4,733,146 , or 153.7%, from cash provided by operating activities of$3,079,634 for the three months endedSeptember 30, 2019 . The decrease was mainly due to a decrease in net income (loss) and increase in inventory during the three months endedSeptember 30, 2020 as compared to the same period in 2019. 33 Investing Activities
Net cash used in investing activities for the three months endedSeptember 30, 2020 was$29,967 , compared to cash used in investing activities of$18,596 for the three months endedSeptember 30, 2019 . The different was due to Company purchased more plant, property and equipment during the last three months compared to the same period last year. Financing Activities Net cash provided by financing activities for the three months endedSeptember 30, 2020 was$294,400 , compared to$10,731,600 net cash provided in financing activities for the three months endedSeptember 30, 2019 , which was largely attribute to$10,252,000 proceeds from the sale of common stock for the three months endedSeptember 30, 2019 , compared to 0 in the same period this year. As ofSeptember 30, 2020 andJune 30, 2020 , our loans payable was as follows: September 30, June 30, 2020 2020 Short term loans payable:$ 3,974,400 $ 3,537,500 Total$ 3,974,400 $ 3,537,500 Accounts Receivable We had accounts receivable of$109,201,762 as ofSeptember 30, 2020 , as compared to$105,693,326 as ofJune 30, 2020 , an increase of$3,508,436 , or 3.3%. The increase was primarily attributable to Jinong's accounts receivable. As ofSeptember 30, 2020 , Jinong's accounts receivable was$26,032,559 , an increase of$3,635,110 , or16.2%, compared to$22,397,449 as ofJune 30, 2020 . Allowance for doubtful accounts in accounts receivable for the three months endedSeptember 30, 2020 was$24,860,835 , a decrease of$13,605,365 , or 35.4%, from$38,466,220 as ofJune 30, 2020 . And the allowance for doubtful accounts as a percentage of accounts receivable was 18.5% as ofSeptember 30, 2020 and
26.7% as ofJune 30, 2020 . Deferred assets We had no deferred assets as ofSeptember 30, 2020 andJune 30, 2020 . During the three 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 amortized
as ofSeptember 30, 2020 . Inventories
We had inventories of$107,895,317 as ofSeptember 30, 2020 , as compared to$98,921,081 as ofJune 30, 2020 , an increase of$8,974,236 , or 9.1%. The increase was primarily attributable to Gufeng's inventory. As ofSeptember 30, 2020 , Gufeng's inventory was$84,400,261 , compared to$75,129,594 as ofJune 30, 2020 , an increase of$9,270,667 , or 12.3%. Advances to Suppliers We had advances to suppliers of$38,142,857 as ofSeptember 30, 2020 as compared to$65,081,818 as ofJune 30, 2020 , representing a decrease of$26,938,961 , or 41.4%. 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. 34 Accounts Payable
We had accounts payable of$19,534,919 as ofSeptember 30, 2020 as compared to$17,719,093 as ofJune 30, 2020 , representing an increase of$1,815,826 , or 10.2%. The increase was primarily due to the increase of accounts payable for VIEs. They have accounts payable of$17,643,645 as ofSeptember 30, 2020 as compared to$16,315,837 as ofJune 30, 2020 , representing an increase of$1,327,808 , or 8.1%.
Unearned Revenue (Customer Deposits)
We had customer deposits of$9,223,513 as ofSeptember 30, 2020 as compared to$7,342,590 as ofJune 30, 2020 , representing an increase of$1,880,923 , or 25.6%. The increase was mainly attributable to Jinong's$2,337,177 unearned revenue as ofSeptember 30, 2020 , compared to$1,645,143 unearned revenue as ofJune 30, 2020 , increased$692,034 , or 42.1%, 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 unaudited condensed 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 unaudited condensed 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 unaudited condensed 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 unaudited condensed 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.
35
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 ofSeptember 30, 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 ofSeptember 30, 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) andXiangrong (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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