China Green Agriculture, Inc.
Q1 2017 Earnings Call Transcript

Published: 14 Nov 2016

[Operator:]

Hello and welcome to the China Green Agriculture First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Frank Wang. Mr. Wang, please go ahead.

[Frank Wang:]

Thank you, operator. Thank you everyone for standing by and welcome everyone to China Green Agriculture first quarter of fiscal year 2017 earnings conference call. This earning release went to the wire pre-market today. Our call today is hosted by Mr. Tao Li, the company’s President and me. I would like to remind our listeners that the management’s prepared remarks contain forward-looking statements that are subject to risks and uncertainties, and the management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to such risks as but not limited to fluctuations in customer demand, management of rapid growth, intensity of competition from other private providers of our company's products and services, in our markets, general economic conditions, geopolitical events and regulatory changes and other information detailed from time to time in our filings and future filings with the United States Securities and Exchange Commission. Accordingly, although the company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectation will prove to be accurate and correct. In addition, any projections as to the company's future performance represent management's estimates as of today November 14, 2016. China Green Agriculture assumes no obligation to update this projection in the future as market conditions change. Now I'm pleased to report results for the first quarter of fiscal year 2017. For the fiscal first quarter ended September 30, 2016 revenues were 61.9 million as compared to 54.2 million for the fiscal first quarter ended September 30, the year of 2015. With our first quarter net revenue, beating guidance, 1.9 million we provided by the last quarter. Net income for the first quarter was 7.4 million or $0.02 per share as compared to 7.2 million or $0.02 per share. Our net income was beating guidance 0.4 million, the guidance that we provided by the last quarter. We are very pleased with our consistent performance in the first quarter of fiscal year 2017 where we continue to build shareholder value and the long-term durability of our business model. Softened net profit and a balance sheet makes [ph] the recently conclude fiscal quarter with our successful business acquisition. The VIE companies contributed approximately 13.3 million net revenue during the last three months. We believe the company will grow into a leading one in the Chinese agricultural industry. And we believe we will create more benefits for our shareholders. Now, I will discuss the financial results in greater details. Our total net sales for the three months ended September 30, the year of 2016 was 61.9 million. There is an increase of 7.7 million or 14.2% from 54.2 million for the three months ended September 30, the year of 2016. This increase was largely due to the inclusion of VIE’s net sales during the three months ended September 30, the year of 2015, which contributed approximately 13.3 million or 21.5% of the total net sales. The total sales without including VIE companies for the three months ended September 30, the year of 2016 was 48.6 million, a decrease of 5.6 million or 0.3% from the same period a year ago. For the three months ended September 30, the year of 2016, Jinong’s net sales decreased 3.3 million or 9.5% to 31.4 million from 34.7 million for the three months ended September 30, the year of 2015. This decrease was mainly due to the decrease in Jinong’s sales, which was a result of Jinong’s implementation of its new sales strategy that further focus on producing high margin deep duty [ph] fertilizer during the last three months. For the three months ended September 30, the year of 2016, Gufeng’s net sale was 15.8 million, a decrease of 2.4 million or 13.3% from 18.2 million for the three months ended September 30, the year of 2015. This decrease was mainly due to Gufeng’s lower starting price to answer the market demand for the three months ended September 30, the year of 2016. For the three months ended September 30, the year of 2016, Yuxing’s net sale was 1.4 million, an increase of 0.2 million or 9.2% from 1.2 million for the three months ended September 30, the year of 2015. The increase was mainly due to the increase in the market demand and the higher priced Yuxing's top grade flowers for the three months ended September 30, the year of 2016. Total cost of goods sold for the three months ended September 30, the year of 2016, was 38.5 million, an increase of 8.5 million or 28.2% from 30 million for the three months ended September 30, the year of 2015. The increase was mainly due to the production and the sales of VIE companies’ product, which accounted for 10.8 million or 28% of total cost of goods sold. The total cost of goods sold without including VIE companies for the three months ended September 30, the year of 2016, was 27.7 million, a decrease of 2.3 million or 7.7% from the same period a year ago. Cost of goods sold by Jinong for the three months ended September 30, the year of 2016, was 13.3 million, a decrease of 1.2 million or 8.7 million from 14.5 million for the three months ended September 30, the year of 2015. The decrease in cost of goods sold was primarily attributable to the 9.5% decrease in net sales for the three months ended September 30, the year of 2016. Cost of goods sold by Gufeng for the three months ended September 30, the year of 2016, was 13.4 million, a decrease of 1.3 million or 9.2% from 14.7 million for the three months ended September 30, the year of 2015. This decrease was primarily attributable to the last products sold for the three months ended September 30, the year of 2016. For the three months ended September 30, the year of 2016, cost of goods sold by Yuxing was 1 million, an increase of 0.3 million or 37.3% from 0.7 million for the three months ended September 30 for the year of 2015. This increase was mainly due to the increase that Yuxing’s net sales and the labor costs. Total gross profit for the three months ended September 30, the year of 2016 decreased by 0.8 million or 3.1% to 23.4 million as compared to 24.2 million for the three ended September 30, the year of 2015. Gross profit margin was 37.9 million and 44.6% for the three months ended September 30, the year of 2016 and the year of 2015 respectively. The decrease in gross profit margin was mainly due to the recent acquisition of VIEs, which mainly sells low-margin fertilizer products. The gross profit without including VIE companies was 20.9 million with the gross profit margin of 43%. Gross profit by Jinong decreased by 2 million or 10% to 18.2 million for the three months ended September 30, the year of 2016 from 20.2 million for the three months ended September 30, the year of 2015. Gross profit margin from Jinong sales was approximately 57.8% and 58.1% for the three months ended September 30 for the year of 2016 and for the year of 2015 respectively. The decrease in gross profit margin was mainly due to the higher raw material costs and the further higher package cost. For the three months ended September 30, the year of 2016, gross profit by Jinong was 2.4 million, a decrease of 1.1 million or 30.5% from 3.5 million for the three months ended September 30, the year of 2015. Gross profit margin from Gufeng sales was approximately 15.3% and 19.1% for the three months ended September 30 for the year of 2016 and for the year of 2015 respectively. The decrease in gross profit percentage was mainly due to the further increase for the sales of low margin product in Gufeng’s total sales. For the three months ended September 30, the year of 2016, gross profit by Yuxing was 0.3 million, a decrease of 0.2 million or 41.7% from 0.5 million for the three months ended September 30, the year of 2015. The gross profit margin was approximately 22.9% and 42.8% for the three months ended September 30 for the year of 2016 and for the year of 2015 respectively. The decrease in gross profit margin was mainly due to the higher labor costs for the three months ended September 30, the year of 2016. Gross profit generated by VIE companies was 2.5 million with the gross profit of approximately 19.1% for the three months ended September 30, the year of 2016. Our selling expenses comprised primarily of salaries of sales personnel, advertising and the promotion expenses, freight-out costs and related compensation. Selling expenses were 5 million or 8.1% of our net sales for the three months ended September 30, the year of 2016 as compared to 2.3 million or 4.3% of our net sales for the three months ended September 30, the year of 2015, an increase of 2.7 million or 113.8% and this increase was primarily due to Jinong and the VIE companies. The VIE companies and Jinong starting to take census [ph] for the three months ended September 30 for the year of 2016. General and administrative expenses consisted primarily of related salaries, rental expenses, the 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 litigations. General and administrative expenses was 3.3 million or 5.2% of our net sales for the three months ended September 30, the year of 2016 as compared to 2.8 million or 5.1% of our net sales for the three months ended September 30 for the year of 2015. There is an increase of 0.5 million of 17.4%. This increase was mainly due to the VIE companies, which have 0.5 million general and administrative expenses for the last three months. Our net income for the three months ended September 30 for the year of 2016 was 7.4 million, an increase of 0.2 million or 1.5% as compared to 7.2 million for the three months ended September 30, for the year of 2015. The net income as a percentage of our total net sales was approximately 11.9% and 13.4% for the three months ended September 30, for the year of 2016 and for the year of 2015 respectively. I’d like to move to our financial conditions. As of September 30, for the year of 2016 cash and cash equivalents were 108 million, an increase of 5 million or 5.1% from 103 million as of June 30, for the year of 2016. The net cash provided by the operating activities was 5.1 million for the three months ended September 30, for the year of 2016, a decrease of 2 million, or 27.1% from cash provided by operating activities of 7.1 million for the three months ended September 30, for the year of 2015. We have 4.6 million in short-term loans as of September 30, the year of 2016, as compared to 4.7 million in short-term loans as of June 30, the year of 2016. We had accounts receivable of 116.5 million as of September 30, the year of 2016, as compared to 117 million as of June 30, the year of 2016, a decrease of 0.5 million or 0.4%. Second quarter fiscal year 2017 and confirmed fiscal year guidance of fiscal year 2017. For the ongoing second quarter ending December 31, 2016, the company expects net sales between 60 million and 65 million, net income between 5 million and 7 million, and EPS between $0.13 and $0.19 based on approximately 37.6 million fully diluted shares. For the fiscal year ended June 30, the year of 2017, management expects net sales between 277 million and 300 million, net income between 20 million and 27 million, and an EPS between $0.53 and $0.72 based on approximately 37.6 million fully diluted shares. Okay, operator. Hello operator, this will now conclude my remarks.

[Operator:]

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And the first question comes from Richard Jones, a private investor.

[Richard Jones:]

Good evening.

[Frank Wang:]

Good evening.

[Richard Jones:]

I wanted to ask you first why were Jinong's selling expenses up so much in the first fiscal quarter?

[Frank Wang:]

Hold on for a second. Hello? [No Audio]

[Richard Jones:]

Hello

[Frank Wang:]

The selling expenses increase as we explained. Its increase is as a result of course due to the inclusion of VIE businesses.

[Richard Jones:]

But weren’t the Jinong's selling expenses up sharply?

[Frank Wang:]

No, you see increase compared to the same three month period a year ago, but the explanation was largely due to the inclusion of the VIE selling expenses. Variable entity, we explained out that it was an increase due to Jinong's increase and the inclusion of the VIE operations but this is largely due to the VIE.

[Richard Jones:]

Okay. What was the total for deferred asset at September 30?

[Frank Wang:]

As of September 30, deferred asset net stand at north of $7 million.

[Richard Jones:]

Okay. 7 point what?

[Frank Wang:]

7.3

[Richard Jones:]

Thank you, okay and when do you expect to file your 10-Q

[Frank Wang:]

We are going to file the 10-Q, very shortly after this earnings call.

[Richard Jones:]

Okay. Thank you very much, that’s all I have.

[Frank Wang:]

Thank you.

[Operator:]

Thank you. And the next question comes from Tio Morrow [ph] with TG Capital Markets.

[Unidentified Analyst:]

Yes, I have two questions, the first one is why did you put your acquisitions VIE, why not make them direct subsidiaries?

[Tao Li:]

Excuse me, but just let's clarify for the benefits of other conference call participants. Mr. Morrow [ph] when you mentioned VIE, you actually mean VIE which stands for Variable Interest Entity. Is that correct?

[Unidentified Analyst:]

That is correct.

[Tao Li:]

Okay good. Let me give you some additional comments, the nature of these variable interest entities as the consolidation. These entities qualified as the parent company or companies variable interest entities after we both party entered into a series of engaged in a relationship in six aspects. We fully disclosed those agreements and contracts in annual reports exhibits. Together with our strategic business combination, framework, agreement of wisdom allow us the prospectus or the terms in a comfortable note, these consists of a business combination activity between us and the so when we report the consolidated financials we then consolidate their businesses with us and their financial performance and you may find the equity applied agreement, the non-competence agreement et cetera. Those agreements together in a set enabled their entity to become a consolidable business operating entity for us and as we explained and lodged this combined strategy before we are going transition to move from traditional product distribution via non-ecommerce space relationship to a convenient, efficient, expandable e-commerce based platform and typically, the e-commerce business is internet related or involved industry is subjected to industrial regulations and the restrictions imposed by various levels of government offices in China to I mean in that cases foreign ownership, foreign investment could be prohibited or not allowed in how companies conduct e-commerce business and how company will be doing future businesses in e-commerce. So you may also find that a lot of internet companies who do business or e-commerce business are VIE or variable interested entities of parent companies and in our case we are not new and in addition we are also engaged in the agriculture industry and this industry involves the transfer of ownership of land use rights in the future transfer of possession of land use rights and the distribution of critical agricultural materials such as seeds et cetera, et cetera and those critical agriculture capital or agriculture assets are sometimes or could be subjected to foreign ownership regulations and we experienced this before and these six newly added VIE entities together with previously consolidated VIE entities totaled our VIE numbers to seven from this fiscal year. I hope this explains.

[Unidentified Analyst:]

Well what you are saying is, if it is a protective move on your part to protect the company, is that it?

[Tao Li:]

It is a legal and legitimate and expandable and viable part. The structure is our business expansion.

[Unidentified Analyst:]

Nice. And my second question.

[Tao Li:]

Go ahead please.

[Unidentified Analyst:]

It is going to be longer. We sent one of our people to your annual meeting this year, and she is perfectly legal executed proxies, I personally send you an email advising you of her presence at the annual meeting and when she came there, to denied entrance to meeting, the proxy was confiscated on the lame excuse that it did not have a stamp of the American embassy in China and she was pushed out and when she resisted you called the police on her and she was escorted to the police station, this brings up some interesting questions, you obviously trample on the interest of the American shareholders, you treat him as disdain and I am wondering what are you hiding, what is the actually meeting an annual meeting or was there and that’s why you pushed her out? That’s my question.

[Tao Li:]

Our annual shareholder meeting was announced in spring and we sent out our proxy statement to our shareholders record and we conducted the shareholder meeting as planned as scheduled. The date is in June.

[Unidentified Analyst:]

We are a large shareholder and sent one of our people with a proxy to attend you meeting. But you did not accept that even though everything was according the way it should be with an executed legal proxy. You denied entrance basically to an American shareholder, you denied entrance to your annual meeting and that’s my point why?

[Tao Li:]

Mr. Morrow, where you there in the company on the day of annual shareholder meeting?

[Unidentified Analyst:]

No we sent Ming Lee one of our people, she was in China, she was in Beijing she is Chinese, we sent her out to the meeting since your annual meeting was obviously going to be conducted in Chinese so we sent Ming Lee and you pushed her out and did not allow an American representative to attend your annual meeting. Again what - were you hiding - are you hiding something that you do not allow American shareholders to attend.

[Tao Li:]

No, we are not hiding anything, we are open and transparent to all of our shareholders however I would like to specify on the day of the shareholder meeting and we have existing procedure for visitors and shareholders to attend the shareholder meeting and as such policies and procedures may require the visitors and the participants to identify themselves properly -

[Unidentified Analyst:]

She did.

[Tao Li:]

- IDs, government issues, papers and the person you mentioned and I was on an impression that she didn’t fully follow the procedure and also assaulted the securities of the company, that’s why police got involved.

[Unidentified Analyst:]

No, she attends several Chinese meeting for us, right, you are not the only one where we invest in China, so it is not the first time that she attends a annual meeting of a Chinese company and by the way this is not the Chinese company, this is an American company, so you follow American rules and since she is an Chinese citizen, she has all her papers, she knows exactly what she has to do and she does attend annual meeting for us right so you threw her out and question still stands, there she had no reason for you to throw her out that is not according to the American rules and in America comes with an perfectly executed proxy for an annual meeting that person goes in but not in your case, so any way I suppose that will be the end of this conversation.

[Tao Li:]

Like I said, we are very transparent and open to all of our shareholders and visitors after the company particularly at the annual shareholder meeting however there are security protocols and procedures that everyone, company employees as well as visitors must follow, must obey and on the shareholder meeting other than the person you mention there are other shareholders they attended the shareholder meeting and because the person assaulted the company's security and that’s why police came in and police took the case.

[Unidentified Analyst:]

Ming Lee is a Chinese woman who cannot assault anybody; she said she pushed back on of your people when she was pushed out. So the still matter stands, you denied a person with a perfectly legal proxy, American proxy, you denied a person entrance to your annual meeting and that thing still stands and as I said that’s end of this conversation.

[Tao Li:]

We will not deny any shareholders entrance if such shareholder presented his or her at all our shareholder meeting, it had been like that and it will be like that in future. If next year, if you want to come to attend our next shareholder meeting, if you bring your ID and follow the procedure we will be very happy to have you in our annual meeting and you will have the opportunity to ask all kinds of questions face to face to the management in a conference room.

[Unidentified Analyst:]

Look Ming Lee is a professional engineer, she knows what she is doing and your explanation makes no sense. Thank you very much good bye.

[Tao Li:]

Thank you.

[Operator:]

Thank you. And there are no more questions; I would like to return the call to management for any closing comments.

[Frank Wang:]

Thank you everyone for participating in today’s earnings conference call. We look forward to meeting you again next quarter. Have a great day. Bye, bye.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.