(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act.
Securities registered or to be registered
pursuant to Section 12(g) of the Act.
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period (September 30, 2016) covered by the annual report:22,873,541ordinary
shares.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 c) Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer.
Indicate by a check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Except where the context otherwise requires and for purposes
of this Annual Report only:
This Annual Report on Form 20-F contains forward-looking statements
that are based on our current expectations, assumptions, estimates, and projections about our company and industry. All statements
other than statements of historical fact in this Annual Report are forward-looking statements. These forward-looking statements
can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,”
“estimate,” “plan,” “believe,” “is/are likely to” or other similar expressions.
The forward-looking statements included in this Annual Report relate to, among others:
We believe it is important to communicate our expectations to
our shareholders. However, there may be certain events in the future that we are not able to predict with accuracy or over which
we have no control. The risk factors and cautionary language discussed in this Annual Report provide examples of risks, uncertainties
and events that may cause actual results to differ materially from the expectations in these forward-looking statements, including
among other things:
The forward-looking statements in this
Annual Report involve various risks, assumptions, and uncertainties. Although we believe that our expectations expressed in these
forward-looking statements are reasonable, we cannot be certain that our expectations will materialize. Our actual results could
be materially different from our expectations. Important risks and factors that could cause our actual results to be materially
different from our expectations are generally set forth in the risk factors included in this Annual Report.
This Annual Report contains information relating to the crop
seed market, in China, which is based on various assumptions. The crop seed market may not grow at the rates we project, or at
all, or there may be contractions in the market. The failure of the markets in which we operate to grow at the projected rates
may have a material adverse effect on our business and the market price of our shares. In addition, the relatively new and rapidly
changing nature and acceptance of the genetically modified crop seed industry subjects any projections or estimates relating to
the growth prospects or future condition of our markets to significant uncertainties. Furthermore, if any one or more of the assumptions
underlying the market data turns out to be incorrect, actual results may differ based on these assumptions.
This Annual Report also contains information regarding the sale
of certain assets of Origin. The transactions being disclosed in this Annual Report are subject to various pre-closing conditions
and there is no guarantee that the transactions will be closed or will be closed under the same terms and conditions as we have
previous disclosed.
The forward-looking statements made in this Annual Report relate
only to events or information as of the date of the statements. Readers should read these statements in conjunction with the risk
factors disclosed in this Annual Report.
All forward-looking statements included herein attributable
to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligations
to update these forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect
the occurrence of unanticipated events.
PART I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|
Not Applicable.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not Applicable.
|
A.
|
Selected financial data
.
|
The following selected consolidated financial information
was derived from our fiscal year end consolidated financial statements. The following information should be read in
conjunction with those statements and Item 5, “Operating and Financial Review and Prospects.” Our summary
consolidated statements of operations and comprehensive income data for the fiscal years ended September 30, 2014, 2015 and
2016 and our summary consolidated balance sheet data as of September 30, 2015 and 2016, as set forth below, are derived
from, and are qualified in their entirety by reference to, our audited consolidated financial statements, including the notes
thereto, which are included in this Annual Report. The summary statement of operations and comprehensive income data for the
fiscal years ended September 30, 2012 and 2013 and the summary balance sheet data as of September 30, 2012, 2013 and 2014,
set forth below are derived from our audited consolidated financial statements which are not included herein.
Our consolidated financial statements are prepared and presented
in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
USD’000(1)
|
|
Consolidated statement of income and comprehensive income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
552,111
|
|
|
|
481,694
|
|
|
|
415,177
|
|
|
|
376,553
|
|
|
|
335,251
|
|
|
|
50,204
|
|
Cost of revenues
|
|
|
(387,783
|
)
|
|
|
(315,082
|
)
|
|
|
(301,148
|
)
|
|
|
(264,039
|
)
|
|
|
(259,253
|
)
|
|
|
(38,823
|
)
|
Gross profit
|
|
|
164,328
|
|
|
|
166,612
|
|
|
|
114,029
|
|
|
|
112,514
|
|
|
|
75,998
|
|
|
|
11,381
|
|
Selling and marketing
|
|
|
(56,437
|
)
|
|
|
(55,375
|
)
|
|
|
(58,972
|
)
|
|
|
(39,987
|
)
|
|
|
(38,079
|
)
|
|
|
(5,702
|
)
|
General and administrative
|
|
|
(77,585
|
)
|
|
|
(66,153
|
)
|
|
|
(46,428
|
)
|
|
|
(40,684
|
)
|
|
|
(62,159
|
)
|
|
|
(9,308
|
)
|
Research and development
|
|
|
(37,629
|
)
|
|
|
(42,162
|
)
|
|
|
(40,377
|
)
|
|
|
(48,741
|
)
|
|
|
(44,032
|
)
|
|
|
(6,594
|
)
|
Other income, net
|
|
|
3,852
|
|
|
|
15,241
|
|
|
|
7,269
|
|
|
|
18,238
|
|
|
|
6,964
|
|
|
|
1,042
|
|
Total operating expenses
|
|
|
(167,799
|
)
|
|
|
(148,449
|
)
|
|
|
(138,508
|
)
|
|
|
(111,174
|
)
|
|
|
(137,306
|
)
|
|
|
(20,562
|
)
|
Income (loss) from operations
|
|
|
(3,471
|
)
|
|
|
18,163
|
|
|
|
(24,479
|
)
|
|
|
1,340
|
|
|
|
(61,308
|
)
|
|
|
(9,181
|
)
|
Interest income
|
|
|
2,547
|
|
|
|
1,776
|
|
|
|
596
|
|
|
|
775
|
|
|
|
162
|
|
|
|
24
|
|
Interest expenses
|
|
|
(4,029
|
)
|
|
|
(11,326
|
)
|
|
|
(19,743
|
)
|
|
|
(18,634
|
)
|
|
|
(14,251
|
)
|
|
|
(2,134
|
)
|
Equity in earnings / Loss on disposal of associated company
|
|
|
4,030
|
|
|
|
5,161
|
|
|
|
(2,274
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on disposal of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,623
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income (loss) before income taxes
|
|
|
(923
|
)
|
|
|
13,774
|
|
|
|
(48,523
|
)
|
|
|
(16,519
|
)
|
|
|
(75,397
|
)
|
|
|
(11,291
|
)
|
Income tax (expense) benefit
|
|
|
(1,862
|
)
|
|
|
(4,462
|
)
|
|
|
38,383
|
|
|
|
(1,295
|
)
|
|
|
(1,436
|
)
|
|
|
(215
|
)
|
Net income (loss) before non-controlling interests
|
|
|
(2,785
|
)
|
|
|
9,312
|
|
|
|
(10,140
|
)
|
|
|
(17,814
|
)
|
|
|
(76,833
|
)
|
|
|
(11,506
|
)
|
Non-controlling interests
|
|
|
(1,351
|
)
|
|
|
1,818
|
|
|
|
(613
|
)
|
|
|
(4,006
|
)
|
|
|
(11,255
|
)
|
|
|
(1,686
|
)
|
Net income (loss) attributable to Origin Agritech Limited
|
|
|
(1,434
|
)
|
|
|
7,494
|
|
|
|
(9,527
|
)
|
|
|
(13,808
|
)
|
|
|
(65,578
|
)
|
|
|
(9,820
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.06
|
)
|
|
|
0.32
|
|
|
|
(0.42
|
)
|
|
|
(0.61
|
)
|
|
|
(2.87
|
)
|
|
|
(0. 43)
|
|
Diluted
|
|
|
(0.06
|
)
|
|
|
0.32
|
|
|
|
(0.42
|
)
|
|
|
(0.61
|
)
|
|
|
(2.87
|
)
|
|
|
(0.43
|
)
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,382,812
|
|
|
|
23,259,127
|
|
|
|
22,743,853
|
|
|
|
22,794,791
|
|
|
|
22,858,541
|
|
|
|
22,858,541
|
|
Diluted
|
|
|
23,382,812
|
|
|
|
23,278,443
|
|
|
|
22,743,853
|
|
|
|
22,794,791
|
|
|
|
22,858,541
|
|
|
|
22,858,541
|
|
|
|
Sept 30
|
|
|
Sept 30
|
|
|
Sept 30
|
|
|
Sept 30
|
|
|
Sept 30
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
USD’000(1)
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
152,789
|
|
|
|
131,978
|
|
|
|
46,268
|
|
|
|
66,025
|
|
|
|
54,509
|
|
|
|
8,163
|
|
Current working capital (2)
|
|
|
(46,153
|
)
|
|
|
(67,436
|
)
|
|
|
(79,660
|
)
|
|
|
(90,381
|
)
|
|
|
(136,399
|
)
|
|
|
(20,426
|
)
|
Total assets
|
|
|
975,437
|
|
|
|
1,158,072
|
|
|
|
1,064,870
|
|
|
|
985,829
|
|
|
|
880,626
|
|
|
|
131,874
|
|
Deferred revenues
|
|
|
23,243
|
|
|
|
22,069
|
|
|
|
19,029
|
|
|
|
11,248
|
|
|
|
7,008
|
|
|
|
1,049
|
|
Total current liabilities
|
|
|
605,195
|
|
|
|
751,978
|
|
|
|
704,611
|
|
|
|
634,140
|
|
|
|
614,502
|
|
|
|
92,022
|
|
Total liabilities
|
|
|
662,005
|
|
|
|
837,827
|
|
|
|
755,283
|
|
|
|
695,091
|
|
|
|
662,009
|
|
|
|
99,136
|
|
Non-controlling interests
|
|
|
52,385
|
|
|
|
54,203
|
|
|
|
53,590
|
|
|
|
49,584
|
|
|
|
38,329
|
|
|
|
5,740
|
|
Total Origin Agritech Limited shareholders’ equity
|
|
|
261,047
|
|
|
|
266,042
|
|
|
|
255,997
|
|
|
|
241,194
|
|
|
|
180,288
|
|
|
|
26,998
|
|
(1) Translation of Renminbi amounts into United States dollar
amounts has been made for the convenience of the reader for the year ended September 30, 2016 and has been made at the exchange
rate quoted by the closing rate by the State Administration of Foreign Exchange in China on September 30, 2016 of RMB6.6778 to
US$1.00. Such translation amounts should not be construed as representations that the Renminbi amounts could be readily converted
into United States dollar amounts at that rate or any other rate.
(2) Current working capital is the difference between total
current assets and total current liabilities.
Exchange Rate Information
The conversion of Renminbi into U.S. dollars in this Annual
Report is based on the statistics of the State Administration of Foreign Exchange with respect to our historical financial statements.
The consolidated financial statements are presented in Renminbi as the reporting currency. The translation of Renminbi amounts
into United States dollar amounts has been made for the convenience of the reader and has been made at the exchange rate quoted
by the closing rate by the State Administration of Foreign Exchange in China on September 30, 2016 of RMB6.6778 to US$1.00. Unless
otherwise noted, for the years ended September 30, 2012, 2013, 2014, 2015 and 2016, all translations from Renminbi to U.S. dollars
in this Annual Report were made at RMB6.3410, RMB6.1480, RMB6.1525, RMB6.3613 and RMB6.6778 per US $1.00, respectively, which
were the prevailing year or period end closing rates for those periods. We make no representation that any Renminbi or U.S. dollar
amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the
rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation
of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.
The following table sets forth information concerning exchange
rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience
and are not necessarily the exchange rates that we used in this Annual Report or will use in the preparation of our periodic reports
or any other information to be provided to you. The source of the rates is the State Administration of Foreign Exchange in
China. At September 30, 2015 the closing exchange rate was RMB6.3613 for one U.S. dollar. As of January
9, 2017, the closing exchange rate was RMB6.9262 for one U.S. dollar.
|
|
Average (1)
|
|
|
High
|
|
|
Low
|
|
|
Period-end
|
|
2011
|
|
|
6.4576
|
|
|
|
6.6349
|
|
|
|
6.3165
|
|
|
|
6.3549
|
|
2012
|
|
|
6.3189
|
|
|
|
6.3482
|
|
|
|
6.2787
|
|
|
|
6.3410
|
|
2013
|
|
|
6.2318
|
|
|
|
6.3449
|
|
|
|
6.1475
|
|
|
|
6.1480
|
|
2014
|
|
|
6.1446
|
|
|
|
6.1710
|
|
|
|
6.0930
|
|
|
|
6.1525
|
|
2015
|
|
|
6.1644
|
|
|
|
6.4085
|
|
|
|
6.1079
|
|
|
|
6.3613
|
|
2016
|
|
|
6.5377
|
|
|
|
6.6971
|
|
|
|
6.3154
|
|
|
|
6.6778
|
|
April 2016
|
|
|
6.4762
|
|
|
|
6.5120
|
|
|
|
6.4579
|
|
|
|
6.4589
|
|
May 2016
|
|
|
6.5315
|
|
|
|
6.5790
|
|
|
|
6.4565
|
|
|
|
6.5790
|
|
June 2016
|
|
|
6.5874
|
|
|
|
6.6528
|
|
|
|
6.5497
|
|
|
|
6.6312
|
|
July 2016
|
|
|
6.6774
|
|
|
|
6.6971
|
|
|
|
6.6472
|
|
|
|
6.6511
|
|
August 2016
|
|
|
6.6474
|
|
|
|
6.6908
|
|
|
|
6.6056
|
|
|
|
6.6908
|
|
September 2016
|
|
|
6.6715
|
|
|
|
6.6908
|
|
|
|
6.6513
|
|
|
|
6.6778
|
|
October 2016
|
|
|
6.7442
|
|
|
|
6.7858
|
|
|
|
6.7008
|
|
|
|
6.7641
|
|
November 2016
|
|
|
6.8375
|
|
|
|
6.9168
|
|
|
|
6.7491
|
|
|
|
6.8865
|
|
December 2016
|
|
|
6.9182
|
|
|
|
6.9508
|
|
|
|
6.8575
|
|
|
|
6.9370
|
|
(1) Annual averages are calculated from month-end rates. Monthly
averages are calculated using the average of the daily rates during the month.
|
B.
|
Capitalization and indebtedness
.
|
Not Applicable
|
C.
|
Reasons for the offer and use of proceeds
.
|
Not Applicable.
Risks relating to our business
If we do not manage our ongoing growth successfully, our
growth and chances for profitability may be hindered or impeded.
We continue to be a growth orientated company, with a focus
on researching and developing our corn seeds and biotechnology, and licensing our traits and seed germplasm characteristics within
China and around the globe. All these activities are expected to create significant demands on our corporate administrative, operational,
and financial personnel and other human resources and on our cash flow needs and the requirement for additional working capital.
Our current resources may not be adequate to support our planned operations and expansion. These demands and ongoing industry factors,
such as overproduction or government policy changes, the increase in cost of seed distribution, may hinder our cash flow as our
profit margins and sales may be adversely affected. For other reasons our expansion efforts may also not be successful.
We require short-term financing to fund our working capital.
The nature of the agricultural seed production industry involves
expenses and revenues cycles that are seasonal in nature. In the third and fourth quarters of our fiscal year, we may face seed
production costs that are in excess of our cash flow sources. The advance payments we make to our seed producing farmers may exceed
the amount of deposits we receive from our customers, the seed distributors and end users. We have customarily relied upon short
term bridge loans to cover our expenses pending receipt of cash payment from farmers at the time of seed purchases. Although historically
we have had access to sufficient financing to manage our cash flow cycles, we cannot be certain that we will be able to obtain
sufficient debt financing on terms that are satisfactory to us to maintain consistent operating results. Downgrades in our credit
rating, tightening of related credit facilities or financial markets or other limitations on our ability to access short-term financing
would increase our interest costs and adversely affect our operating results and operations.
Because of the nature of our business, which has seasonal
variation, it is likely that our future financial performance will fluctuate from period to period.
The industry in which we operate is seasonal in nature. The
sales season of corn and rice seeds lasts from October to June; the sales season of canola seeds lasts from July to September.
We generally do not have significant sales revenues from July to September, which results in cyclical changes of our cash
flow and operating activities. As a result, if we are unable to generate sufficient working capital from operations and working
capital facilities, we may encounter liquidity difficulties from the period of July through September, which may harm our operations.
The seasonal nature of our business causes our operating results to fluctuate from quarter to quarter. Any unexpected seasonal
or other fluctuations could cause the price of our common shares to fall. As a result, you may not rely on comparisons of our quarterly
operating results as an indication of our future performance.
In addition, as a seed producer our profits depend on our ability
to secure sufficient orders from customers and sufficient seed production from the seed production farms. We also have to manage
our inventory levels and respond to competitive forces in our markets. An adverse change in the seed market conditions may have
material adverse effects on our operating results if we cannot adjust our operating and marketing strategy to respond to such changes.
The results of our operations will be adversely affected by reduced orders and profit margins in the event of a slowdown in market
demand, constraint on the market supply, an increase in business competition, a decrease in government subsidies to farmers, increased
costs, or for other reasons. As such, there is a risk that we will not be able to achieve or maintain profitability or our historical
results.
Aged inventory may result in an increase of our expenses
and cause operating losses.
We normally produce seeds according to our annualized production
estimate that is developed at least one year before delivery to our customers. If our production plan is too aggressive, we could
produce more seeds than the market demands, resulting in larger amounts of inventory that remain unsold. We may decide not to sell
these aged seeds as crop seed products, taking into account factors such as the quality of the seeds and commodity pricing. In
that case, the aged inventory may be sold as common feed products at greatly reduced prices. Aged inventory could result in asset
impairment risk, in which case we would suffer a loss and incur an increase in our cost of revenues and a decrease in gross profit.
Over the last several years, due to competition and our production levels, we have experienced larger amounts of inventory and
had to liquidate our aged seeds resulting in unanticipated losses, which has affected our operating results.
If we are unable to match our production to customer demand,
our business, financial condition and results of operations may be adversely affected.
We attempt to produce seeds according to an annualized
production plan based on estimated customer demand, our assessment of industry wide inventory, and growing capacities that is
developed before we sell and deliver crop seeds to distributors. Chinese farmers, the end users of our crop seeds, generally
decide to purchase our products based on market prices, economic and weather conditions and other factors that we and our
distributors may not be able to fully or accurately anticipate in advance. In recent years, end-users and distributors began
to purchase seeds online and order closer to the time of use, which makes it more difficult for us to produce according to an
annualized production plan. If we fail to accurately estimate the volume and types of products sought by farmers and
otherwise adequately manage production amounts, which may also be adversely affected by weather conditions, we may produce
more seeds than we are able to sell, resulting in excess inventory and aged seeds. On the other hand, if we underestimate
demand, we may not be able to satisfy demand for our crop seeds, and thus damage our customer relations and end-user loyalty.
Additionally, the ordering closer to the time of use has made it more difficult to estimate needed inventory quantities to
fulfill orders, and this has resulted in over production and consequential write downs of inventory. Our failure to estimate
farmers’ future needs and to match our production to the demand, overall industry inventory and competition may
adversely affect our business, financial condition and results of operations. In addition, inadequate distributor liquidity
could affect distributors’ ability to pay for our products and, therefore, affect our sales or our ability to collect
on our receivables. Partly from the shift to on-line purchasing, our receipt of orders is now closer to the time of use, this
timing shift has required us to increase our borrowing to cover production costs, whereas in the past, we partly financed our
operations from advances on orders, which were paid many months in advance of delivery. The increased borrowing has added,
and will continue to add, to the cost of operations.
The successful development and commercialization of our
biotech pipeline of products will be important for our growth.
We conduct our own research and development efforts for genetically
modified seeds, referred to as GM, and we have entered into agreements with the Chinese Academy of Science and the China Agricultural
Academy of Science in the PRC working on genetic modifications and other biotechnologies that give us the right to market the seeds
and technologies they develop. We are also seeking other development and marketing arrangements with other entities in China and
elsewhere. There can be no assurance that these efforts will produce improved seed varieties. Commercial success frequently depends
on being the first company to enter a particular market. The length of time and the risk associated with breeding and biotech pipelines
are similar and interlinked because both are required as a package for commercial success in markets where biotech traits are approved
for growers. Regulatory requirements affect the development of our biotech products, including the GM crop testing of seeds containing
the biotech traits, which could harm our business and results of operations if regulations are not satisfied. The testing procedures
can be lengthy and costly, with no guarantee of success. It could have an adverse effect on our operations if our genetically modified
products are unable to pass the safety evaluation of genetically modified agricultural organisms.
There has been a worldwide increase in the development and application
of genetically modified agricultural products to enhance crop seed quality and increase crop yields. The production
and commercial sales of genetically modified corn and rice seeds have been allowed in China only recently. As government
policies change to allow more genetically modified seeds and demand develops for these products, we expect that we will produce
more genetically modified products to meet customer demand to the extent we are able. There is a risk that our current steps to
respond to the potential competitive threat posed by genetically modified agricultural products, including our research and development
activities with respect to genetically modified crop seeds, may not enable us to compete successfully.
The potential uncertainty in the government regulation
in China of genetic technology and genetically modified, or GM, agricultural products and the acceptance of these products by the
public could have an adverse effect on our business.
We continue to undertake the transition from a conventional
hybrid seed company to an agricultural biotechnology company. It is a slow process because genetically modified seed products are
controversial, and genetic modification has not yet been widely accepted in many countries in the world. The government has only
recently begun to approve GM crops for commercial cultivation. Consumer reaction to GM products is also becoming a factor in the
approval process and the ability of companies, such as ours, to market and sell our products. The relative novelty and the potential
uncertainty in the government regulation of genetic technology and ultimate consumer acceptance will have an effect on our business
development strategy and may cause us to re-evaluate our development programs for developing new seeds.
The government may not approve or limit commercialization
of genetically modified corn products, which could have an adverse impact on the future of the company.
With the successful approval for commercial use of genetically
modified phytase corn, we continue to pursue the commercialization of phytase corn and the development of other seed biotechnology
products. Even though we believe biotechnology is important in agricultural applications, we cannot predict whether or when the
government will approve the full commercialization of genetically modified corn. The government may not approve the full commercialization
of GM corn, and it may even ultimately conclude to limit or ban commercialization and/or research relating to genetically modified
corn and other seed products. Any of these actions could have an adverse impact on our future development, and we would not be
able to recover our research and development costs spent in developing biotechnology products.
Our operations outside China will be subject to foreign
regulatory and legislative requirements, and it will be costly to comply with those regulatory requirements. If we are unable to
meet these requirements, we will not be able to distribute our products.
Foreign regulatory and legislative requirements will impact
the development, manufacture and distribution of our products in the global market. Certain markets may require rigorous testing
and pre-approval prior to a market release of the GM seeds. For example, prior to the entry into the United States market, we believe
that we will need to obtain regulatory approval from various federal and state governmental agencies. The United States Department
of Agriculture has to determine if there are any “plant pest” issues with the specific crop and traits. Further, because
we use Bt genes in our some of our products, the US Environmental Protection Agency (the “EPA”) will have to determine
if there are any pesticide-related traits that are subject to regulation. We may be required to submit a Microbial Commercial Activity
Notice (MCAN) to the EPA, which includes detailed information describing the seed’s characteristics and genetic construction,
health and environmental effects, and other data, before our GM seeds can be used in the United States for commercial purposes.
Finally, even if our products have the required certificates and permits, we continuously will be subject to Food and Drug Administration
(“FDA”) regulations about food safety, which place responsibility on the seed producer to assure the safety of the
GM seed in the food chain. We may also need to provide to the FDA information to prove that our GM crop seeds are “substantially
equivalent” to non-modified versions of the seed. In the United States, we will also be subject to state regulations: for
example, some states have required specific labeling, banned planting and cultivation, and imposed additional certification requirements
for use of GM seeds. These types of central and local government regulation and restrictions exist in many other countries around
the world.
Obtaining and maintaining permits and certificates for production
and sales, and obtaining and maintaining testing, planting and import approvals for our GM seeds, can be time-consuming and costly,
with no guarantee of success. In addition, regulatory and legislative requirements may change over time which may affect our sales
and profitability in those markets. The failure to receive necessary permits or approvals could have long-term effects on our ability
to produce and sell some or all of our current and future products outside China and adversely affect our revenues.
The degree of public acceptance or perceived public acceptance
of our biotechnology products can affect our operations.
Although all genetically modified products must go through rigorous
testing, some opponents of the technology consistently attempt to raise public concern about the potential for adverse effects
of genetically modified seed products on human or animal health, other plants and the environment. The potential for the adventitious
presence of commercial biotechnology traits in conventional seed, or in the grain or products produced from conventional or organic
crops, is another factor that could affect the public’s acceptance of these traits. Public concern can affect the timing
of, and whether we are able to obtain, government approvals. Even after approvals are granted, public concern may lead to increased
regulation or legislation, which could affect our business and operations, and may adversely affect sales of our products to farmers,
due to their concerns about available markets for the sale of crops or other products derived from biotechnology.
Future success in our global business expansion includes
accessing customers in markets outside of China, specifically North America as an initial expansion target. We may not be
able to establish an adequate customer base and distribution network outside of China.
We have never sold products in North America and have no current
brand reputation in the North America market. To enter into the North American market, we will need to collaborate with strategic
partners to; access commercial products that we can bring into our systems, and work with partners to pass through required regulatory
hurdles and develop pre-commercial products. Credibility of our strategic partner’s brands within our systems
will solidify the Origin reputation and brand. Failure to establish these strategic partnerships and ability to sell
into the target markets will adversely affect our Company in establishing brand recognition, obtaining market share, and generating
sales and revenues
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The global competition in biotechnology will affect our
business.
We believe we are a leader in biotechnology in China since we
have been conducting our proprietary biotechnology research program for many years and have built the first internal biotech research
center among domestic Chinese crop seed companies. However, if and when multinational corporations engaged in the crop seed business
expand into the agricultural market in China, they may have a greater portfolio of seed products and more advanced technologies
than us. Major multinational competitors have a long history in the research and commercialization of their products, sophisticated
marketing capabilities and strong intellectual property estates, all of which may give them competitive advantage over us. Any
of these competitive advantages could cause our existing or future products to become less competitive or outdated, and adversely
affect our product acceptance in the market place and our results of operations.
We face significant international competition in the GM
seed market and the competition may affect our overall sales.
The GM seed market outside China is highly competitive, dominated
by a limited number of companies. Many of our competitors have greater experience of the GM market and substantially greater resources
in the research and development of plant biotechnology. These companies also have substantial production facilities for crop seeds.
In addition, our competitors have established market presence, have obtained patent protection in some instances for different
seeds, and have built up their brand reputation and distribution networks globally. In the United States Monsanto Company and E.I.
DuPont de Nemours and Company (Pioneer), dominate the GM corn seed market with approximately 70% of that market. Our competitors’
extensive GM portfolio of seeds and their success in developing new traits in the seeds could render our existing products less
competitive in those markets, resulting in reduced sales compared to our expectations.
Even if we can successfully introduce our GM corn seeds
into the United States market, we may not be able to maintain our market advantage by improving our GM seeds to fit the needs of
the United States market.
GM seeds varieties need to be improved and altered over time
because the weed and insects develop resistance to herbicides and pesticides, which render the benefits of the GM traits less effective.
GM seeds need to be altered to tolerate higher doses and/or new varieties of herbicides and pesticides and other farming practices.
We believe that among other things, this characteristic of GM seeds gives us an opportunity to introduce our products into the
United States GM corn seeds market. Even if we can successfully enter into the United States GM corn seeds market, we will be required
to continue to invest in new research to develop our portfolio of GM corn seeds so that our GM corn seeds can adapt to new herbicides
and pesticides and soil, weather and growing conditions. If our GM corn seed portfolio do not keep pace or goes in a direction
that is not effective in the market, our position in the market would be adversely impacted.
Our Operation outside of China is subject to special risks
and restrictions, which may negatively affect our results of operations.
Historically we have conducted most of our research,
manufacturing and distribution business in China. Although we are in the process of expanding our operation globally,
beyond China, there is no guarantee that we can successfully enter into any market outside of China. Our
expansion outside of China is subject to special risks, including fluctuations in foreign exchange rates, exchange control
regulations, public understanding and acceptance of Chinese GMO products, changes in local political and economic conditions
and import and trade restrictions
We depend on licensed seed products for the majority of
our revenues. If we lose the right to produce and sell licensed seeds, we will lose substantial revenues and suffer substantial
losses.
A substantial portion of our past and current revenues are derived
from licensed hybrid seeds instead of our internally developed proprietary hybrid seeds. The majority of the licensed hybrid seeds
that we sell have been developed and produced under our license agreements with the Corn Research Institute in Li County, Hebei
Province (currently known as Shijiazhuang Liyu Technology Development Co., Ltd., and referred to as Liyu herein), the Henan Agricultural
University and the Zhengzhou Rui Yuan Agricultural Science and Technology Development Co., Ltd. If we are not able to develop and
produce the licensed seed products, if the current license agreements are terminated, or if we are unable to renew some of these
license agreements on commercially reasonable terms or at all, we will suffer a substantial loss of our product offerings and,
consequently, our revenues will be substantially limited and our financial condition and results of operations may be adversely
affected.
We have a relatively short operating history and are subject
to the risks of any growing enterprise, any one of which could limit our growth and our product and market development.
It continues to be difficult to predict how our business will
develop over the long term. Accordingly, we are still facing all of the risks and uncertainties encountered by companies in the
earlier stages of development and expansion, such as:
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uncertain and continued market acceptance for our product extensions and our services;
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evolving nature of the crop seed industry in the PRC, where significant consolidation may occur, leading to the formation of
companies which may be better able to compete with us than is currently the case;
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changing competitive conditions, technological advances or customer preferences could harm sales of our products or services;
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maintaining our competitive position in the PRC and competing with Chinese and international companies, many of which have
longer operating histories and greater resources than us;
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successfully entering into the U.S. market and gaining recognition for our products in the U.S. market;
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maintaining our current licensing arrangements and entering into new ones to expand our product offerings;
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continuing to offer commercially successful products to attract and retain a larger base of direct customers and ultimate users;
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continuing our existing arrangements with production farms that grow our seed products and entering into new arrangements with
additional production farms;
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maintaining effective control of our costs and expenses; and
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retaining our management and skilled technical staff and recruiting additional key employees.
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If we are not able to meet the challenges of building our businesses
and managing our growth, the likely result will be slowed growth, lower margins, additional operational costs and lower income.
Any diversion of management attention to matters related
to corporate reorganization or any delays or difficulties encountered in connection with integrating or changing operations may
have an adverse effect on our core business, results of operations, and/or financial condition.
We are in the process of expanding our business internationally,
particularly into the United States. Corporate reorganization activities present challenges, including geographical coordination,
personnel integration and retention of key management personnel, system integration and the unification of corporate culture. These
efforts could divert management attention from our core business, cause a temporary interruption of or loss of momentum in our
business and the loss of key personnel from the acquired companies. In addition, any proposed acquisitions and corporate reorganization
activities will cause us to incur substantial costs, none of which are generally recoverable.
From time to time we must evaluate whether or not to discontinue
a line of business or an expansion effort, which if discontinued could have an adverse impact on our financial position.
From time to time we evaluate whether or not to continue a particular
line of business or an expansion effort. In the past we implemented restructuring programs to eliminate our activities in agricultural
chemicals and cotton seed development, sales centers, seed distribution and other unprofitable activities. Whenever a company undertakes
to discontinue a line of business, there are expenses associated with the sale or closing of those related operations, which are
reflected in the accounting for discontinued operations. The actual and accounting costs for discontinued operations may have an
adverse effect on the financial position of the company in the period of discontinuance, which may result in an adverse market
reaction and decline in our stock price.
We or our licensors may be subject to intellectual property
infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us or our licensors,
may materially disrupt our business.
We cannot be certain that our licensed or self-developed proprietary
seed products do not or will not infringe the intellectual property rights held by third parties. We, or any of our licensors,
may be subject to legal proceedings and claims from time to time related to the intellectual property of others. If we, or any
of our licensors, are found to have violated the intellectual property rights of others, we may be required to pay damages and
be enjoined from using such intellectual property, and we may incur new or additional licensing fees if we wish to continue using
the infringing products, or be forced to develop or license alternative products. In addition, we may incur substantial expenses
in defending against these third party infringement claims, regardless of their merit.
Efforts to protect our intellectual property rights and
to defend against claims can increase our costs and may not always succeed. Any failures could adversely affect our sales and results
of operations or restrict our ability to conduct our business.
Intellectual property rights are important to our business.
We endeavor to obtain and protect our intellectual property rights where our products are produced. However, we may be unable to
obtain protection for our intellectual property. Even if protection is obtained, competitors, growers or others in the chain of
commerce may raise legal challenges to our rights or illegally infringe our rights, including through means that may be difficult
to prevent, detect or defend. In addition, because of the rapid pace of technological change and the confidentiality of patent
applications in some jurisdictions, competitors may be issued patents from applications that were unknown to us prior to issuance.
These patents could reduce the value of our commercial or pipeline products or, to the extent they cover key technologies on which
we have unknowingly relied, require that we obtain licenses at a financial cost to us or cease using the technology, no matter
how valuable the patents may be to our business. We cannot assure you that we would be able to obtain such licenses on acceptable
terms. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others. There is a risk that the outcome of such potential litigation may not be
in our favor. Such litigation may be costly and may divert management attention as well as consume other resources which could
otherwise be devoted to our business. An adverse determination in any such litigation will impair our intellectual property rights
and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs due to
lack of this kind of insurance being available in China, and we would have to bear all costs arising from such litigation to the
extent we are unable to recover such costs from other parties. The occurrence of any of the foregoing may harm our business, results
of operations and financial condition.
Finally, implementation of PRC intellectual property-related
laws has historically been lacking, primarily because of the ambiguities in the PRC laws and the difficulties in enforcement. Accordingly,
intellectual property rights and confidentiality protections in China may not be as effective as they are in the United States
or other countries, which increases the risk that we may not be able to adequately protect our intellectual property. The increase
in counterfeiting seed products in the market is also affecting the sales of our products.
Our business may not be profitable if we do not continue
to identify and market products considered valuable by our customers.
To be profitable, our crop seed depends on recurring and sustained
reorders. Reorder rates are inherently uncertain due to several factors, many of which are outside our control. These factors include
changing customer preferences, competitive price pressures, and our failure to develop acceptable new products, development of
higher quality products by competitors, weather conditions and general economic conditions.
Our revenue generating business currently focuses on crop
seed development and production and does not permit us to spread our business risks among different businesses and, thus, a disruption
in our seed production or the industry would harm us more immediately and directly.
Our crop seed business is the principal revenue generating business
activity of the Company. Therefore, our business opportunities, revenues and income could be more immediately and directly affected
by disruptions from factors including drought and other natural disasters, epidemics, or widespread problems affecting the crop
seed industry, such as limited farmer credit, payment disruptions or customer rejection of genetically modified crop seeds, among
other things. If there is a disruption as described above, our revenues and income will be reduced, and our business operations
may have to be scaled back.
We are dependent on revenues from our corn seed products
and, therefore, our operating results could be disproportionately and negatively impacted if we are unable to sell a sufficient
amount of corn seed at satisfactory margins.
Corn seed represents the principal source of revenues for the
Company. For the fiscal year ended September 30, 2016, sales of our corn seed products comprised approximately of 91% our
revenues, as compared to 88% for the fiscal year ended September 30, 2015. Our dependence on corn seed makes us particularly
vulnerable to any negative market changes that might occur in this product line. In particular, if the demand for our corn seed
products generally decreases or if the supply exceeds demand, then corn prices will be driven downwards and our margins will be
negatively impacted, which would have an adverse effect on our business, results of operations and financial condition.
Failure to develop and market new products could impact
the Company’s competitive position and have an adverse effect on the Company’s financial results.
The Company’s operating results are largely dependent
on its ability to renew its pipeline of new seed products and services and to bring those products and services to the market.
This ability could be adversely affected by difficulties or delays in product development such as the inability to identify viable
new products, greater than anticipated development costs, technical difficulties, regulatory obstacles, competition, lack of demand,
insufficient intellectual property protection, or lack of market acceptance of new products and services. Due to the lengthy development
process, technological challenges and intense competition, there can be no assurance that any of the products the Company is currently
developing, or could begin to develop in the future, will achieve substantial commercial success. Consequently, if we are not able
to fund our research and development activities and deliver new products to the markets we serve on a timely basis, our growth
and operations will be harmed. In addition, sales of the Company’s new products could cannibalize sales of some of its current
products, offsetting the benefit of even a successful product introduction.
If we fail to introduce and
commercialize new crop seed, we will not be able to recover research, development and cover our other costs.
We cannot guarantee the development and performance of new crop
seed varieties, whether licensed or proprietary, or that they will meet our customers’ expectations. Farmers generally
need time to learn about new seed varieties and how to plant and tend them. Their traditional planting experience may make it difficult
for them to adapt to the new varieties. The process and timing for new seed products to gain market recognition and acceptance
is long and uncertain. If we fail to introduce and commercialize a new seed variety that meets the demand of farmers and to provide
the proper education about the seeds to distributors, farmers and the public, we may not be able to generate sufficient sales to
cover our costs or generate a financial return on our investment.
One or more of our distributors could engage in activities
that are harmful to our brand and to our business.
Our crop seed products are sold primarily through distributors. The
distributors are responsible for ensuring that our products have the appropriate licenses to be sold to farmers in the PRC provinces.
If the distributors do not apply for and receive the appropriate licenses, their sales of our products in those provinces may be
illegal, and we may be subject to government sanctions, including confiscation of illegal revenues and a fine of between two and
three times the amount of such illegal revenues. Unlicensed sales in a province may also cause a delay for our other distributors
in receiving a license from the authorities for that province, which could further adversely impact our sales in that province.
In addition, distributors may sell our products under another brand that is licensed in a particular province if our product is
not licensed there. If our products are sold under another brand, the purchasers will not be aware of our brand name, and we will
be unable to cross-market other crop seed varieties or other products as effectively to these purchasers. Moreover, our ability
to provide appropriate customer service to these purchasers will be negatively affected, and we may be unable to develop our local
knowledge of the needs of these purchasers and their environment. If any of our distributors sell inferior crop seeds produced
by other companies under our brand name, our brand and reputation could be harmed, which could make marketing of our branded crop
seeds more difficult.
We may be exposed to product quality claims, which may
cause us to incur substantial legal expenses and, if determined adversely against us, may cause us to pay significant damage awards.
The performance of our seeds depends on climate, geographical
areas, cultivation method, farmers’ degree of knowledge and other factors in addition to genetic traits and the quality of
our seeds. Natural disasters may also affect the performance of our seeds, particularly when farmers are not able to timely and
effectively respond to those disasters. Furthermore, the cultivability of some farmland is deteriorating because of toxic and hazardous
materials resulting from farmers’ overuse of chemical herbicides and pesticides and the fall-out from other sources of environmental
pollution. These factors generally cause underproduction, but farmers may attribute underproduction to seed quality. We may be
subject to legal proceedings and claims from time to time relating to our seed quality. The defense of these proceedings and claims
can be both costly and time consuming and may significantly divert efforts and resources of our management personnel. An adverse
determination in any such proceeding could subject us to significant liability and damage our market reputation and prevent us
from achieving increased sales and market share. Protracted litigation could also result in our customers or potential customers
deferring or limiting their purchase of our products.
Our revenues depend on the ability of a large number of
farmers to buy seed for cash because financing for purchases of this size and type is not available; therefore, if a substantial
number of our customers become unable to pay for seed, our sales, revenues and operating results will decline.
We have a large and diversified customer base in the PRC. The
large customer base provides some protection to us against a loss of revenues due to the inability of our customers to pay for
seed that has been previously ordered. The unavailability of credit for farmers in the PRC, however, reduces the ability of those
farmers to withstand the effects of difficult economic times. The lack of credit could prevent farmers from fulfilling their purchasing
commitments to us with the result that we may suffer a lower amount of recognized revenues or our revenues and results of operations
may be reduced.
Fluctuations in commodity prices can increase our costs
and decrease our sales.
We purchase the crop seed that we sell from our production growers
at market prices and retain the seed in inventory until it is sold. These purchases constitute a significant portion of the manufacturing
costs for our seeds. We use hedging strategies to mitigate the risk of short-term changes in these prices, but we are unable to
avoid the risk of medium and long-term changes in the market and overall availability of our seeds due to weather and production
vagaries associated with growing plants. Additionally, we cannot predict with certainty the overall national inventory of competing
crop seeds held by our competitors, which amount of seeds will have an impact on market prices and alternative product for farmers
to choose from. Accordingly, increases in commodity prices may negatively affect our cost of goods sold or cause us to increase
seed prices, which could adversely affect our sales. Farmers’ incomes are also affected by commodity prices; as a result,
commodity prices could have a negative effect on their ability to purchase our products.
Price increases for energy costs and raw materials could
have a significant impact on our ability to sustain and grow earnings.
Our production and distribution processes consume significant
amounts of energy and raw materials, especially in connection with the transportation of our products where the costs are subject
to worldwide supply and demand and other factors beyond the control of the Company. Significant variations in the cost of energy,
which primarily reflect market prices for oil and raw materials, may affect the Company’s operating results from period to
period though this has not been a factor in the past. When possible, the Company purchases raw materials through negotiated long-term
contracts to minimize the impact of price fluctuations. The Company has taken actions to offset the effects of higher energy and
raw material costs through selling price increases, productivity improvements and cost reduction programs. Success in offsetting
higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly
depending on the market served. If the Company is not able to fully offset the effects of higher energy and raw material costs,
it could have a significant impact on the Company’s financial results.
Storage systems for seeds have to be managed carefully,
which if not so managed may result in damage to the seeds in storage and, thus, result in operating losses.
Seed storage, among other things, requires careful management
of the temperature and humidity of the storage conditions. Any failure of the storage requirements to maintain the efficacy of
the seeds may result in damage to the seeds in storage and, thus become unsellable for planting. If there is damage to stored seed,
we may have to take impairment in respect of our inventory, which could result in operating losses.
We have limited business insurance coverage in China.
PRC insurance companies do not offer extensive business insurance
products. As a result, we have very limited business liability insurance, business disruption insurance, or product liability coverage
for our operations in China. We have determined that the difficulties associated with acquiring such insurance on commercially
acceptable terms make it impractical for us to obtain such coverage. Most likely we would bear the effects of any business disruption,
litigation or natural disaster resulting in our incurring substantial costs and the diversion of our resources, and could adversely
affect our operations and financial condition.
We rely on producing farmers for the production of our
crop seed products of which the vast majority has been operating with us for a long period of time. Although our relationship with
those farmers has been stable in the past, there are no assurances that those relationships will remain stable in the future. Instability
of this kind could limit the amount of seed products available to us for sale to customers and threaten customer loyalty.
We believe we maintain a favorable relationship with the farmers
in our seed production network. In addition, the fact that we rely on a large number of farmers to produce crop seeds means that
not one or even several farmers can, acting independently, adversely affect our business. However, events such as a shift in pricing
caused by an increase in the value of commodity food crops other than seed crops, increase in land prices or competition could
disrupt our chain of supply. Any of these disruptions could limit the supply of seeds that we obtain in any given year, adversely
affecting supply and thereby lowering revenues in the subsequent marketing season. Such disruption could also damage our distributor
relationships and farmer loyalty to us if we cannot supply the quantity of seed expected by them.
Agreements between our subsidiaries may not reflect terms
that would have resulted from arm’s length negotiations among unaffiliated third parties.
Agreements between our subsidiaries that have been entered into,
including the technical services agreements, by and among Beijing Origin, Changchun Origin, Henan Origin and Origin Biotechnology,
may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. These agreements
relate to, among other things, the transfer of intellectual property rights and the provision of technical research, production
and distribution services.
If our rights to lease land from farmers were subject
to a dispute, or if their legality or validity were challenged, our operations could be disrupted.
PRC law provides for the registration of land ownership and
land-use rights and for the issuance of certificates evidencing land ownership or the right to use land. The administrative system
for registration of land ownership and land-use rights, however, is not well-developed in rural areas where most of our crop seed
production bases are located. As a result, we generally are not able to verify through the land registry system the ownership or
land-use rights of the parties from whom we have leased land. Despite our efforts to obtain representations from the farmers that
they own the land, possess land-use rights or have the right to sub-contract the land-use right on behalf of the holder of such
rights, there is nevertheless a risk that they have not legally and validly granted the right to use the land to us. Moreover,
there is a risk that farmers may, in breach of the terms of the applicable leases, enter into leases with other third parties in
respect of land-use rights which they have previously granted to us, or that they have not entered into leases with third parties
before entering into leases with us.
There is a risk that the legality or validity of our leases
will be subject to dispute or challenge in the future. If our leases become subject to a dispute or challenge, our operations on
such land, especially our research and development on crop breeding, could be suspended and we could lose our rights to use such
land which could adversely affect our business, financial condition and results of operations.
The introduction of other animal feeds in the future may
dramatically reduce the consumption of corn, which may affect our corn seed sales.
Currently, an important use of our corn seed product is as animal
feed. The corn is either used as delivered or is mixed with other feed products and additives. Thus far, there has not been an
animal feed product that can be substituted for corn that provides the same benefits. However, in the event that other animal feed
capable of supplying the same nutrients at similar or lower prices is introduced to the market, farmers may be incentivized to
switch to that product partially or completely depending on the efficacy and economics. In that event, our corn seed sales may
be adversely impacted, and given the predominant position of corn seed as a percentage of our total sales, our sales and financial
positions could be adversely affected.
Normal operation of the Company may be disrupted due to
improper handling of safety procedures in various facilities.
We engage in operating and processing activities with machinery
equipment that can result in serious accidents. If our procedures are not effective, or if an accident occurs, we could be subject
to liabilities arising out of personal injury or death, our operations could be interrupted and we might have to shut down or abandon
affected facilities. In particular, our new Xinjiang processing facilities have commenced formal operation only recently. Workers
may not be as familiar with the operation of the equipment and technicians may not be able to respond to emergencies as effectively
and expeditiously as those in other established facilities, therefore increasing the likelihood of serious accidents occurring.
Accidents could cause us to expend significant amounts of remediate safety issues or to repair damaged facilities.
The transactions contemplated
by that the Master Transaction Agreement may not be completed on the terms or timeline currently contemplated, or at all, as Origin
or the Shihui may be unable to satisfy the conditions or obtain the approvals required to complete the transactions or such approvals
may contain material restrictions or conditions
.
In September 2016, we entered into a Master Transaction Agreement,
along with our controlled companies, with Beijing Shihui Agricultural Development Co.Ltd. (“Shihui”), for the purpose
of selling our commercial seed production and distribution assets and certain other assets in the PRC (the “Sale”)
.
The
transaction involves special risks to our results, including but not limited to, the failure to consummate or delay in consummating
the proposed transaction; the risk that a condition to closing of the proposed transaction may not be satisfied or that required
financing for the proposed transaction may not be available to Shihuior may be delayed; the risk that a regulatory approval that
may be required for the proposed transaction is delayed, is not obtained, or is obtained subject to conditions that are not anticipated;
the effect of the announcement of the proposed transaction on our relationships with our customers, operating results, and business
generally; and adverse changes in general economic or market conditions. We also need to obtain shareholders’ approval to
be able to consummate the transaction, which may not be obtained. If the Sale cannot be completed, our results will be adversely
impacted.
If the sale of the production facilities
for seeds is completed, the anticipated benefits from the transactions may not be realized.
The consummation of the sale of designated seed production assets
is expected to provide us with resources to re-invest in its new strategic business model for and from China. This strategy
is focused on upgrading research & development, enabling the licensing of Origin’s biotech traits and seed gemplasm,
and establishing e-commerce business in North America for the non-GM and organic markets. Through this new strategy, we intends
to diversify its business and reduce the risks we face in our operations but those anticipated benefits may not be realized and
the sale may bring additional risks to our operations:
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we currently generate a significant portion of our revenue from the corn seed production and distribution business in China. Without
that segment of the revenue, our operation results may be negatively impacted;
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we currently have little presence outside of China, in the future, we may not be able to successfully expand our biotechnology
and planned genetic research and introduce our products to non-Chinese markets and obtain new customers in those markets;
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because of the foreign exchange regulations in China, we may not be able to use the proceeds from the sale to fund our foreign
offices and provide necessary funding for the expansion of our foreign operations;
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we may face additional government regulations in the new markets; and
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we may have difficulties in achieving anticipated cost savings, business opportunities and growth prospects from the sale.
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Risks relating to our industry in the PRC
The Chinese agricultural market is highly competitive
and our growth and results of operations may be adversely affected if we are unable to compete effectively.
The agricultural market in China is highly fragmented, largely
regional and competitive, and we expect competition to increase and intensify over time within the sector. We face significant
competition in our crop seed business. Our competitors may have greater financial, research and development resources than us.
Competition may also result from consolidation or other market forces within the crop seed industry in China, the privatized crop
seed producers that were operated by the local governments in China, large state-owned seed companies, and potential participation
of large state owned companies in the seed industry. Our competitors may be better able to take advantage of industry consolidation
and acquisition opportunities than us. The reform and restructuring of the previously state-owned seed enterprises will likely
lead to the reallocation of market share in the seed industry, and our competitors may increase their market share by participating
in the restructuring of the state-owned seed companies. Privatization will likely mean that these producers will need to develop
more efficient and commercially viable business models in order to survive. In addition, the PRC government currently restricts
foreign ownership of any domestic seed development and production business to no more than 49%. When and if such restrictions are
lifted, multinational corporations engaged in the seed business may expand into the agricultural market in China. These companies
have significantly greater financial, technological and other resources than us and may become our major competitors in China.
With the changing industry dynamics, we could face increasing competition from existing and new seed suppliers, and from time to
time, market changes could alter the supply/demand balance significantly for each selling season. If competition intensifies, our
margins may be compressed by more competitive pricing in the short term and may also be compressed in the long term, and we may
lose our market share and experience a negative impact on our margins, revenues and results of operations.
Natural or man-made disasters could damage seed production,
which would cause us to suffer production losses and material reduction of revenues.
We produce our seeds using a network of producing farmers who
plant the crops and harvest the seeds for use as crop seeds for the next growing season. As a result, the source of supply for
our seeds is subject to all of the risks associated with any agricultural enterprise, including natural disasters such as widespread
drought, flood, snowstorm, pestilence and plant diseases, and man-made disasters such as environmental contamination. Other man-made
incidents may damage our products, such as arson or other acts that may adversely affect our crop seed inventory in the winter
storage season. Furthermore, natural or man-made disasters may cause farmers to migrate from the farmland, which would decrease
the number of end users of our products. While our use of a large number of farmers provides some protection against a widespread
failure of any particular crop, the majority of our seed production farmers are located in Gansu, Sichuan, Hunan, and Xinjiang
provinces, making them subject to risks that are somewhat local in nature.
We primarily rely on arrangements with farmers to produce
our crop seed products. If we were unable to continue these arrangements or enter into new arrangements with other farmers, our
total land acreage devoted to crop seed production would decrease and our growth would be inhibited.
We have access to over 3,200 hectares of farmland in several
provinces mainly through contractual arrangements with farmers for seed production. These production agreements to produce crop
seeds are typically one year in duration, covering one growing season. In the event that prices for other crops increase, these
farmers may decide to farm other crops in breach of our seed production agreements with them. If we were unable to find new village
collectives willing to produce crop seeds for us, our business and results of operations would be materially and adversely affected.
Any of these disruptions could materially and adversely affect our supply of crop seeds and our revenues. Such disruptions could
also damage distributor relationships and farmer loyalty if we cannot supply them with the quantities and varieties of seeds that
they expect.
Crop seed prices and sales volumes may decrease in any
given year with a corresponding reduction in sales and margins and results of operations.
Although we follow a branded product strategy to differentiate
our products from our competitors, the crop seed market continues to behave largely as a commodity market in China. There could
be periods of instability in the future during which commodity prices and sales volumes may fluctuate greatly. Commodity prices
can be affected by industry inventory levels, general economic conditions, weather, disease and aspects of demand such as financing,
competition and trade restrictions. As a result, the price that we are able to demand for our seeds is somewhat dependent on the
size of the supply of our seeds in relation to total market supply and demand. The amount of revenues that we receive in any given
year is subject to change. Because production decisions are made prior to the time when order volume or market price is known,
it is possible that we will have too much or not enough products available, each with the attendant impact on revenues, margins
and results of operations.
Prices of crop seed products in China may fluctuate due
to changes in supply and demand.
The profitability of our operations is affected directly by
the selling prices of our products. We benchmark the prices of our crop seed products against the prevailing domestic market prices
of crop seed products of similar quality and attributes. The price of crop seed products in China may fluctuate greatly depending
on the market in any giving year. If the general prices for crop seed products were to decline at a faster rate than our cost of
production and sales or to increase at a slower rate than our cost of production and sales, our profit margins will decrease and
our ability to generate operating results at historical levels will be adversely affected.
Risks relating to our business organization and structure
Three of our PRC operating subsidiaries are controlled
subsidiaries through stock consignment agreements rather than by direct ownership of shares, the terms of which may have to be
enforced, which would require us to incur extra costs, create uncertainty as to ownership of the operating businesses involved
and risk the possible loss of rights.
Under PRC law, foreign entities are not currently permitted
to own more than 49% of a seed production company. In order to address those restrictions, Origin, a non-Chinese entity that cannot
directly own the shares of our PRC operating subsidiaries, namely, Beijing Origin, Changchun Origin, and Henan Origin will instead
hold the right to control such shares in all respects, including voting, dividends, nomination of directors, and corporate management,
through stock consignment agreements executed by the owners of the stock of these companies. In addition, if we engage in the research,
production and sale of genetically modified seed products, then foreign entities are not currently permitted to own any portion
of the seed production company, therefore we have to carefully structure our company.
There is the risk, however, that a consigning shareholder will
not fulfill its obligations under the stock consignment agreement. In that event, we may need to resort to the PRC courts to have
our rights under the applicable agreement enforced. Such enforcement will cause us to incur legal expenses. In addition, while
a case is pending there will be uncertainty regarding our rights as to the three PRC operating subsidiaries involved. A PRC court
may decide not to enforce the agreements in whole or in part. To the extent these agreements are neither observed nor enforced
as intended, the PRC operating subsidiaries will not be controlled by us as intended, which will affect our enterprise value and
restrict our ability to obtain the income and other rights of ownership associated with the consigned stock. It may also prevent
the consolidation of our financial statements with the PRC operating subsidiaries, which would reduce the reported earnings of
the consolidated companies. The uncertainty of ownership may also adversely affect the market value of our ordinary shares.
Whether or not a stock consignment agreement is terminated
depends on the consensus of our Board and the consignees. Any such termination could result in a possible loss of certain rights
or assets held by us without receiving fair value in return.
The stock consignment agreements relating to our control of
the stock of our PRC operating subsidiaries (not including Origin Biotechnology) may be terminated after three years upon mutual
agreement between us and the consignees. One of the PRC consignees, Dr. Han also serves as our directors and owns 4,503,827 shares
of our ordinary stock. Holding this amount of stock will allow these officers to control or greatly influence the selection of
directors and matters submitted to a vote of our shareholders, including voting to terminate the stock consignment agreements.
There are corporate protections in place designed to protect
our interests, such as an independent Board of Directors, an audit committee comprised of independent directors that must approve
insider transactions, a code of conduct requiring fair dealing with the Company, and the British Virgin Islands statutory provision
that a disposition of more than 50% of the assets of a company must be approved by a majority of the shareholders. Moreover, if
consigned stock is transferred to us as provided in the stock consignment agreements when the restrictions under PRC law are lifted,
that stock will no longer be subject to the stock consignment agreements, and the termination of the stock consignment agreements
would then have no effect on the ownership of that stock. However, if the stock consignment agreements are terminated, then we
would lose our rights with respect to the consigned stock and the profits from the issuing corporation. Such a loss would impair
the value of the Company and would reduce our ability to generate revenues.
Risks relating to doing business in China
If we do not comply with PRC regulations, we may not be
able to operate our business or we may be fined, both of which would adversely affect our business, operations and revenues.
The PRC has many regulations relating to the seed business,
including obtaining and maintaining operating licenses and permits. Seed products must be licensed and undergo a stringent review
process before they may be sold in the PRC. Environmental regulation in the future may be potentially concerned with the development,
growing and use of GM seed products. We believe we currently have all the necessary licenses for our business, and that we are
in compliance with applicable laws and regulations. If we are not in compliance, we may be fined or lose the ability to sell a
particular seed or operate our business altogether. If the fines are substantial or if our ability to sell or operate is withdrawn,
this will result in additional costs or the loss of revenues and could prevent us from continuing as an operating business.
If we do not comply with applicable government regulations,
we may be prohibited from continuing some or all of our operations, resulting in a reduction of growth and ultimately market share
due to loss of competitive position.
Continuation of our business revenues depends on receiving approval
from the PRC government to market new seed hybrids that we are developing and will develop. In addition, there may be circumstances
under which the governmental approvals granted are subject to change without substantial advance notice, and it is possible that
we could fail to obtain the approvals needed to expand our business. The failure to obtain or to maintain such approvals would
limit the number and quality of products that we would be able to offer. This reduction in product offerings would cause a reduction
in the growth previously experienced and over time would result in the loss of market share from the competitive pressures of seeds
developed by others that would likely be better than our products.
The technical services agreements between
Origin Biotechnology and the other operating subsidiaries may be subject to scrutiny by the PRC tax authorities for transfer pricing
adjustments.
We could face adverse tax consequences if the PRC tax authorities
determine that our technical service agreements between Origin Biotechnology and the other PRC operating subsidiaries, namely,
Beijing Origin, Changchun Origin, and Henan Origin, were not entered into based on arm’s length negotiations. If the PRC
tax authorities determine that these agreements were not entered into on an arm’s length basis, they may adjust our income
and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result in a
reduction, for PRC tax purposes, of deductions recorded by the three PRC operating subsidiaries, which could adversely affect us
by:
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increasing the PRC operating subsidiaries’ tax liability without reducing Origin Biotechnology’s tax liability,
which could further result in late payment fees and other penalties to our PRC operating subsidiaries for under-paid taxes; or
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limiting Origin Biotechnology’s ability to maintain preferential tax treatment and government financial incentives, which,
if the transfer pricing adjustment is significant, could result in Origin Biotechnology failing to qualify for those preferential
tax treatments and government financial incentives.
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As a result, any transfer pricing adjustment could have an adverse
impact on our financial condition.
Our business benefits from certain PRC government subsidies
for the agricultural sector. Expiration of, or changes to, these incentives could have a material adverse effect on our operating
results.
The PRC government has in recent years reduced taxes and
increased subsidies and other support across the agricultural industry. For instance, the government subsidizes farmers for
their seed purchases, and has increased spending on rural infrastructure. Sales of agricultural products from producers to
intermediaries or to farmers are exempt from PRC Value-Added Tax (“VAT”). The discontinuance of preferential
treatments granted by the Chinese government to the seed industry and farmers could adversely affect our earnings. In
addition, subsidy policies may have an adverse effect on our ability to market our products. Farmers can buy crop seeds
designated as “high-quality” at subsidized prices, however, the designation of seeds as
“high-quality” is at the discretion of the local government. It is possible that this policy could result in
preferential treatment for local seed producers, with locally produced seeds being designated as “high-quality”
while ours are not designated as such. If such preferential treatment were to occur, the price for our seeds to farmers in
those provinces would be higher than the subsidized local seeds, and our sales in that province could suffer, which could
adversely affect our results of operations.
The discontinuation of any of the preferential tax treatments
currently available to our PRC subsidiaries could materially increase our tax liabilities.
Prior to January 1, 2008, under applicable PRC tax laws, companies
established in China were generally subject to a state and local enterprise income tax, or EIT, at rates of 30% and 3%, respectively.
In addition, an enterprise qualified as a “high and new technology enterprise,” including agricultural companies, located
in certain specified high-tech zones was entitled to a preferential state EIT rate of 15% and could enjoy an exemption from the
state EIT for the first three years since its establishment and a 50% reduction of the state EIT for the succeeding three years.
The qualification of a “high and new technology enterprise” was subject to an annual or biennial evaluation by the
relevant government authority in China. Beijing Origin is entitled to a preferential tax rate of 15% as a new technology company.
Additionally, Beijing Origin has recently received the “breed-produce-distribute” integrated crop seed license and
is currently applying for more favorable tax rate.
In 2007, the National People’s Congress, enacted the Enterprise
Income Tax Law, or the New EIT Law, and in December 2007, the State Council promulgated the implementing rules of the EIT Law,
both of which became effective on January 1, 2008. The EIT Law significantly curtails tax incentives granted to foreign-invested
enterprises under the previous tax law. The EIT Law, however, (i) reduces the top rate of enterprise income tax to 25%, (ii) permits
companies to continue to enjoy their existing tax incentives, subject to certain transitional phase-out rules, and (iii) introduces
new tax incentives, subject to various qualification criteria. Under the phase-out rules, enterprises established before the promulgation
date of the EIT Law and which were granted preferential EIT treatment under the then effective tax laws or regulations may continue
to enjoy their tax holidays until their expiration and will gradually transition to the uniform 25% EIT rate over a five-year transition
period. In addition, the new technology enterprise qualification of our PRC subsidiaries is subject to a biennial re-assessment
by the relevant PRC government authority. In the event the preferential tax treatment for our PRC subsidiaries is discontinued,
the affected entity will become subject to the standard PRC enterprise income tax rate. There is no assurance that the local tax
authorities will not, in the future, change their position and discontinue any of our preferential tax treatments, potentially
with retroactive effect. The discontinuation of any of our preferential tax treatments could materially increase our tax obligations,
and our application for more favorable tax rate based on our “breed-produce-distribute” integrated crop seed license
may not be approved.
Under China’s Enterprise Income Tax Law, we may
be classified as a “resident enterprise” of China. Such classification could result in unfavorable tax consequences
to us and our non-PRC shareholders
Under the current Enterprise Income Tax Law, or the New EIT
Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.
The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over
the production and operations, personnel, accounting, and properties” of the enterprise. However, it is unclear
how tax authorities will determine tax residency based on the facts of each case. If the PRC tax authorities determine that our
British Virgin Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number
of unfavorable PRC tax consequences could follow. First, we may be subject to enterprise income tax on our worldwide taxable income
as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules dividends paid
to holding companies outside of China which are “resident enterprises will be subject to a 10% withholding tax. It is
possible that future guidance issued with respect to the new “resident enterprise” classification could be applied
to our British Virgin Islands sub-holding company with similar consequences. Therefore, any dividends paid by our PRC subsidiaries
may be subject to a 10% withholding obligation.
In addition to the uncertainty in how the new “resident
enterprise” classification could apply, it is also possible that the rules may change in the future, possibly with retroactive
effect.
Adverse changes in political and economic policies of
the PRC, including its policy of reforming its economic system, could have an adverse effect on the growth of private businesses
in the PRC such as ours.
Since the late 1970’s, the PRC has been reforming its
economic system and changing from a planned economy based on governmental dictates and priorities to one that uses market forces
to influence deployment of economic resources, labor and capital and to determine business endeavors. We cannot predict whether
or not the government will continue to encourage economic liberalization and further loosens its control over the economy and encourage
private enterprise. We also cannot predict the timing or extent of future economic reforms that may be proposed. Any re-imposition
of planned economy regulation or similar kinds of restrictions could reduce the freedom of private businesses to operate in a profitable
manner, restrict inflows of capital or stifle investor willingness to participate in the PRC economy. To the extent we need additional
capital; any restrictions on foreign ownership, foreign investment and repatriation of profits will hamper our ability to find
capital outside of the PRC.
A return to profit repatriation controls may limit our
ability to pay dividends and expand our business, and may reduce the attractiveness of investing in PRC business opportunities.
PRC law allows enterprises owned by foreign investors to remit
to other countries their current account items, such as profits, dividends and bonuses earned in the PRC, and the remittance does
not require prior approval by the State Administration of Foreign Exchange, or SAFE, upon the proper production of qualified commercial
vouchers or legal documents as required by the regulations. However, dividend payments are subject to prior satisfaction of corporate
and withholding tax obligations, corporate reserve requirements and board determined social benefit allocations. SAFE regulations
generally require extensive documentation and reporting about other kinds of payments to be transmitted outside of China, some
of which is burdensome and slows payments. If there is a return to payment restrictions and reporting, the ability of a PRC company
to attract investors will be reduced.
Also, our investors may not be able to obtain the benefits of
the profits of the business generated in the PRC for other reasons. Relevant PRC laws and regulations permit payment of dividends
only from accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our subsidiaries
and our affiliated entities in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund
a statutory reserve until such reserve reaches 50% of its registered capital, and to further set aside a portion of its after-tax
profits to fund the employee welfare fund at the discretion of the shareholders’ meeting or the board. These reserves are
not distributable as cash dividends. In addition, the PRC tax authorities may require us to adjust our taxable income under the
contractual arrangements we currently have in place in a manner that would materially and adversely affect our subsidiary’s
ability to pay dividends and other distributions to us. Any limitation on the ability of our subsidiary and our affiliated entity
to distribute dividends or other payments to us could materially limit our ability to grow, make investments or acquisitions that
could be beneficial to our businesses or otherwise fund and conduct our business.
Pursuant to PRC enterprise income tax law, dividends payable
by a foreign-invested enterprise, or FIE, including Origin Biotechnology, from sources in the PRC to its foreign investors are
subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with
China that provides for a different withholding arrangement. No such treaty currently exists with the British Virgin Islands. Prior
to 2008, dividend payments to foreign investors made by FIEs were exempt from PRC withholding tax.
Any fluctuations in exchange rates may adversely affect
your investment.
The value of the Renminbi against the U.S. dollar and other
currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Because our earnings
and cash from operations are denominated in Renminbi, as the reporting currency, fluctuations in exchange rates between U.S. dollars
and Renminbi will affect our balance sheet and earnings per share when stated in U.S. dollars. The translation of Renminbi amounts
into United States dollar amounts has been made for the convenience of the reader. Such translation amounts should not be construed
as representations that the Renminbi amounts could be readily converted into United States dollar amounts at that rate or any other
rate. The appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results
when reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations
in the exchange rate will affect the relative value of any dividend we issue which will be exchanged into U.S. dollars, the value
of any U.S. dollar denominated investments we make in the future and any earnings on such investments.
There are government regulations that limit or prohibit
foreign investment in the PRC, which may restrict our growth.
Notwithstanding the general restriction on foreign investment
in the seed industry in the PRC, our corporate structure currently enables us to receive foreign investment. Our continued ability
to receive foreign investment may be important to our ability to continue to expand our business rapidly and to manage that expansion
effectively. We cannot be certain that a change in the regulations allowing us to receive foreign investment will not occur. In
the event of such a change, our plan to expand our business could be disrupted.
PRC regulations relating to offshore investment activities
by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas
and cross-border investment activity. Failure by our shareholders who are PRC residents to make any required applications and filings
pursuant to such regulations may prevent us from being able to distribute profits, if any, and could expose us and our PRC resident
shareholders to liability under PRC law.
SAFE promulgated regulations that require registration with
local SAFE offices in connection with direct or indirect offshore investment by PRC residents, including PRC individual residents
and PRC corporate entities. These regulations apply to our shareholders who are PRC residents and also apply to our prior and future
offshore acquisitions. In particular, the SAFE regulations require PRC residents to file with competent SAFE offices information
about offshore companies in which they have directly or indirectly invested and to make follow-up filings in connection with certain
material transactions involving such offshore companies, such as increases or decreases in investment amount, transfers or exchanges
of shares, mergers or divisions, long-term equity or debt investments, or external guarantees or other material events that do
not involve return investment.
The SAFE regulations required prior registration of direct or
indirect investments previously made by PRC residents in offshore companies. If a PRC resident with a direct or indirect stake
in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company
may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from
any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with various
SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.
We believe our major shareholders who are PRC residents, or
whose shares are beneficially owned by PRC residents, have completed foreign exchange registration with the local foreign exchange
bureau according to these SAFE regulations. However, with these regulations there is uncertainty concerning the reconciliation
of the new regulations with other approval requirements, it is unclear how the regulations, and any future legislation concerning
offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We
cannot assure you that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable
registrations or approvals required by the regulations or other related legislation. The failure or inability of our PRC resident
shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions,
restrict our overseas or cross-border investment activities, limit our PRC subsidiary to make distributions or pay dividends or
affect our ownership structure. As a result, our business operations and our ability to distribute a dividend to you could be adversely
affected.
The PRC legal system has inherent uncertainties that could
limit the legal protections available to you.
Nearly all of our assets and all of our operations are in the
PRC. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but are not binding on
subsequent cases and have limited precedential value. Since 1979, the PRC legislative bodies have promulgated laws and regulations
dealing with such economic matters as foreign investment, corporate organization and governance, commerce, taxation and trade.
However, because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement
of these laws and regulations involve uncertainties. The laws in the PRC differ from the laws in the United States and may afford
less protection to our non-PRC shareholders.
You may experience difficulties in effecting service of
legal process, enforcing foreign judgments or bringing original actions in the PRC based on United States judgments against us,
our subsidiaries, officers and directors.
We are incorporated in the British Virgin Islands and our PRC
operating subsidiaries are formed under PRC law. Substantially all of our assets are located in the PRC. In addition, some of our
directors and executive officers reside within the PRC, and substantially all of the assets of these persons are located within
the PRC. It may not be possible to affect service of process within the United States or elsewhere outside the PRC upon our directors,
or executive officers and experts, including effecting service of process with respect to matters arising under United States federal
securities laws or applicable state securities laws. The PRC does not have treaties providing for the reciprocal recognition and
enforcement of judgments of courts with the United States and many other countries. As a result, recognition and enforcement in
the PRC of judgments of a court in the United States or many other jurisdictions in relation to any matter, including securities
laws, may be difficult or impossible. Furthermore, an original action may be brought in the PRC against our assets and our subsidiaries,
our directors and executive officers and experts only if the actions are not required to be arbitrated by PRC law and only if the
facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC
court may award civil liability, including monetary damages.
A reversion in the Chinese government’s policy of
favoring state owned enterprise including seed companies at the expanse of privately owned companies may disadvantage our competitive
position in the industry.
In China, state owned enterprises including state owned seed
companies typically enjoy preferential policy treatments such as more favorable access to capital, tax breaks and subsidies at
various levels of governments. These treatments have created barrier of entry protecting state companies at the expense of private
ones, both domestic and international. Despite the reform of the Chinese seed industry in 2008 and the anticipated market-driven
industry consolidation going forward, any reversion in the Chinese government’s policy to protect state owned seed companies
may again pose competitive challenges to non-state owned companies such as Origin.
We may become a passive foreign investment company, which
could result in adverse U.S. tax consequences to U.S. holders.
Depending upon the value of our shares and the composition of
our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, by the IRS, for U.S.
federal income tax purposes. If we were classified as a PFIC in any taxable year in which you hold our shares and you are a U.S.
investor, you would generally be taxed at higher ordinary income rates, rather than lower capital gain rates, when we dispose of
those shares at a gain in a later year, even if we are not a PFIC in that year. In addition, a portion of the tax imposed on your
gain would be increased by an interest charge. Moreover, if we were classified as a PFIC in any taxable year, you would not be
able to benefit from any preferential tax rate with respect to any dividend distribution that you may receive from us in that year
or any later year. Finally, you would also be subject to special U.S. tax reporting requirements.
Based on our understanding and current assessment, we believe
that we were not a PFIC for the taxable year 2015. However, there can be no assurance that we will not be a PFIC for the taxable
year and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year. For example, we would
be a PFIC for the taxable year 2015 if the sum of our average market capitalization, which is our share price multiplied by the
total number of our outstanding shares, and our liabilities over that taxable year is not more than twice the value of our cash,
cash equivalents, and other assets that produce, or are held for the production of, passive income. We could also be a PFIC for
any taxable year if the gross income that we and our subsidiaries earn from passive investments is substantial in comparison with
the gross income from our business operations. While we will continue to examine our PFIC status, we cannot assure you that we
will not be a PFIC for any future taxable year.
Risks relating to our shares
Certain provisions in our organizational documents may
discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.
Our memorandum and articles of association include provisions
that could limit the ability of others to acquire control of us. Under those provisions, our board of directors has the power to
issue preferred shares with such rights attaching to them as they decide and this power could be used in a manner that would delay,
defer or prevent a change of control of us. These provisions could have the effect of depriving you of the opportunity to sell
your shares at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a
tender offer or similar transactions.
We qualify as a foreign private issuer and, as a result,
are subject to reduced requirements with respect to the reporting of financial statements and other material events to our shareholders
and the SEC.
As a foreign private issuer, we are obligated to file an Annual
Report with audited financial statements and Form 6-K reports with the United States Securities and Exchange Commission, or the
SEC, at such times as we release information to the public either voluntarily or pursuant to the laws of the British Virgin Islands
or the PRC. Therefore, the regularity of financial and other information may be less than would be applicable to a domestic United
States registered company under the rules and regulations of the SEC. Investors may not receive information on a timely basis,
which could increase their risk of investment in us.
Because we are a foreign private issuer, we have elected
to follow British Virgin Islands law in connection with compliance under the NASDAQ Marketplace Rules, which restrict the application
of the NASDAQ corporate governance requirements.
The NASDAQ Marketplace Rules permit foreign private issuers
to elect not to be governed by all the corporate governance rules. We have elected to avail ourselves of the exemption provided
by NASDAQ, and we have elected to be governed by only the British Virgin Island laws and the terms of our memorandum and articles,
which for example do not require us to hold an annual meeting each year. Consequently, investors may not have the ability
to express their opinion on our business and the actions of directors through the voting process for directors. In other respects,
we do follow the NASDAQ Marketplace Rules, such as having a nominations and compensation committee, but these are voluntary and
may be eliminated at any time.
Leverage and debt service obligations may adversely affect
our cash flows.
We currently have short-term borrowings of approximately RMB190
million (US$28.45 million) and the current portion of long-term borrowings of approximately RMB27.06 million (US$4.05 million)
and long-term borrowings of approximately RMB20 million (US$3.00 million). The degree to which we are leveraged could,
among other things:
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require us to dedicate a portion of our near term cash flows from operations and other capital resources to debt service;
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make it difficult for us to obtain necessary financing in the future for working capital, acquisitions or other purposes on
favorable terms, if at all;
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make us more vulnerable to industry downturns and competitive pressures;
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limit our flexibility in planning for, or reacting to changes in, our business, and
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require us to dedicate a portion of our near term cash flows from operations and other capital resources to debt service;.
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Our ability to meet our debt service obligations will depend
upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which
are beyond our control.
Future sales by us or our existing shareholders could
depress the market price of our ordinary shares.
If we or our existing shareholders sell a large number of shares
of our ordinary stock, or if we sell additional securities that are convertible into ordinary stock, the market price of our ordinary
stock could decline significantly. Further, even the perception in the public market that we or our existing shareholders might
sell shares of ordinary stock could depress the market price of our ordinary stock.
Our auditor, like other independent registered public
accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board,
and as such, investors may be deprived of the benefits of such inspection.
The independent registered public accounting firm that issues
the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the
United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by
the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States
and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct
inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms
operating in China, is currently not inspected by PCAOB. Inspections of other firms that PCAOB has conducted outside of China have
identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of
the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered
public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures
or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
On May 24, 2013, the PCAOB announced that it has entered into
a Memorandum of Understanding (“MOU”) on Enforcement Cooperation with the China Securities Regulatory Commission (the
“CSRC”) and the Ministry of Finance (the “MOF”). The MOU establishes a cooperative framework between
the parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions.
More specifically, it provides a mechanism for the parties to request and receive from each other assistance in obtaining documents
and information in furtherance of their investigative duties. In addition to developing enforcement MOU, the PCAOB has been
engaged in continuing discussions with the CSRC and MOF to permit joint inspections in China of audit firms that are registered
with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and development of the Company
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Origin was first incorporated in the British Virgin Islands
on February 10, 2005, and is governed by the BVI Business Companies Act, 2004, or BCA, by re-registration on July 10, 2006.
Chardan China Acquisition Corp., the predecessor of Origin,
was a blank check company organized as a corporation under the laws of the State of Delaware on December 5, 2003, formed for the
purpose of effecting a business combination with companies having operations based in China.
On December 20, 2004, Chardan entered into a stock purchase
agreement, referred to as the Stock Purchase Agreement, with State Harvest, a company incorporated in the British Virgin Islands
on October 6, 2004, and all the shareholders of State Harvest. On February 10, 2005, Chardan formed a wholly-owned subsidiary under
the laws of the British Virgin Islands, under the name “Origin Agritech Limited” to effect the stock acquisition of
State Harvest. Chardan merged into Origin to re-domesticate out of the United States, and immediately thereafter, Origin acquired
all of the issued and outstanding stock of State Harvest, which acquisition included three controlled affiliated operating companies,
namely, Beijing Origin, Changchun Origin, and Henan Origin. These three controlled operating companies are organized under the
laws of the PRC.
On June 26, 2007, our common shares began trading on the NASDAQ
Global Select Market, where they continue to trade. Prior to trading on that market, our common shares had been listed on the Nasdaq
Global Market from November 8, 2005 to June 25, 2007.
Over the years, our strategic focus has been on the
corn seed business and corn seed biotechnologies in China. In 2015, we announced our strategic transition from a traditional
seed company to a biotechnology seed company after more than 10 years of successful development in biotech seed products. We
have developed transgenic corn seed products including our first generation biotech product phytase traits, second
generation biotech product glyphosate tolerance traits and our new technologies of stacked traits of Bt and glyphosate
tolerance genes. In 2016, we completed the laboratory and field production trials for our first generation PEST/WEED trait.
We anticipate that in 2017, our first generation WEED and PEST/WEED traits will be incorporated into the elite corn inbred
lines of ours and into the products of leading Chinese seed industry partners preparing for future regulatory approval and
commercialization.
Built on the success of biotech pipelines, we announced
our intention to expand our business globally in 2016. In August 2016, we established our North America office in Des Moines,
Iowa. We have also successfully requested and received the first transgenic corn seed export permit from China’s
Government agencies, following required protocols. Our U.S. collaborator has secured an importation permit for these seeds
from the United States Department of Agriculture(“USDA”). In late 2016 corn seeds containing our lead trait event
and a back-up were successfully shipped from China to the US and planted in a USDA designated greenhouse. Furthermore, corn
seeds carrying our insect resistance and herbicide tolerance technologies developed in China will enter collaborative field
experiments next summer to conduct testing required by the USDA, Environmental Protection Agency and the Food and Drug
Administration.
To further shift our focus from seed production and
distribution to seed biotechnologies, in September 2016, we entered into a Master Transaction Agreement, along with our
controlled companies Beijing Origin Seed Limited (“Beijing Origin”), Denong Zhengcheng Seed Limited
(“Denong”), Changchun Origin Seed Technology Development Limited, (“Changchun Origin”), Linze Origin
Seed Limited (“Linze Origin”), with Beijing Shihui Agricultural Development Co. Ltd., a company incorporated
under the Laws of the PRC (“Shihui”), for the purpose of selling our commercial seed production and distribution
assets and certain other assets in the PRC to Shihui(the “Sale”).We will retain our biotech research facilities
and business in China after the Sale. The Sale is designed to further orient Origin becoming a multi-national seed
development company, capitalizing on its biotechnology assets and skills and to allow us to focus on strategic partnerships
both within China and around the globe. The future focus of Origin will be expansion into the United States and other markets
through licensing its biotech traits and seed germplasm characteristics and continuing to develop both genetically and
non-genetically modified corn and other seeds.
Our principal executive offices are located at No. 21 Sheng
Ming Yuan Road, Changping District, Beijing 102206, China, and our telephone number is (86-10) 5890-7588. Our North America operations
and international relations center is located at 666 Walnut Street, Des Moines, IA 50309.
Overview
Origin Agritech Limited, along with its subsidiaries, is
an agricultural biotechnology company located in the PRC. We specialize in crop seed breeding, genetic improvement, and the
production, processing, distribution of seeds as well as related technical services. We are staffed by 389 employees as of
September 30, 2016, Origin operates 9 breeding stations, 5 production and processing centers, and 5
marketing centers nationwide with sales centers located in key crop-planting regions. Our main corn seed production
facilities are located in Gansu province and Xinjiang province. After our 2015 transformation, Origin is now organized into a
simple structure of two fundamental business lines: Biotech & Product Development under State Harvest and Seed
Production& Distribution under Beijing Origin. In addition, State Harvest has built a solid capacity for breeding
technologies, including marker-assisted breeding and doubled haploids technologies, which we believe along with its rich
germplasm resources, will allow State Harvest to become a global seed technology company. Beijing Origin is focusing on seed
production and distribution business in China. In September 2016, we entered into a Master Transaction Agreement pursuant to
which we have agreed to sell the seed production and distribution business to Beijing Shihui Agricultural Development Co.
Ltd. After the Closing of the Sale, we will focus on growing our biotech research capacity and biotech portfolio and emerging
product pipeline through State Harvest. We will also retain the management persons and staff operating the biotech research
and plant breeding activities, who will continue to be located in the PRC. The transaction is designed to further orient
Origin becoming a multi-national seed development company, capitalizing on its biotechnology assets and skills and to allow
the Company to focus on strategic partnerships both within China and around the globe. The future focus of Origin will be
expansion into the United States and other markets through licensing its biotech traits and seed germplasm characteristics
and continuing to develop both genetically and non-genetically modified corn and other seeds.
We built China’s first in-house agricultural biotechnology
research center in 2005 and have been leading the development of biotechnology among crop seed companies in China since then. In
2009, the Company’s phytase corn was the first transgenic corn to receive the Bio-Safety Certificate from China’s Ministry
of Agriculture. Over many years of proprietary development and collaboration with leading research institutes, Origin has established
a robust seed product and germplasm pipeline, including products with glyphosate tolerance and insect resistance (Bt) traits. After
the Sale, through the retained ownership of Xinjiang Origin, the Company will maintain its “Green Pass” status, providing
the company with the competitive advantage of introducing new hybrid varieties to the Chinese market under an expedited government
approval process.
The Company’s current products include hybrid varieties
of corn, rice and canola seeds, which represented 99.86% of our sales in fiscal year 2016. Hybrid corn seeds remain our strongest
product line, generating 91% of our sales in fiscal year 2016. We believe that we are a leading, technology-focused crop seed company
operating in China. We have sought to broaden our usage and penetration of our latest plant breeding techniques, modern biotechnology,
and innovative information and research management to develop and deliver high-yield seeds to the Chinese farmer. Our goal is to
lead the industry by providing farmers with unique enabling technology and services, producing and protecting higher crop yields.
Our activities include the specialization in the research and development, production, and sales and marketing of crop seeds (corn,
rice, and canola) throughout the PRC.
During the last several years, we have continued to develop
our established plant genetic engineering technology platforms, including transforming herbicide tolerance, insect resistance,
nitrogen efficiency, and drought stress tolerance traits into corn inbred lines. Of note, we made significant strides in developing
our exclusive herbicide tolerance, insect resistance and phytase products. In November 2009, our genetically modified phytase corn
received the Bio-Safety Certificate from PRC’S Ministry of Agriculture. This was the world’s first genetically modified
phytase corn and also the first genetically modified corn seed product in China. The certificate was renewed by the Ministry of
Agriculture in January 2015. We are also actively pursuing the approval of other GM seed products in China including glyphosate
resistant corn and bacillus thuringiensis, or BT, corn.
We seek to utilize modern biotechnology in China more effectively
and plan to use China’s emerging technology base for our future development. In particular, from time to time we enter and
further develop cooperative agreements with publicly funded research institutes in China. In exchange for providing funding to
these institutes, we receive rights, which are frequently exclusive rights, to market any seeds developed by these institutes.
When a seed is ready to be marketed, we negotiate with the institute to establish an arrangement by which we are permitted to sell
the newly developed seeds in exchange for the payment of certain fees to the institute. We believe that these cooperative agreements
allow us to access new products without expending substantial costs for our own research and development.
On the global front, in the first quarter of 2015, we
submitted a patent application to the United States Patent and Trademark Office for our glyphosate-tolerance technologies
which entered public stage in 2016. In addition, we have also applied for a patent in Brazil for similar biotechnologies. In
2016, we filed a patent application on insect resistant corn technology with Patent Cooperation Treaty (PCT), an
international patent system assists applicants seeking patent protection of their inventions internationally. We also file a
patent on insect resistant corn technology in Argentina in 2016. We believe these patents will strengthen further our leading
position in the genetically modified seed technologies in China and will allow us to expand our biotechnology position in the
international seed market.
We also entered into two commercial licensing agreements with
DuPont Pioneer, the advanced seed and genetic business of DuPont, in April 2016 and January 2017. Pursuant to the April license,
the Company and DuPont will jointly develop new seeds for Chinese farmers, and pursuant to the January license, we will gain access
to DuPont’s non-GM corn seed products and bring such products into Origin’s North America non-GM/Organic business.
In August 2016,we established our North American operations
in Des Moines, Iowa. Although our Key biotech and seed breeding operations will continue to be based in China, including the plant
breeding and biotech research and development center, the Xinjiang Origin seed company and the critical off-season winter nursery
in Hainan, we plan to expand partnerships on biotech traits globally via our new Des Moines center.
Research and Development
Developments in the science of genetics have allowed seed producers
to create entirely new species of plants, rather than merely new varieties of existing species. Compared with conventional varieties,
the obvious advantages of these new species, known as GM varieties, are higher yield, better quality and increased disease-resistance
and herbicide tolerance. Farmers plant GM varieties to save time and cost, while also reducing field labor. GM corn, soybean and
cotton have been widely used in the United States and many other countries to guard against insect damage and to increase yield.
Since receiving the Chinese government approval in 1997, cotton that has been genetically modified to guard against damage from
borer insects is now widely planted and accepted in China. The Chinese market has widely accepted GM cotton and the PRC Ministry
of Agriculture has approved GM corn and rice traits. We believe that GM food crop seeds in time will be approved by the PRC Ministry
of Agriculture for production and sale and will be accepted in the Chinese market over time.
Utilizing our existing hybrid seed product line, we seek to
further increase crop yield and produce higher quality seeds with the addition of GM traits. We commenced our own biotechnology
research program in early 2000’s with a goal of having technology in place to produce GM products when demand for these products
is sufficiently high. In 2005, we built an internal research and development center in China for GM crop seeds, which we believe
was the first such facility to be utilized by a Chinese crop seed company. Our key focus remains on biotechnology for GM varieties
of corn, which has accelerated significantly. We currently employ people who are primarily engaged in genetic transformation, molecular
biomarker testing and genetic mapping activities. Our development efforts go beyond our internal biotechnology center, as this
unit serves as a central hub to connect with other research facilities throughout China. We are collaborating with the Chinese
Academy of Sciences, Peking University and China Academy of Agriculture Science in the field of biotechnology. These co-operations
help enhance our research capabilities and will help enable us to develop and commercialize our products. We have established several
plant genetic engineering technology platforms, which incorporate increased herbicide tolerance, insect resistance, nitrogen efficiency,
and drought stress tolerance traits into corn inbred lines. The GM traits and products we are working on now include increased
herbicide tolerance, insect resistance, nitrogen efficiency, and drought stress tolerance in corn. We developed phytase GM
corn, the first genetically modified corn seed product in China. Notwithstanding our obtaining the Bio-Safety Certificate from
the Chinese government, there can be no assurance that GM products generally will be approved in China, and we expect that the
introduction and acceptance of GM products will be cautious.
In addition to biotechnology, our internal research and development
also invests considerable effort in the conventional breeding of hybrid crop seed and we currently have 9 breeding stations across
the country. For our total research and development activities, we employed 72 full time research personnel in this area as of
September 30, 2016. In August 2016, we hired a new Chief Technology Officer, Dr. Jihong Liang, to direct our global biotechnology
and plant genetic research, and to coordinate and accelerate external collaborations with private, academic and governmental partners
to further develop our technologies, traits and seed products. In order to maintain our position as a quality producer of advanced
products and develop new seed products through our biotechnology programs, we have targeted to invest approximate 7-13% of our
revenue into research and development activities. Once we close the Sale of the commercial assets of Beijing Origin in 2017, we
plan to use a part of the net proceeds from the Sale to invest in biotechnology trait and seed germplasm research and development.
The Company has received government funding for research and
development activities. Such funding was received in the fiscal years of 2014, 2015 and 2016 in the amounts of RMB7.61 million,
RMB7.08 million, and RMB10.37 million respectively.
Seasonality
Because we are an agricultural seed production company, we experience
several aspects of seasonality in our operations and revenues. The seasonal nature of our business causes our operating results
to fluctuate from quarter to quarter. The sales season of corn and rice seeds lasts from October to June; the sales season of canola
seeds lasts from July to September. Historically, in the third to fourth quarters of our fiscal year, we face costs that are in
excess of our cash flow sources. The advance payments we make to our seed producing farmers may exceed the amount of deposits we
receive from our customers, the seed distributors and end users. The exact timing of these deposit payments is dependent on the
Chinese lunar calendar, which varies from one calendar year to the next. To mitigate the impact on cash flow, we customarily
have relied upon short term bridge loans to cover our expenses pending receipt of the cash payments from farmers at the time of
their seed purchases.
Commercial Production
We produce most of our hybrid seeds by contracting with local
farmers in China to whom we provide parental seeds and technical support. Currently, we have 127 production personnel and
seed conditioning plants located in Gansu, Xinjiang, Jilin, Henan, and Sichuan, with our main production facilities in Gansu province
and Xinjiang province. The facilities of Xinjiang Origin, along with the seed production land of the Fifth Agricultural Construction
Division, deploy modern technologies and full mechanization throughout the entire production process from land preparation and
seeding to product packaging. This processing facility employs advanced corn husker system, which is one of the largest corn husker
systems in the world. The production base uses modern drip irrigation systems and advanced farming equipment for corn seed production.
Together, our production centers work to supply parental seeds to our producer-farmers, who plant, grow and harvest the hybrid
to produce seeds for us. This network of local farmers who produce our seeds is an important element of our strategy to produce
an increasing number of products with consistent quality. We are the first Chinese seed company to obtain the ISO9001-2000 certification
by the China Certification Center for Quality Mark. With a strict seed quality control system, we have sufficient processing capability
and advanced equipment to allow us to operate efficiently and maintain a high quality of seed products. By employing these practices,
we have achieved product quality on par with that of our foreign competitors and that is consistently well received by our customers.
According to the sales plan we develop for each year, before
the growing season, we choose the planting area according to the trait of the seed variety, and enter into a seed booking production
agreements with the local farmers. Under the agreement, we provide the producer-farmers with the parental seed, as well as the
technical support in the course of farming. After the growing season, we purchase the seeds that meet our quality specifications
from the farmers.
National Marketing and Distribution
We have our own sales organization consisting of 71 employees
who oversee all aspects of our distribution and retail sale network and promote our sales within the distribution chain. In addition,
these individuals provide high-level technical service to our end customers.
The terms of our distributor agreements provide for territorial
exclusivity for a distributor on a designated product, usually on a county-wide basis. To enforce exclusivity and monitor product
locations, we assign a code to each distributor and mark all packaging sent to the distributor with this code. Careful monitoring
of territorial integrity and enforcement of contractual penalties, which may include termination of distribution rights and cancellation
of discounts on prices, provides stability and profitability within the distribution network and aims to provide quality services
and product availability. We believe that we enjoy a positive reputation with our distributors for our implementation and enforcement
of this exclusive distribution system. Distributors buy our seeds at a wholesale price established by us and are required to make
payments to us prior to delivery.
Distributors that place orders and make deposits on orders for
sales to be made the following year at least two months prior to delivery are generally offered a discount. At the end of the annual
sales season, we set a discounted final sales price. The discounted final sales price results from the fact that the PRC government
sets the price for agricultural commodities after we have sold our seeds to distributors. Seed prices fluctuate with agricultural
commodity prices. This correlation is particularly strong for corn seeds that can be consumed as food and used as seeds. For example,
if the price for corn for consumption increases, the price for corn seeds will increase as well. Once the PRC government has set
the price for agricultural commodities, we negotiate with distributors the final price for our seeds which reflects the price the
distributors sold our seeds to farmers and includes any season discount we may offer to such distributors. If the final price is
lower than the preliminary price previously offered by us, we will return the difference to our distributors. Although the final
price could technically be higher than the preliminary price, we have never experienced such a result. As a result of our discount
policy, we cannot set the final price of our seeds to distributors prior to the end of their selling season to farmers. Selling
seasons vary among distributors from region to region and from year to year, and generally start in October and end in June of
the following year for most of our products. We deliver our products and receive payments on a relatively predictable schedule.
First, we request and generally receive a cash deposit, followed by a further pre-payment of the expected sales price. Then, we
deliver products to our customers and receive confirmation of delivery. Finally, we set the final sales price of our delivered
products to a customer based on the total volume of product delivered to that customer.
The specific terms of the distributor agreements vary
depending on negotiations and the nature of the distributor and its prospective territory. There usually is an initial
payment made by the distributors to the Company for the distribution right which is applied in whole or in part to future
orders, depending upon compliance with the terms of the agreement. The agreement also delineates pricing adherence
requirements and permissible discounting sales, territory, ordering and supply obligations, returns, market support and other
regular business terms and dispute resolution provisions. We have also established cell-phone based ordering and sales
management systems. We further reduced the distribution layers by selling directly to retailers in certain regions. We are
currently exploring various commission based sales incentive plans in seven regions.
Our sales team assists distributors in writing monthly sales
plans. During the harvest season, we invite farmers and others in the seed distribution chain to attend production demonstrations
in cooperation with local villages and seed distributors. At these demonstrations, our teams show our seeds, explain planting techniques,
discuss industry best practices and disseminate promotional materials. These marketing and production demonstrations help create
new demand, not only in each village where demonstrations are held, but also in nearby villages, for both the current season and
for succeeding years.
Our technical service department has a 24-hour toll-free telephone
number available for our producer-farmers and distributors, through which they can obtain solutions to specific technical problems.
We also provide customers with limited on-site help. We also enlist the help of our distributors to provide help and advice to
farmers. We believe that our focus on customer service and technical support have helped us to build brand identity and loyalty
and have contributed to our total sales volume.
Product and technical service brochures are provided throughout
the distribution network and have proved to be a valuable tool in promoting the sale of our crop seed products and the recognition
of the Origin brand.
In the recent years, through the arrangement with
Beijing Shihui Agricultural Development Co. Ltd. (“Shihui”), our biggest distributor, our distribution network
has been moving towards on-line distribution and other channels. We have also engaged Shihui to take over more of our
distribution channel and sales centers. Shihui is a related party in that the two principal shareholders are the brother and
son of Dr. Han Gengchen, our Chairman of the Board.
Intellectual Property
Our intellectual property includes trademarks and patents relating
to our seed products. All of the intellectual property has been registered for IP protection in China (or is the subject of a pending
application), and is used in connection with our seed products packaging, production and distribution. Although we do not require
our distributors to pay any license fee for the seed products, the value of the intellectual property has been reflected in selling
price directly. Our intellectual property is crucial to our business, and bears directly on our ability to generate revenues.
We currently have fourteen Chinese patents registered with the
State Intellectual Property Office (“SIPO”) of China. Among these fourteen patents, thirteen domestic patents and one
PCT patent are related to the biotechnology corn seed. One of the thirteen patents relating to the method of producing hybrid corn
seed is jointly owned by Henan Agriculture University and Beijing Origin. Also, we have applied for two additional patents in the
field of our biotechnology corn seed, and the applications have been accepted and are now being reviewed by SIPO.
In addition, we currently have thirty one Chinese trademarks
registered with the Trademark Office of China’s State Administration for Industry and Commerce (“SAIC”). Also,
we have applied for four additional trademarks, and the applications have been accepted and are now being reviewed by the Trademark
Office of China’s SAIC.
In addition to the domestic patents and patent
applications, we have filed patent application outside of China. During the first quarter of fiscal year 2015, we submitted a
patent application to the United States Patent and Trademark Office for our glyphosate-tolerance technologies which entered
public stage in 2016. In addition, we have also applied for a patent in Brazil for similar biotechnologies. In 2016 we filed
a patent application on insect resistant corn technology with Patent Cooperation Treaty (PCT), an international patent system
assists applicants seeking patent protection of their inventions internationally. We also file a patent on insect resistant
corn technology in Argentina in 2016. We believe these patents will strengthen further our leading position in the
genetically modified seed technologies in China and will allow us to expand our biotechnology position in the international
seed market.
As of September 2016, we had eighteen proprietary corn seed
products, ten proprietary rice seed products and one proprietary canola seed product that are in commercial production and distribution.
Licensed Seed Products
In addition to the development of our own proprietary seeds,
we have licenses to distribute seeds developed by independent research and development institutions. Currently, we have licenses
to distribute seventeen varieties of corn seed, twenty six varieties of rice seed and seven varieties of canola seed.
Under a typical license agreement, one of our PRC
Operating Companies will obtain a license for a designated product for exclusive production and marketing within China. The
license fees vary in their method of determination, but generally they are either a percentage of revenues from the sale of
the variety or a flat fee arrangement. Beijing Origin has these types of agreements with China Academy of Sciences
Microbiology Institute, Shijiazhuang Liyu Technology Development Co., Ltd.(Liyu) in Hebei Province, Henan Puyang Agricultural
Academy, Tieling Agricultural Academy, Liaoning Benxi Agricultural Academy, Sichuan Agricultural Academy, Corn Research
Institution of Beijing Agricultural Forestry Academy, Huafeng Seed Limited, Liaocheng Huafeng Corn Breeding Research
Institution, Food Corn Research Institution of Yunnan Agricultural Academy, Henan Agriculture University, Hubei Province
Shiyan Agricultural Sciences Institute, China Rice Research Institution, Zhengzhou Rui Yuan Agricultural Science and
Technology Development Co., Ltd,among others. These agreements generally have no fixed term or termination date. The
agreements may be terminated for breach by either party. We may terminate the agreements at any time, in effect, by not
producing seeds there under, without penalty.
In addition to the exclusive license agreements set forth above,
we also have non-exclusive license agreements. The non-exclusive license fees tend to be lower than the typical exclusive license
fees. Those licensors that lack production ability or distribution channels of their own grant us the right to produce, distribute
and propagate the covered variety of seeds, provide us with technical materials and instructions, supervise seed quality and evaluate
growing areas. We are responsible for undertaking all the propagation costs and maintaining quality standards. The agreements may
be terminated for breach by either party. We may terminate the agreements at any time by not producing seeds there under, without
penalty.
With regards to the licensed GM varieties, we have entered into
a strategic cooperation agreement with the China Academy of Agriculture Science, or CAAS, to work on biotechnology research and
development. That agreement gives us the right to produce and sell the GM crop varieties that are developed in connection with
this arrangement, subject to our obligation to reimburse certain of CAAS’ expenses.
We also entered into two commercial licensing agreements with
DuPont Pioneer, the advanced seed and genetic business of DuPont, in April 2016 and January 2017. Pursuant to the April license,
we and DuPont will jointly develop new seeds for Chinese farmers, and pursuant to the January license, we will gain access to non-GM
corn seed products and bring such products into Origin’s North America non-GM/Organic business.
The Chinese Crop Seed Market
The Chinese agricultural sector is primarily made up of small,
family-oriented farms. Increasingly, corn is becoming an important crop in China because it has a number of uses, including the
use as livestock feed, source of industrial products and a source of fuel in the form of ethanol. In addition, rice is an important
human food crop and canola is used to produce cooking oil.
The Chinese agricultural seed industry is fragmented, with the
corn seed market in particular being served by approximately 5,000 small, local seed suppliers. Most of these seed companies were
established in the 1960s and 1970s by local county governments to address Chinese central government agricultural initiatives.
They were designed at the time to provide service and support to local farmers. These local seed providers usually sell varieties
of agricultural seeds that have been grown in their respective locales for years. The number of small suppliers is generally contracting
as licensing is becoming more stringent and seed products are advancing beyond what they offer.
Improved seed products have been generally available in China
through large multinational suppliers, the largest being Pioneer Hi-Bred International, Inc., or Pioneer, Monsanto Company, or
Monsanto, and Syngenta AG, or Syngenta, each of which established operations in China more than a decade ago. Their products, however,
are limited to those developed through traditional plant and seed selection.
Our business strategy focuses on meeting the needs of small
Chinese farmers and includes the following elements:
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(i.)
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producing and distributing high-quality seed products, initially under third-party licenses and, over time, increasingly internally
developed proprietary seeds, to deliver superior value to our distributor-customers and their farmer-customers;
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(ii.)
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devising a process for obtaining regulatory approvals for new crop seeds (a Chinese legal requirement) that is efficient and
effective;
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(iii.)
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establishing a broad network of producer-farmers and distributor-farmers in several regions to participate in the seed development
process and to produce approved crop seeds for commercial distribution;
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(iv.)
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creating an effective distribution system using a relatively small network of primary distributors, only one in each county
with exclusive territories, with which we can deal directly and efficiently which, in turn, develop their own secondary distribution
network to reach out directly to the consumer- farmers. This distribution network is not only a means for securing and fulfilling
orders, but acts as a conduit for our marketing and technical support activities;
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(v.)
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relying on a number of marketing activities to retain existing customers and attract new ones. These marketing activities include:
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a demonstration program that provides technical assistance to customers regarding the correct seed choice and proper cultivation
methods;
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a database of over 15 million customers that we use to keep repeat sales at a high level, an important component of revenue
growth; and
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(vi.)
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delivering service and technical support to customers throughout the growing season for its products. End-user customers can
contact us through a dedicated call center that handles up to 1,000 calls per day. Field service representatives are dispatched
within 48 hours of a customer’s request for help.
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The average lifespan of a typical product in our industry is
five to seven years. After this period, the product may begin to lose potency and develops material genetic weaknesses that make
the product significantly less attractive in the marketplace. New hybrids are approved every year and the speed at which technology
changes is partially driven by the amount of high quality hybrids produced in the local region for the local seed type. One product
may dominate a particular region for a three to five year time period, and then the dominance may shift depending on the available
seeds for the local soil types.
Competition
We face competition at three primary levels, including large
Chinese companies, small local seed companies, and large multinational hybrid and GM seed producers. Currently, we believe that
we can compete effectively with each of these competitors and that we can continue to do so in the future. Each of these groups
of competitors is discussed in turn below.
Larger Domestic Seed Companies.
While there are six seed companies that control approximately
25% of the corn seed market of China, we believe we may possess the most competitive technology base, including the capability
to develop and commercialize genetically modified seeds. However, there is little public information in this regard, and as a result
other companies’ internal research pipelines remain unclear. Much of the genetically-modified product research remains at
the academic level. The majority of the largest crop seed companies have been in existence for considerably longer periods of time
than we have, and though they have sophisticated breeding techniques, are somewhat entrenched in their ways. Some of these larger
entities are evolved state owned enterprises and some stayed as state-owned entities. We compete within this group on the basis
of our consistent product quality, brand identity, customer and technical support, enforcement of our intellectual property rights
and a pipeline of proprietary products.
Smaller Local Seed Companies.
The local seed companies in China are the legacy of the centrally
planned agricultural economy that was predominant in China until recently. Most of these were affiliated with county governments,
which played a role in determining what crops would be grown and by whom. As was often the case with planned economies, these extensions
of the bureaucracy had no profit motive, and no incentive to improve efficiencies, increase sales or innovate with new products.
Market expansion was limited by the tight geographic boundaries within which they were designed to operate.
The majority of these local companies lack the scale and the
resources to compete with us in a number of ways. They lack access to the improved, proprietary hybrids. For the most part they
do not have effective marketing, advertising, technical support or customer service operations. The majority of our recent growth
has come from acquiring customers from these operations. We believe that the existing trend will continue, and that eventually
some of these smaller, local distributors can be integrated into our distribution network.
Multinational Seed Companies.
At the opposite end of the competitive spectrum from the local
seed companies are the large multinational companies, including Pioneer (DuPont), Monsanto and Syngenta. These companies present
a formidable competitive threat because of their financial resources, the high quality of their seed products, and biotechnological
capabilities. These companies will present significant competition in the international and United States market context. However,
the unique aspects of the Chinese crop seed market, which distinguish it from the market in Western countries, have proven a significant
hurdle for market success for these very large companies, even though they have come to the market through joint ventures formed
with existing Chinese seed companies.
The principal difference between the Chinese and Western seed
markets is that in China a large number of low volume sales are made to local farmers, while in the West, relatively few sales
of very large volumes make up the majority of product sales. As a result, success in the Chinese seed market depends on marketing
and distributing effectively to a very large number of small customers. Relatively few Chinese companies have achieved any degree
of success in doing so, and the international competitors only have limited success after many years of trying and heavy investment.
These multinationals rely heavily on GM seed products in the
non-PRC markets. Our market research indicates that most of the superior products that the multinationals have to offer are genetically
modified. GM seed products have only begun to be accepted in China, and the extent of this acceptance is not yet determinable.
To date, phytase corn and Bt Rice are the only genetically modified major food crop seed products that have received safety certificate,
yet to obtain approval for commercial seed sale in China. The limited GM technology approval therefore currently limits their competitive
advantage.
Should GM seed products become approved by the government on
a larger scale and begin to gain broader acceptance in the market, as we expect they will in the future, the large biotech companies
would become more serious competitors. However, they will also continue to face numerous obstacles in competing with us, including
the significant lead time associated with obtaining approval of a new seed (usually at least six years) and the need to establish
effective sales, marketing and distribution networks to manage the large volume of small purchases that is characteristic of the
Chinese market.
PRC Government Regulation
We operate our business mainly in China under a legal regime
that consists, at the national level, of the State Council, which is the highest authority of the executive branch of the PRC central
government, and several ministries and agencies under its leadership, including:
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Ministry of Agriculture and its local authorities;
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Ministry of Commerce and its local authorities;
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State Administration of Foreign Exchange and its local authorities;
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State Administration of Industry and Commence and its local authorities;
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State Environmental Protection Administration; and
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State Administration of Taxation, and the Local Taxation Bureau.
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The following sets forth a summary of the significant regulations
or requirements that affect our business activities in China and our shareholders’ right to receive dividends and other distributions
from us.
PC Seed Law and Other Relevant Regulations
Participation in the crop seed business is a highly regulated
activity in the PRC. In July 2000, China enacted its Seed Law, which became effective on December 1, 2000. The Seed Law was revised
in August 2004. The Seed Law sets forth provisions concerning the development, government approval, production, and distribution
of crop seeds. Various provinces have enacted regulations to implement the Seed Law. In September 2011, the Ministry of Agriculture
published and implemented the Administrative Measures on Production and Business Operation Permission of Crop Seeds.
In November 2015, China's top legislature adopted revisions
to the Seed Law which became effective on January 1, 2016. The revised law left the major-crop seed approval system unchanged,
but has cut those that need to be approved by regulators before hitting the market from 28 kinds to five major seeds — rice,
corn, wheat, soybean and cotton — so as to stimulate seed research innovation while guaranteeing China's food security. Producers
for seeds other than the abovementioned five major ones will only need to register their products at the regulators said the new
law.
Under the Seed Law and the new adopted administrative measures,
for a company to engage in the seed business, it must obtain two licenses. One is the production license, which is issued at the
provincial level, entitling the holder to engage in seed production in that province. The production license specifies the types
of seeds that may be produced, the location of the production of the seeds, and the term of the production license. The second
is a license to distribute seeds. Generally, a distribution license is issued by the government at the county level or above. A
seed company must obtain a provincial-level license to distribute major crop seeds in that province. In addition, a national level
license is necessary for a seed company to distribute seeds nationwide. Among other standards, the amount of the licensee’s
registered capital determines if the distribution license is issued at the national or local level and the new adopted administrative
measures have increased the registered capital requirements significantly.
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to obtain a national distribution license, the licensee must have a registered capital of at least RMB100 million. More importantly,
the new adopted administrative measures now requires the licensee to meet various qualitative and quantitative measures to prove
the capability of vertically integrated operations of crop seed breeding, established seed production base, and well-organized
distribution and service system.
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to obtain a provincial license to distribute hybrid seed varieties, the licensee must have a registered capital of at least
RMB30 million; and
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to obtain a provincial license to distribute non-hybrid seed varieties, the licensee must have a registered capital of at least
RMB5 million.
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A separate license is required to import and export seeds. To
obtain this license, the applicant must have a minimum registered capital of RMB30 million.
In September 2012, the MOA issued the first group of Breed-Produce-Distribute
Vertically-Integrated Crop Seed Distribution Licenses (BPDVI License) based on the new administrative measures. Beijing Origin
was included as a licensee among the first 32 crop seed companies that received the BPDVI License.
In addition to the license(s) needed to engage in the seed production
and distribution business, each seed must undergo a stringent regulatory review before it may be sold in China. A seed production
company cannot receive a license to engage in seed production, regardless of the level of its registered capital, until it has
secured rights to an approved seed product.
The testing of seeds for approval can be conducted at the provincial
level or the national level. However, seeds that have been approved at the provincial level can only be distributed in the province
in which the approval was issued. An approval at the national level means the approved seed can be distributed nationwide.
The procedure for provincial examination and approval requires
the applicant to:
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submit the application to the provincial variety authorization committee;
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Undergo two growing seasons of monitored growth in at least five different locations in the province. Seeds submitted for testing
are planted together with control seeds, which is typically the most popular seed with farmers in the testing locations. Only seeds
that have an increased yield of 8% or higher versus the control seeds and that rank in the top six among all seeds then being tested
are cleared to proceed to the second year of testing, during which the results of the initial test season must be confirmed; and
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go through one successful growing season of trial production, also in at least five different locations. If successful, a provincial
examination certificate is granted and a public announcement is made.
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The procedure for national examination and approval requires
the applicant to:
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submit the application to the national variety authorization committee;
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complete two growing seasons of monitored production in at least five different locations. Only seeds that have 8% or higher
yield compared to control seeds and that also rank in the top six among all seeds being tested in that cycle can proceed to the
second year of testing; and
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complete one successful growing season of trial production in at least five different locations.
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Seeds developed outside of China must also follow the above
procedures before they can be distributed in China.
The ability to process an application for approval is an important
element of success, especially in view of the long timeframe associated with obtaining approval after the seed has been developed.
Failures and delays in getting the approvals on a timely basis can seriously disrupt the planning that is critical to successful
commercial production. A minimum of six years - three to obtain approval and three to develop the first crop of seed for commercial
distribution - is required to bring a seed to the market after it has been developed. Because of our extensive network of seed-producing
farmers, we have consistently been able to bring new products to the market within a short period of time. Other seed companies
often take an additional season or more to bring an approved product to the market. This loss of an entire growing season can be
a significant disadvantage for other companies.
Genetically Modified Organisms Safety Regulations –
PRC
GM products continue to be controversial in China, and, to date,
very few GM products have been approved. There is public concern regarding the potential for adverse effects of GM products on
human health. In May 2001, the State Council of China enacted the Agricultural Genetically Modified Organisms Safety Regulation.
The Ministry of Agriculture enacted the Agricultural Genetically Modified Organisms Safety Assessment Approach which became effective
in July 1996 and was revised in March 2002. These enactments set forth provisions concerning the classification, testing, safety
evaluation and identification of GM crop seeds.
Considering the degree of risk faced by humans, animals, plants,
micro-organisms and the ecological environment, agricultural genetically modified organisms are divided into the following four
levels:
Safety level I: no danger;
Safety level II: low danger;
Safety level III: moderately dangerous;
Safety level IV: highly dangerous.
Agricultural genetically modified organisms testing generally
goes through three stages including an intermediate test, environmental release and production test. When finished with the production
test, a company can apply for the Safety Certificate of agricultural genetically modified organisms.
Due to the fact that we are engaged in the GM seed business
in China, we must comply with the Seed Law as well as the GM regulations described above.
International Expansion of Our Biotechnology Business
We plan to expand our biotechnology business internationally,
with an initial focus on introducing our GM corn seed products into the United States. Currently, it is estimated that more than
90% of the corn grown in the United States market is genetically modified. The GM corn seed varieties need to be improved and altered
over time to maintain efficacy of the traits and quality of the seeds because of variable weather and soil conditions, farming
practices and changing resistance of weeds and insects to herbicides and pesticides. It appears, however, that farmers, when faced
with changing conditions for, or growing resistance to pests and weeds to the benefits of, one variety of GM seeds, tend to stay
with GM products changing over to new varieties, rather than abandoning GM products. We believe that this character of the GM corn
seeds and the farmer’s behavior give us an opportunity to introduce our double stacked products into the United States market.
We also believe that the United States market is more receptive to GM products, and the governments and farmers are more willing
to promote and use GM seeds.
GM products in the United States are regulated under health,
safety, and environmental legislation, mostly at the federal level under the Coordinated Framework for Regulation of Biotechnology.
United States regulation focuses on the nature of the product rather than the process in which they are produced. Plant GM products
are regulated by the United States Department of Agriculture’s Animal and Plant Health Inspection Service under the Plant
Protection Act. GM products in food, drugs and biological products are regulated by the Food and Drug Administration under the
Federal Food, Drug and Cosmetic Act and the Public Health Service Act. GM products that have pesticide and microorganism qualities
are regulated by the Environmental Protection Agency pursuant to the Federal Insecticide, Fungicide and Rodenticide Act and the
Toxic Substances Control Act. The importation of GM plants are regulated under the Plant Protection Act, which can be used to prohibit
or restrict the importation, entry, exploitation and movement in interstate commerce of any plant that may result in the introduction
of plant pests and noxious weeks within the United States. GM plants are considered potential plant pests, and therefore are subject
to a notification process, permitting process and determination of non-regulated status before entry into the United States market.
Additionally, some states in the United States separately are
establishing regulation with respect to GM plants. These regulations take a number of forms, including banning the planting and
cultivating of GM plants, labeling requirements and permitting requirements. We may have to meet these requirements depending on
the anticipated markets for our products.
We are currently exploring various strategies in connection
with the introduction of our products into the United States market. Our products have no market presence in the North American
market at this time. We will need to establish our brand reputation and introduce our products to the United States farmers via
marketing and distribution networks. We may need to enter into licensing arrangements and/or arrangements with local distributors,
independent retailers and dealers, and agricultural cooperatives and agents to market our brand and our products in different regions.
We also will have to establish production facilities to the extent that we need to produce seeds to meet demand. We believe our
products are highly valuable in the United States GM corn seed market and will attract the local distributors’ interests.
The United States seed market is highly competitive. It is estimated
that Monsanto Company and E.I. DuPont de Nemours Inc. (Pioneer) dominate the corn seed market in the United States, with about
70% of the market. It is estimated that independent seed producers only have about 11% of the market. We believe that we will have
to compete based on many different aspects of the United States market, including seed traits, overall seed quality, customer acceptance
and service, and value added technology. Additionally, our ability to compete will be impacted by shifts in acreage planted with
corn, commodity price changes, and weather conditions and planting practices. Our competitive position will also be affected by
government farm subsidies and government programs that favor certain crops and seeds such as those that encourage and subsidize
GM seeds to be used in marginal lands and draught prone areas.
Foreign Ownership Restrictions of Chinese Companies
Currently, China restricts foreign ownership of businesses in
the seed industry. A foreign invested enterprises, or FIE that is engaged in the production, marketing, distribution and sale of
food crop seeds is limited to 49% foreign ownership pursuant to the Regulation on the Approval and Registration of Foreign Investment
Enterprises in Agricultural Seed Industry (effective on September 8, 1997) and the Foreign Investment Industrial Guidance Catalogue
(effective on December 1, 2007).
In addition to restrictions in the conventional seed business,
China forbids FIEs from engaging in the development, production and distribution of genetically modified corn seeds pursuant to
the Foreign Investment Industrial Guidance Catalogue distributed by the Ministry of Commence of China in 2007. Furthermore, FIEs
need to obtain government approvals to engage in the breeding of GM research and testing pursuant to the Agricultural Genetically
Modified Organisms Safety Regulation.
Tax
Origin and State Harvest are both tax-exempted companies organized
in the British Virgin Islands.
Our PRC Operating Company Subsidiaries are organized in the
PRC and governed by PRC laws. PRC enterprise income tax, or EIT, is calculated based on taxable income determined under PRC accounting
principles. Under the New EIT law, effective January 1, 2008, FIEs and domestic companies are now subject to a uniform EIT
rate of 25% and the tax exemption, reduction and preferential treatments which were applicable only to FIEs were ended. However,
any enterprises established before the promulgation of the New EIT law in 2008 that were entitled to preferential tax treatments
for a fixed period continued to be entitled to such preferential tax treatment until the expiration of those periods.
The applicable tax rate of the PRC New EIT to Beijing
Origin is 15% since January 1, 2008, because Beijing Origin has been approved as new technology enterprises and enjoys the
reduced New EIT rate of 15% while our other operating companies are subject to the New EIT at a uniform rate of 25%. The
preferential treatment in EIT to Xinjiang Origin is 2 years of exemption and 3 years of half reduction from January 1, 2012
and December 31, 2016. Xinjiang Origin is currently in the status of ‘half EIT’ for the year ended September 30,
2016. Linze Origin is entitled to a preferential tax rate of 15% from January 1, 2016 and December 31, 2016.
Pursuant to the Provisional Regulation of China on Value Added
Tax, or VAT, and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of
repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17% of the
gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Pursuant to the Notice of the Ministry
of Finance and the State Taxation Administration on Exempting the Value Added Tax for Agricultural Material, self-produced agricultural
products sold by agricultural producers shall be exempt from VAT. Pursuant to an approval document received from Beijing Haidian
District State Tax Bureau, Beijing Origin has been entitled to exemption from VAT since August 1, 2001. Denong has also been exempted
from VAT since January 1, 2006.
Dividend Distribution
Under PRC law, FIEs in China, including Origin Agritech may
pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting principles. In addition,
FIEs in China are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year for
their general reserves until the accumulative amount of such reserves reaches 50% of registered capital. These reserves are not
distributable as cash dividends. The Board of Directors of a FIE has the discretion to allocate a portion of its after-tax profits
to staff welfare and bonus funds, and expansion (development) funds which may not be distributed to equity owners except in the
event of liquidation. The amount set aside as of September 30, 2015 and 2016 were RMB24,789 and RMB24,789, respectively. We are
currently in compliance with all applicable PRC laws and regulations relating to our business.
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C.
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Organizational structure
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Origin Agritech is a holding company with no operations of its
own. We conduct our operations in China primarily through our PRC Operating Companies. The following diagram illustrates our current
organizational structure:
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(1)
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We do not have any ownership interest in Beijing Origin, Henan Origin, Changchun Origin, Denong, Linze Origin and Xinjiang Origin, rather, through State Harvest, we have entered into a series of stock consignment agreements for Beijing Origin, Henan Origin and Changchun Origin with their respective shareholders which provides us control of Beijing Origin and its subsidiaries.
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The table below lists each of our
group companies, their place of incorporation and their percentage of ownership interest:
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Place of incorporation
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Percentage
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Name
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(or establishment)/operation
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of ownership
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State Harvest
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British Virgin Islands
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100% owned by Origin
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Origin USA
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Des Moines, Iowa, USA
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100% owned by Origin
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Origin Biotechnology
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Haidian District, Beijing, PRC
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100% owned by State Harvest
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Beijing Origin
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Haidian District, Beijing, PRC
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97.96% controlled by State Harvest
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Henan Origin
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Zhengzhou, Henan Province, PRC
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92.04% owned by Beijing Origin
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Changchun Origin
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Changchun, Jilin Province, PRC
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99.83% owned by Beijing Origin
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Denong
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Chengdu, Sichuan Province, PRC
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98.58% owned by Beijing Origin
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Linze Origin
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Linze, Gansu Province, PRC
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100% owned by Beijing Origin
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Xinjiang Origin
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Jinbo City, Xinjiang Province, PRC
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51% owned by Beijing Origin
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Stock Consignment Agreements
As discussed above in “Foreign Ownership Restrictions,”
under Chinese law, foreign ownership of businesses engaged in the breeding of new varieties, development, production, marketing,
distribution and sale of hybrid food crop seeds is limited to 49% pursuant to the Regulation on the Approval and Registration of
Foreign Investment Enterprises in Agricultural Seed Industry and The Foreign Investment Industrial Guidance Catalogue. State Harvest,
as a non-Chinese corporation, may not directly own more than 49% of any of the PRC Operating Companies. However, Chinese law does
not forbid the owner of stock to consign rights associated with the stock, as long as the owner does not transfer title to the
stock. Moreover, if we engage in the research and development of genetically modified seed products, then foreign entities
are not currently permitted to own any of the seed production company.
To gain control over the PRC Operating Companies (other than
Origin Biotechnology, which is not subject to the 49% ownership restriction and which State Harvest entirely owns), State Harvest
entered into a series of stock consignment agreements with shareholders of those companies or, in the case of Denong and Xinjiang
Origin, with Beijing Origin, the parent of those entities. These agreements consign to State Harvest or Beijing Origin all of the
rights of ownership of the shares involved other than legal title, effectively transferring the control of the shares subject to
the agreements to State Harvest. Those rights include the right to manage in all respects the shares held in title by the shareholders
that are parties to them, including all shareholder rights to call meetings of shareholders, to submit shareholder proposals, to
elect directors, to vote the shares on all matters and to exercise all other rights of a shareholder in respect of the shares consigned.
More specifically, the consignment agreements include giving the right to select, replace and increase the number of the directors
and supervisors, recommend new directors and supervisory personnel and to exercise management rights, controlling rights and decision-making
power over the shares of the subject company. Additionally, the shares of the PRC operating companies are pledged.
Each title holder of these shares has agreed not to interfere
with State Harvest’s or Beijing Origin’s exercise of its rights and to cooperate fully and promptly to permit them
to exercise its authority over the consigned shares. This includes all limitations on the ability of the consignee to transfer
or dispose of the shares to someone other than to the consignee, give guarantees using the shares, consign the shares to another,
alter the ownership proportion in any way, dispose of any rights in the ownership of the shares, and agree to any debt or restructuring
of the shares. The consignee has the right to take all action in respect of the consigned shares to avoid any damage or infringement
of its rights, including in the event of the consigning shareholder’s bankruptcy. The consignee, under the agreements, has
virtually all of the property rights of the consigned shares, including the profits, interests, dividends, bonuses and residual
assets, except for legal title. If in the future any stock subject to the consignment agreements can be legally transferred to
State Harvest then, without further action by the consignee, it shall be transferred to the consignee in whole or in part for no
additional consideration to the consigning shareholder.
The stock consignment agreements also provide that if and when
the restriction on foreign ownership of food production companies to 49% is removed or the allowed ownership percentage is increased,
the consigned shares will then be transferred to the consignee. If not, the consignment agreements continue in full force and govern
the consignee’s rights over the shares.
The agreements are subject to force majeure limitations. The
term of the agreements is initially three years, but they are automatically renewed indefinitely until both the consignee and the
consignor agree to terminate. There is no unilateral right of termination except in the event of a breach, in which event the non-breaching
party may cancel the consignment agreement after notice and a reasonable cure period has passed and the breach continues. The consigning
shareholders have warranted their authority to enter into the agreements and that the consignee has the exclusive right to control
the shares that are subject to the consignment agreements. The agreements are binding on the successors, assignors and heirs of
the respective consigning shareholders.
The importance of the stock consignment agreements is that,
under U.S. GAAP, the consignee corporation may consolidate the financial reporting of those PRC Operating Companies whose shares
are subject to stock consignment agreements in the manner of wholly and majority owned subsidiaries and enjoy the economic benefits
of such subsidiaries. Each stock consignment agreement is subject to enforceability and other limitations of the laws and rules
of PRC. The consignee may not transfer the consignment agreement, except as permitted by PRC law. However, we may transfer our
interest in the intermediate consignee corporation without limitation. If there is non-performance by the shareholder or some or
all of an agreement is unenforceable, we and the consignee may lose the benefits of the agreements and suffer severe economic loss
as a result. No assurance can be given that the consignee will be able to enforce its rights vis-à-vis the consigning shareholders
in the courts of the PRC, and we are not aware of any cases where these types of stock consignment agreements have been interpreted
by PRC courts.
We believe that these agreements are enforceable under current
PRC law. However, none of these kinds of agreements have yet been subject to judicial review or interpretation. The consignment
agreements provide that if there is any interpretation of the terms by a PRC court, the agreements should be construed in such
a way as to give the consignee as much of the full and actual ownership and full beneficial rights and benefits of the consigned
stock as is possible, so as to approximate full ownership under all applicable law.
In the event that the consignment agreement is not enforced
or is terminated because of a breach by the consignee that is not cured, the right to the underlying stock would be lost and the
economic rights would be terminated. However, such a termination would not terminate the separate agreements entered into by Beijing
Origin, Henan Origin and Changchun Origin to transfer technology from those companies to Origin Biotechnology, so even in the event
of a termination of a consignment agreement, the consignee would continue to own the applicable PRC entity’s technology and
intellectual property through Origin Biotechnology, its wholly owned subsidiary (see “Technical Service Agreements”
below). Also, the termination of one shareholder’s consignment agreement does not cause the termination of any of the other
consignment agreements, so it would only result in a reduction in consigned shares under the consignee’s control.
The following is a table of the parties to the consignment agreements
PRC Operating Company
|
|
Consigning Owner
|
|
% of Shares
Consigned
|
|
Beijing Origin
|
|
Gengchen Han
|
|
|
34.40
|
%
|
|
|
Yasheng Yang
|
|
|
28.68
|
%
|
|
|
Liang Yuan
|
|
|
25.80
|
%
|
|
|
Yuping Zhao
|
|
|
3.99
|
%
|
|
|
Weidong Zhang
|
|
|
3.13
|
%
|
|
|
Weicheng Chen
|
|
|
1.96
|
%
|
|
|
|
|
|
97.96
|
%
|
Changchun Origin
|
|
Beijing Origin
|
|
|
99.00
|
%
|
|
|
Gengchen Han
|
|
|
1.00
|
%
|
|
|
|
|
|
100.00
|
%
|
Henan Origin
|
|
Beijing Origin
|
|
|
92.04
|
%
|
|
|
Yingli Zhang
|
|
|
4.08
|
%
|
|
|
Yasheng Yang
|
|
|
3.88
|
%
|
|
|
|
|
|
100.00
|
%
|
Technical Service Agreements
All of the intellectual property rights of Beijing Origin, Changchun
Origin and Henan Origin are held by Origin Biotechnology pursuant to technical service agreements with each of these respective
entities dated December 25, 2004. The purpose of this arrangement was to permit better management and licensing of the intellectual
property that the three assignors developed. Under the technical service agreements, Origin Biotechnology will provide technical
research and production and distribution services to Beijing Origin, Changchun Origin, and Henan Origin. These services include
support in the research and development of agricultural seeds, analysis of breeding technologies, environment and feasibility suggestions,
technical tutorials and breeding field supervision, market analysis and seed promotion, insect prevention and technical education
to distributors and farmers. The fees payable under the agreements are variable, depending on differing formulae for different
categories of seeds, and are to be charged on the sales of certain seed products in each fiscal year. These agreements are considered
intra-company transactions.
Master Transaction Agreement
In September 2016, Origin entered into a Master
Transaction Agreement to sell its seed production and distribution business to Beijing Shihui Agricultural Development
Co.Ltd. (“Shihui”). The overall transaction will be conducted in two steps. The first step will be the sale of
the equity held by Beijing Origin of each of the Denong, Changchun Origin and Linze Origin companies, and the second step
will be the sale of a company holding the Zhengzhou Branch Assets and the office building in Beijing. Beijing Origin will
also orchestrate with the parties that own minor percentages of Changchun Origin, not now owned by Beijing Origin, to
purchase their ownership equity amounts so that Shihui acquires from Beijing Origin all of the equity of Changchun Origin in
the first step of the transaction. The second step requires Beijing Origin to effect a restructuring to form a company to own
the current office building located in Beijing, PRC and certain other assets (together the “Zhengzhou Branch
Assets”), which company will be sold to Shihui so as to transfer the building and assets to Shihui. By separate
agreement Shihuiwill enter into license arrangements to pay Beijing Origin a royalty for the present and future seed
portfolio and a technology access fee for the research and development effort that Beijing Origin will provide going forward
in the areas of product discovery and development, hybrid registration, trait integration and intellectual property
protection.
At the first closing, Shihuiwill pay to Beijing Origin
RMB200 million (approximately US$30,000,000), for the 98.58% equity ownership interest in Denong, 100% equity ownership
interest Changchun Origin and 100% equity ownership interest in Linze Origin (together the “VIE Subsidiaries”).
The first closing is conditioned (among other things) on Beijing Origin acquiring the current minority percentage ownership
of Changchun Origin that is held by the Company’s Chairman, so as to deliver to Shihui 100% of the equity ownership
of Changchun Origin. The minority interest of Denong will continue to be held by two third parties and will not be sold
to Shihui. At the second closing, Shihui will pay to Beijing Origin RMB190 million (approximately US$28,500,000) and the RMB10 million (approximately US$1,500,000) deposit, which has been received in September 2016, will be used for settle for the 100% ownership interest in an entity formed by
Beijing Origin as part of its reorganization to hold the Zhengzhou Branch Assets. The total consideration to be paid to
Beijing Origin will be RMB400 million (approximately US$60,000,000).
Shihui will assume the outstanding liabilities of the
acquired subsidiaries and the Zhengzhou Branch Assets, except for certain outstanding bank loans. The current bank loans
aggregating RMB100 million (approximately US$ 15,000,000) will be transferred to Beijing Origin, subject to the approval and
agreement of the bank lenders. If the bank loans cannot be transferred, then the purchase price will be reduced for the
outstanding amount due, but any guarantees provided by Dr. Han Gengchen will be terminated without liability to Beijing
Origin or Dr. Han.
Beijing Origin has agreed to use its reasonable best
efforts (i) to complete the restructuring of the company so as to be able to complete the second closing, to acquire the
portion of Changchun Origin that it does not own, and to transfer certain assets, the Linze Branch Assets, to Linze Origin.
Additionally, all intercompany accounts between Beijing Origin and its retained affiliates, on the one hand, and the acquired
subsidiaries, on the other hand, regardless of any due dates, existing prior to the first closing will be paid in full before
or at the first closing. Shihui and Beijing Origin will negotiate separate license agreements regarding Shihui’s
continued use of the trademarks and trade names owned by Beijing Origin and licensing designated seeds developed by Beijing
Origin or Beijing Biotechnology. Origin Agritech and Beijing Origin are jointly responsible for all transfer, documentary,
sales, use, stamp, recording, value added, registration, conveying taxes and fees in connection with the sale of the various
types of assets to Shihui.
Beijing Origin has agreed that for ten years after the closing,
without the written consent of Shihui, it and its affiliated entities will not directly conduct any business in the distribution
of crop seeds in the PRC, except for the distribution of crop seeds in Xinjiang province by Xinjiang Origin. This limitation will
not prohibit Origin, Beijing Origin or Beijing Biotechnology from conducting the businesses of crop seed licensing, transgenic
materials licensing, transgenic traits licensing or other activities related to its intellectual property in the PRC. This non-competition
provision will terminate if more than 50% of the equity interest or assets of Origin Agritech are acquired by an independent third
party during the restrictive period.
To be able to complete the transaction, the transaction
will need to be approved by our shareholders. Also, Beijing Origin will be required to obtain waivers of a right of first
refusal to purchase the Denong shares being sold to Shihui held by Leshan Agricultural Science Institute and Sichuan Neijiang
Agricultural Science Institute, each of whom currently own a small percentage of the shares of Denong.
|
D.
|
Property, plant and equipment
.
|
Our principal executive offices are located in the
Changping District in Beijing where we own approximately 10,320 square meters of office space, and the right to use
approximately 19,250 square meters of land. The land uses right, and the property, plant, and equipment of our headquarters
in Beijing currently secures a loan of RMB60 million. This loan was extended by China Construction Bank. The office building
in Beijing is expected to be sold to Buyer at the Closing of the Sale.
We own or lease manufacturing facilities, laboratories, seed
production and other agricultural facilities, office space, warehouses, research stations and breeding centers in Gansu, Henan,
Liaoning, Jilin, Inner Mongolia, Yunnan, Jiangsu, Shanxi, Sichuan, Hainan, Hubei, Anhui, Hunan, Jiangxi and Xinjiang provinces,
and in the Tongzhou District of Beijing. These facilities include approximately 457,000 square meters of land, including additional
200,000 square meters of land in Bole, Xinjiang Province, and approximately 22,500 square meters of office. The leased facilities
are rented at regular commercial rates, and management believes other facilities are available at competitive rates should it be
required to change locations or add facilities.
We leased an office space in the United States at 666 Walnut
Street, Des Moines, IA 50309. The office space is approximately 87 square meters and is rented at the regular commercial rate.
The Des Moines location serves as our North America operations and international relations center and our Chief Executive Officer,
Chief Financial Officer and a few independent contractors are located in the Des Moines location.
From 2012 to date, our capital expenditures consisted primarily
of construction and purchase of plant and equipment, which are located in the PRC and financed mainly by bank borrowing. The Xinjiang
Origin’s plant was the major investment in this period. The table below sets forth the amount of our capital expenditures
for the periods shown:
For the year ended
September 30,
|
|
|
For the year ended
September 30,
|
|
|
For the year ended
September 30,
|
|
|
For the year ended
September 30,
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
|
26.01 million
|
|
|
|
20.36 million
|
|
|
|
16.96 million
|
|
|
|
2.54 million
|
|
We believe that our existing facilities are adequate to conduct
our current and foreseeable future business operations.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial results of operations
and condition is based upon and should be read in conjunction with our consolidated financial statements and their related notes
included in this Annual Report on Form 20-F. This report contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements
regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,”
“intend,” “believe,” or similar language. All forward-looking statements included in this Annual Report
are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.
Actual results could differ materially from those projected in these forward-looking statements. In evaluating our business, you
should carefully consider the information provided under the caption “Risk Factors” in this Annual Report on Form 20-F.
We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
|
A.
|
Operating Activities and Results.
|
Corporate Strategies
Origin started as a hybrid
corn seed company in 1997 as the first private seed company in China. With the success in and strong cash flow from the
hybrid corn seed business, Origin started its seed biotechnology research in early 2000’s and established Origin Life
Science Center in 2005. The Company has since focused on the seed biotech product development and funded the biotech R&D
with its free cash flow from the traditional hybrid seed business.
After more than 10 years of seed biotech development, the Company
is now essentially becoming a biotech company focused on its GMO (Genetically Modified Organism) technologies and product pipelines
that are waiting to be commercialized. At the same time, the Company has already built up state-of-the-art seed production bases
and solid distribution channels in China and continues to generate cash flow from the hybrid seed business.
With the success in biotech product development,
especially the successful field trials of the stacked traits of insect resistance Bt genes and glyphosate tolerance genes,
the Company announced in June, 2015 its strategies going forward. The Company is now reorganized into two business units:
Biotech & Product Development under State Harvest and Seed Production & Distribution under Beijing Origin.
Under the new corporate structure, the Company plans to
enter the seeds and traits market in North America with its GMO product pipelines under State Harvest represented by its
first generation FEED/ENVIRONMENT trait phytase transgenic corn, first generation WEED(herbicide tolerance) tolerance corn
seed, and its first generation WEED/PEST stacked traits of herbicide tolerance and insect resistance. While waiting for the
approval for commercial planting in China, State Harvest plans to introduce these agri-biotech products into the United
States seed market. In addition, State Harvest has also built a solid capacity for breeding technologies, including
marker-assisted breeding and doubled haploids technologies, which along with its germplasm resources, will allow State
Harvest to become a global seed technology company.
Beijing Origin, the current operating entity in China, focuses
on the seed production and distribution business in China.
Biotechnology Progress
While we continue to advance
our GMO product pipelines with phytase traits and glyphosate tolerance technologies, the most significant progress made in
the last several years is in the new biotech pipelines of stack traits of insect resistance (Bacillus Thuringiensis, or Bt)
and herbicide tolerance. 2016 marks the fifth year that our double stacked products of Bt and glyphosate tolerance genes were
tested in the field against the technologies currently used in the global market. Additionally, we have started to introduce
triple stacked and quadruple stacked traits of Bt and herbicide tolerance genes.
In 2016, Origin completed the laboratory and field
production trials for its first generation PEST/WEED trait. In these trials, molecular characteristics, field efficacy,
environmental safety and food safety were thoroughly evaluated and the results met critical biosafety regulation standards.
Dossiers summarizing the laboratory and field-test studies internal to Origin and in collaboration with third party research
labs were submitted in November 2016 to request Phase 5 Safety Certificate approval. It is anticipated that in 2017,
Origin’s first generation WEED and PEST/WEED traits will be incorporated into the elite corn inbred lines of Origin
and into the products of leading Chinese seed industry partners preparing for future regulatory approval and
commercialization
Biotechnology Corn Seed Product Pipelines
and Regulatory Approval in China
For the double stacked Bt and GT genes, our repeated field testing
in both our northern testing site (for summer testing) and southern testing site (for winter testing and with heavy natural insect
pressure) has shown very positive and stable insect resistance results. We believe the Bt gene (Cry1Ah) used in our double stacked
traits could be highly valuable in the North American corn seed market, a major reason we plan to enter the U.S. corn seeds and
traits market.
Origin’s first generation biotechnology trait
for insect resistance and herbicide tolerance (PEST/WEED) has been successfully exported from China to the U.S. with permits
from the Chinese and U.S. governments. This initiates the global regulatory approval process and represents the first export
of such technology by a Chinese company to a strategic partner based in the U.S. Origin has successfully requested and
received the first transgenic corn seed export permit from China’s Government agencies, following required
protocols. Specifically, our U.S. collaborator has secured an importation permit for these seeds from the United States
Department of Agriculture(“USDA”). In late 2016 corn seeds containing our lead trait event and a back-up were
successfully shipped from China to the US and planted in a USDA designated greenhouse.
Corn seeds carrying Origin’s insect resistance
and herbicide tolerance technologies developed in China will enter collaborative field experiments next summer to conduct testing
required by the USDA, Environmental Protection Agency and the Food and Drug Administration.
Based on our successful development in biotech seed products,
we have continued to take steps to secure our biotechnologies intellectual property protections. We believe these patents will
strengthen our position in the genetically modified seed technologies and will allow us to maintain our leading position in China
and enter the global biotech traits market.
Operating Improvement Progress
On the operating improvement front, we were able to overcome
the challenges in another difficult year in the seed industry in China by significantly reducing the operating costs and managing
our inventory reduction efforts.
Following the corporate restructuring in fiscal year
2012 and operational improvements in fiscal years 2013, 2014 and 2015, we achieved further significant improvement in
operating efficiency and cost reduction in fiscal year 2016. As of September 30, 2016, Origin has a total of 389 employees,
compared with 856, 713, 678, 531 and 430 employees as of September 30, 2011, 2012, 2013, 2014 and 2015, respectively.
Excluding restructuring cost , expenses related to expansion of operation in North America and one-time stock compensation
expense,the G&A costs in fiscal year 2016 was RMB38.1 million (US$5.7 million), compared to RMB86.7 million, RMB77.6
million, RMB66.2 million, RMB46.4 million and RMB40.7 million in FY2011, FY2012, FY2013, 2014 and FY2015, respectively.
The G&A expenses as the percentage of sales declined from 15.3% in FY2011 to 11.3% in FY2016. We believe our cost
reduction efforts were important to the improvements in our financial performance during the challenging year.
|
|
FY2011
|
|
|
FY2012
|
|
|
FY2013
|
|
|
FY2014
|
|
|
FY2015
|
|
|
FY2016
|
|
Number of employees at the end of period
|
|
|
856
|
|
|
|
713
|
|
|
|
678
|
|
|
|
531
|
|
|
|
430
|
|
|
|
389
|
|
General & Administrative expenses
1
, RMB in thousands
|
|
|
86,748
|
|
|
|
77,585
|
|
|
|
66,153
|
|
|
|
46,428
|
|
|
|
40,684
|
|
|
|
38,079
|
|
G&A expenses as the percentage of revenue, %
|
|
|
15.3
|
|
|
|
14.1
|
|
|
|
13.7
|
|
|
|
11.2
|
|
|
|
10.8
|
|
|
|
10.9
|
|
1
The general & administrative expenses in
FY2016 excluding restructuring cost, expenses related to expansion of operation in North America and one-time stock
compensation expense.
Our cash flow from operating activities had a significant
recovery as we manage our inventory and sales efforts product by product. Net cash provided by operating activities was
RMB47.9 million (US$7.2 million) for the fiscal year ended September 30, 2016 compared with net cash provided of RMB52.2
million and net cash used of RMB85.6 million for the fiscal year ended September 30, 2015 and 2014, respectively. We
believe that the progress that the Company has made in the operating improvements will improve the Company’s cash flow
from operating activities in the next years.
Overall Analysis
Total revenues for the fiscal year ended September 30,
2016 were RMB335.3 million (US$50.2 million), a decrease of 11.0% from RMB376.6 million during the fiscal year ended
September 30, 2015. Overall, the year-over-year decrease in revenues was mainly due to the lower volumes for the corn and
rice seeds as the result of market oversupply and increasing competition.
Corn seed accounted for 91% of our overall sales. Total
revenues from corn seeds were RMB306.4 million (US$45.9 million) in fiscal year 2016, compared with RMB331.3 million
in fiscal year 2015. Revenues from the rice product line for the year ended September 30, 2016 decreased to RMB19.7
million (US$3.0 million) from RMB29.2 million in the fiscal year 2015. Sales of canola seeds decreased to RMB8.7 million
(US$1.3 million) in fiscal year 2016 compared to RMB15.7 million in fiscal year 2015. Revenues of Biotech &
Product Development,related to conversion and testing fees from DuPont Pioneer and KWS SAAT SE, for the year ended September
30, 2016 increased to RMB 0.5 million (US$0.1 million) from RMB 0.3 million in fiscal year 2015.
Operating expenses for the fiscal year ended September
30, 2016 were RMB137.3 million (US$20.6 million), representing an increase of 23.5% from RMB111.2 million in the
fiscal year 2015, which was mainly because of restructuring cost,expenses related to expansion of operation in North America
and one-time stock compensation expense of RMB24.08 million (US$3.6 million). Selling and marketing expenses for the fiscal
year ended September 30, 2016 were RMB38.1 million(US$5.7 million), a decrease of 4.8% year-over-year due mainly to the
decline in salary as a result of decrease in headcount.
Operating loss for the fiscal year ended September
30, 2016 was RMB61.3 million (US$9.2 million), compared with operating income of RMB1.3 million in fiscal year 2015. The
decrease in operating results was mainly due to decline in revenue and rise in operating expenses as a result of
corporate restructuring.
Net loss attributable to Origin for the fiscal year
ended September 30, 2016 was RMB65.6 million (US$9.8 million) compared to the net loss of RMB13.8 million for the fiscal
year ended September 30, 2015.
Net loss per share was RMB(2.87) or US$(0.43) for the
fiscal year 2016, compared with net loss per share of RMB(0.61) in fiscal year 2015.
As of September 30, 2015
and 2016, we had approximately RMB66.0 million and RMB54.5 million (US$8.2 million), respectively, in cash and cash
equivalents. Total borrowings as of September 30, 2015 and 2016 were RMB285 million and RMB237 million (US$35.5 million),
respectively. During fiscal year 2016, net cash provided by operating activities was RMB47.9 million (US$7.2 million)
compared with RMB52.2 million for the fiscal year ended September 30, 2015. Net cash used in investing activities was
RMB6.5 million (US$1.0 million) for the fiscal year ended September 30, 2016 compared with RMB20.4 million for the fiscal
year ended September 30, 2015. Net cash used in financing activities was RMB48.8 million (US$7.3 million) for the fiscal
year ended September 30,2016 compared with RMB9.5 million for the fiscal year ended September 30, 2015. The borrowing was
mainly related to support the operations of Beijing Origin and Linze Origin, which had RMB210 million (US$31.5 million) bank
loans for settlement of seed purchases, and RMB27.1 million (US$4.1 million) used for the corn seed production facilities in
Xinjiang Origin and the Company’s working capital.
Research and Development Activities
Origin was built on its R&D platform
and we believe a commitment to R&D is essential to the growth of the Company, particularly as we orientate our operations to
biotechnology. During fiscal year 2016, we continue to make significant progress both in our conventional hybrid crop seed development
programs and biotechnology R&D activities.
Key developments for Origin’s GM corn seeds:
Phytase: Four commercial hybrids with phytase traits have completed
a number of variety production tests. These varieties with phytase traits have been submitted to the Chinese government (the Ministry
of Agriculture) to obtain variety safety certificates. We are waiting for the final approval from the Chinese government.
Glyphosate Tolerance: One GM glyphosate tolerance event (the
unique DNA recombination event that took place in one plant cell) completed a second year Phase 4 – Production Test and the
summary of test results has been submitted to the MOA for the Phase 5 – Safety Certificate.
Glyphosate(G2) + Bacillus Thuringiensis (Bt): The double stacked
traits of insect resistance and glyphosate tolerance genes have completed the Production Test (Phase 4). The lab and field tests
conducted internally and in collaborations with 3
rd
party research institutes and universities that are certified by
MOA showed consistently positive performance same as that we have observed in the tests of previous years. The molecular characteristics,
field efficacy of insect resistance and herbicide tolerance traits, agronomic performance, environmental safety, food safety of
the transgenic event were thoroughly evaluated. These results meet the standards of the government GM regulations. The summary
of these results has been submitted to MOA for safety certificate (phase 5).
Triple and Quadruple Stacked Traits: Stacked triple and
quadruple traits of insect resistance and herbicide tolerance genes with different resistance mechanisms have been under
intermediate testing. These traits are expected to increase herbicide tolerance and expand the insecticidal spectrum and
durability. More than 3,000 events of the stacked traits are being screened in a greenhouse environment of Phase 1-Laboratory
Research. Backcrossing Programs: Multiyear programs of backcrossing of our biotech products, including phytase, glyphosate
tolerance, and stacked traits of Bt and G2 genes, into corn varieties from our own product lines as well as several product
lines of multinational companies are progressing well. Successful backcrossing products into our own varieties are and will
be submitted for government approvals in due course.
Hybrid Corn Seed Development Program:
The most significant development in the hybrid corn seed
approval process in China is the introduction of the Corn Seed Green Pass Test System. Origin is now one of a few major seed
companies in China able to use the national level Corn Seed Green Pass Test System. Under this system, Origin can introduce
to the market our new hybrid varieties with the field tests conducted by us at our own test sites following aprotocol
developed by the government. This is an important step to accelerate new product introduction to the market.
Previously in China, new hybrid seed varieties needed to go
through an official approval process prior to sales. This approval process typically involves three to four years of registered
trials and normally proceeds according to the following sequential steps:
Pre-Registration
¨
Registration Trial 1
¨
Registration Trial 2
¨
Field Demo
¨
Approval
Each step leading up to approval takes approximately one year
unless it needs to be repeated. In some localities the Registered Trial 2 and Field Demo steps are treated as one and the same
step.
In the standard official approval process, the government test
sites are limited by the size of test fields. So seed companies are limited in the amount of varieties submitted for testing. Under
the new Corn Seed Green Pass Test System, Origin can conduct testing of much larger pools of varieties even in the early stage,
which allows us to better screen the varieties from our breeding programs and introduce the best varieties earlier.
During fiscal year 2016, the second year under the new Green
Pass Test System, we had more than 36 tests going through different stages of the testing stages. As the results of multiyear testing,
we received registration approval for 2 of our new varieties. During the fiscal years 2014 to 2016, we received a total of 17 approvals
for our corn seed hybrid products.
Hybrid Corn Seed Registration and Approval
|
|
|
|
|
|
|
|
|
|
Registration
|
|
|
|
|
Pre-Registration
|
|
Registration
|
|
Registration
|
|
|
|
Trial 2 +
|
|
|
Year
|
|
Trial
|
|
Trial 1
|
|
Trial 2
|
|
Field Demo
|
|
Field Demo
|
|
Approved
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
72
|
|
16
|
|
5
|
|
5
|
|
4
|
|
0
|
2012
|
|
33
|
|
18
|
|
5
|
|
5
|
|
3
|
|
3
|
2013
|
|
44
|
|
12
|
|
3
|
|
6
|
|
2
|
|
7
|
2014
|
|
18
|
|
6
|
|
3
|
|
5
|
|
3
|
|
8
|
2015
|
|
13
|
|
27
|
|
4
|
|
3
|
|
N/A
|
|
7
|
2016
|
|
9
|
|
13
|
|
6
|
|
5
|
|
3
|
|
2
|
Research and Development Outlook
With the continued growth of the Chinese economy, demand for
higher levels of food production and agricultural products have increased substantially, and we expect that this demand will continue.
This demand is being driven by several factors: by consumer desire for high-quality food products, increasing usage of agricultural
products as bio-fuels, and dwindling arable land. The Chinese central government has taken a series of measures to deal with these
issues. One of the approaches has been the approval of GM plant varieties. Compared with conventional varieties, the advantages
of GM varieties include higher yield, higher quality and increased disease and weed resistance. Farmers plant GM varieties to save
time and cost, while reducing the amount of field work. GM corn, soybean, and cotton have been widely used in the United States
and in many other developed countries to guard against insect damage and to increase crop yields. A 10% to 15% increase in crop
yields with the successful application of biotechnology has been routinely reported by Monsanto and Syngenta. According to the
U.S. Department of Agriculture, the planted area for GM corn increased from 160,000 hectares in 1996 to about 35 million hectares
in 2013 in the United States representing 90% of the corn grown. Since receiving approval from the Chinese government, cotton has
been genetically modified to guard against damage from insects, such as the borer, and these varieties are now widely planted throughout
China. GM cotton is widely accepted in the Chinese market. The Chinese authorities have taken preliminary steps in approving GM
crop seed research and commercialization to meet the increasing demand for agricultural food products, as evidenced by the approval
of our phytase corn and BT rice seed. We expect the Chinese authorities to continue in this direction, albeit with caution.
In the past several years, our focus on biotechnology research
has continued to accelerate significantly. We initially were approved for the first GM corn seed crop in China. Our glyphosate-tolerant
gene has been approved to advance to the next phase of development. We seek to become the leader in biotechnology and GM product
commercialization in China. We expect that GM crop seeds will eventually gain wide acceptance in China and for this reason we have
pursued biotechnology seed development and invested in genetic modification programs that focus on improving yields, product quality,
and insect resistance and disease tolerance for corn seeds and other selected crop seeds. The development of biotechnology attributes
remains a cornerstone of our business strategy. As a result, a significant proportion of our management resources are dedicated
to building these capabilities across the Company for the introduction into the PRC domestic crop seed market.
During the past few years, we have established several plant
genetic engineering technology platforms. These include introducing traits such as herbicide tolerance, insect resistance, nitrogen
efficiency, and drought stress tolerance into inbred corn lines. We seek to efficiently utilize modern biotechnology in China and
aim to expand beyond China.
Currently, we possess exclusive rights to five genetic traits
in various stages of testing and development. We have continued to build our technology platform based upon cooperative relationships
with top universities and research institutes in China. These cooperative arrangements allow us to limit our own risk exposure
and fixed cost structure and maximize our flexibility in developing applicable technology.
Under government regulations, a registrant company must follow
the following procedures prior to registration and marketing GM crops in China. Each step (except laboratory research) has an associated
reporting and approval process established by the Ministry of Agriculture, the clearance of which is necessary in order to proceed:
|
1.
|
Laboratory Research: defined by genetic manipulations and research work conducted under a control system within laboratory;
|
|
2.
|
Intermediate Testing Phase: a small-scale test conducted under a regulated control system;
|
|
3.
|
Environmental Release Test: a medium-scale test conducted under natural condition by taking relatively secure measures;
|
|
4.
|
Production Test: a relatively large-scale test before production and application; and
|
|
5.
|
Obtaining the safety certificate on genetically modified organisms
|
Since we are considered a domestic Chinese company, we can proceed
through all five phases of the GM approval in China, while international entities are restricted to only phrase one, and currently
forbidden to proceed to phases two through five. We have already had several of our products submitted to testing in phases two
through four, and one product has completed the five-step process. We are the first company to obtain approval to produce
and sell GM corn seeds in China.
If GM seed products are approved by the government on a broader
scale and begin to gain widespread acceptance in the market, which we expect will occur in the future, large international biotech
companies could likely become more serious competitors. However, they may continue to face numerous obstacles in competing with
us in China. Foreign companies are currently prohibited from developing or producing genetically modified plant seeds, breeding
livestock and poultry, or producing aquatic seed according to
Catalog Guiding Foreign Investment Industries
(distributed
by Ministry of Commence of China). As a result, we believe we will continue to be in a strong competitive position in the genetically
modified segment of the seed market when it becomes meaningful and legally permissible to do so.
As part of our internal efforts, we developed genetic markers
to enhance the selection of disease resistance corn lines to accelerate the breeding process. In addition, we continued to utilize
our previously implemented data mining infrastructure to search for stable and high-yielding hybrids. Our business model draws
from existing and new technologies using both conventional breeding and advancement in biotechnology. We aim to build upon our
current hybrid base where we have accumulated parental seeds with advantageous traits optimized to local soil conditions.
Our accomplishments with hybrid crop seeds provide a foundation
to launch into a range of GM products. Our agronomists and technical support provide the platform for us to educate farmers on
the benefits of GM products. Our accumulated germplasm from conventional breeding techniques forms a basis to transform our genetic
traits. Our high-end processing, production, and quality control will continue to ensure high-quality seed production. Our nationwide
footprint and comprehensive data mining infrastructure allow for the matching of products with their most appropriate locations
throughout China.
Key factors affecting our growth, operating results and financial
condition
We expect our future growth, operating results and financial
condition to be driven and affected by a number of factors and trends including but not limited to:
|
·
|
our ability to strategically manage our growth and expansion, organically or through mergers and acquisitions. If we do not
manage our growth effectively, our growth may slow down and we may not be able to achieve or maintain profitability;
|
|
·
|
our ability to fit acquisitions and our corporate reorganization into our growth strategies to generate sufficient value to
justify their cost;
|
|
·
|
our ability to develop new products through research and development;
|
|
·
|
our ability to expand internationally and develop our business in different regulatory, distribution and competitive markets;
|
|
·
|
our ability to evaluate our business lines and take action to discontinue aspects of our business as well as to take cost savings
measures for the future growth of the company;
|
|
·
|
our ability to partner or joint venture for the creation of more advanced bio-technology products;
|
|
·
|
market fluctuations in the demand for and supply of crop seeds in China and our ability to anticipate market demand and adjust
our volume and product mix to maximize revenues and maintain sufficiently high margins to achieve and maintain profitability;
|
|
·
|
our ability to continue to license or acquire crop seeds from third party developers and our ability to develop proprietary
crop seeds;
|
|
·
|
our ability to continue to effectively market and distribute our core products through active agronomic assistance;
|
|
·
|
future consolidations in the crop seed industry in China that may give rise to new or strengthened competitors;
|
|
·
|
the possibility that the crop seed industry in China may favor genetically modified seeds over hybrid seeds, and our ability
to develop, produce, market, and sell such products;
|
|
·
|
the possibility of major natural disasters in China, which may have an adverse impact on our business and results of operation,
as there is currently no agriculture insurance available in China against natural disasters;
|
|
·
|
the Chinese government’s continuing support for the growth and development of the agriculture sector;
|
|
·
|
the impact of regulation affecting our industry;
|
|
·
|
our benefits from certain government incentives including tax incentives, the expiration of which, or changes to which, could
have an adverse effect on our operating results;
|
|
·
|
the possibility that excess supply of one or more of our products in our markets may drive down prices and reduce our margins,
especially if we are unable to sufficiently differentiate our products from those of our competitors thereby enabling us to charge
higher prices; and
|
|
·
|
our ability to correctly estimate growers’ future needs, and match our product varieties and production levels to meet
those needs.
|
Revenues
The most significant factor that affects our sale of crop seeds
in China is the demand for and supply of crop seeds in the overall China market. As a result, the price we are able to set for
our seeds is dependent on the aggregate supply of crop seeds from us and our competitors in relation to crop seed demand in any
growing season. Any potential fluctuation in the demand and supply of seeds in China may cause significant volatility in the pricing
of crop seeds in China and, as a consequence, in our operating results and financial condition. In addition, because decisions
relating to our production volume are made before we know the volume of seed orders and the market price for such orders, we face
the risk of either over-supplying the market or under-supplying the market, which could materially and adversely affect our revenues,
operating results and ability to achieve or maintain profitability.
Deferred revenues
Because of our revenues recognition policy, we sometimes carry
sizeable deferred revenues on our balance sheet. These deferred revenues reflect the value of our canola seeds delivered after
evidence of a sale arrangement is confirmed, delivery to the customer is made and full pre-payment from the customer is received,
but before the final sales price is fixed and determined. This aspect of our revenues recognition policy does not have a significant
effect when deferred revenues in the periods being compared maintain approximately the same proportion to overall sales. However,
when the proportion of our sales classified as deferred revenues varies significantly from year to year, as sometimes occurs, our
revenues and earnings as reported in our financial statements may not accurately reflect our operating activities.
Cost of revenues
Our cost of revenues consists of expenses directly related to
our crop seed sales. These expenses are primarily made up of the purchase prices for seeds, depreciation and amortization, shipping
and handling costs, salary and compensation, license fees, supplies, and write-down of inventories.
Purchase price for seeds
. The purchase price for seeds
consists of the price we pay to farmers for the seeds they grow for us. The purchase price for seeds is the largest component of
our cost of revenues and is likely to be the most variable element of our cost of revenues.
Depreciation and amortization
. Depreciation consists
of depreciation of property, plant and equipment. Amortization consists of amortization of our seed license fees.
Shipping and handling
. Shipping and handling costs include
costs associated with product delivery and handling costs related to transportation of goods from suppliers to factories and from
factories to factories.
Salary and compensation
. Salary and compensation expenses
include wages, bonuses and other benefits, including welfare benefits. Salary and compensation included in our cost of revenues
related to our production personnel. We expect that our salary and compensation expenses will increase in the future in conjunction
with our intended growth.
License fees.
License fees consist of royalty fees paid
to independent research and development institutions.
Supplies
. Supplies consist of items needed for production
and packing costs for the seeds we produce.
Write-down of Inventories.
Any excess of the cost over
the net realizable value of the inventories is recognized as a provision for diminution in the value of inventories. Net realizable
value is the estimated selling price in the normal course of business less the estimated costs to completion and the estimated
expenses and related taxes necessary to make the sale.
Operating expenses, net
Our operating expenses, net consist of general and administrative
expenses, research and development expenses, selling and marketing expenses and other income, net. Our operating expenses, net
increased for the fiscal year ended September 30, 2016 compared to fiscal year 2015 was mainly due to one-time stock compensation
expense and corporate restructuring cost.
General and administrative expenses
. General and administrative
expenses primarily consist of salary and compensation, depreciation and amortization, legal fees, professional expenses and other
expenses, including travel and other general business expenses and office supplies.
Research and development expenses
. Our research and development
expenses primarily consist of salary and compensation expenses of personnel engaged in the research and development of our proprietary
crop seeds and genetically modified products, travelling expenses, depreciation of plant and equipment, rent and development efforts
and the expenses paid to certain research institutes to carrying research projects on behalf of Origin during the period.
Selling and marketing expenses
. Our selling and marketing
expenses primarily consist of salary and compensation for our sales and marketing personnel, advertisement and promotion expenses,
transportation expenses and related marketing expenses.
Equity award plans and award agreements
Our equity based awards are granted under the 2005, 2009 and
2014 Performance Equity Plans. We adopted the 2005 Plan in November 2005, under which we may issue equity based awards for up to
1,500,000 ordinary shares to our directors, officers, employees, individual consultants and advisors. On April 22, 2010, our company
adopted the 2009 Performance Equity Plan, under which we may issue equity based awards for up to 1,500,000 ordinary shares to our
directors, officers, employees, individual consultants and advisors. On December 22, 2014, our company adopted the 2014 Performance
Equity Plan, under which we may issue equity based awards for up to 5,000,000 ordinary shares to our directors, officers, employees,
individual consultants and advisors. In addition to current equity awards to the directors and officers, we plan to expand our
equity awards to a broader range of employees in order to align our employee incentives towards the stock performance. There
are equity awards currently outstanding for nil ordinary shares under the 2005 Plan, for 1,060,000 ordinary shares under the 2009
Plan and for 1,380,000 ordinary shares under the 2014 Plan.
On December 22, 2014 and January 2, 2016, the compensation
committee of the Board of Directors approved the substitution of restricted stock for outstanding grants under Tranche
5&6 that no longer offer the kind of incentive opportunity originally sought for valued employees given the fall in the
market price of the ordinary shares of the Company during the recent years. The revised terms of the stock options were
accounted for as a modification in accordance with ASC 718-20. For the purpose of determining the amount of any incremental
share-based compensation cost that may have resulted from the modification of the exercise prices, the Company compared the
fair value of modified awards and that of the original awards, and determined that RMB0.61 million and RMB 0.54 million
(US$0.1 million) of the modifications required the recognition of additional share-based payment expense, respectively.
As of September 30, 2016, all option based awards had an
exercise price within the range of US$1.27 to US$2.55, and the awards expire 5-10 years from the date of grant and either
vest immediately or vest over a period of 1 to 5 years, depending on the award. We recorded a total stock-based compensation
expense of RMB1.32 million for the fiscal year ended September 30, 2014, and RMB1.61 million for the fiscal year ended
September 30, 2015 and RMB8.80 million (US$1.32 million) for the fiscal year ended September 30, 2016.
Critical Accounting Policies
The discussion and analysis of our financial condition and results
of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation
of those financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities,
revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual
results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant
judgments or uncertainties, and potentially result in materially different results under different assumptions and conditions.
We have described below what we believe are our most critical accounting policies that involve a high degree of judgment and the
methods of their application. For a description of all of our significant accounting policies, see Note 2 to our consolidated financial
statements.
Revenues
We derive revenues primarily from the sale of various crop seeds,
including corn, rice and canola seeds in China. We recognize revenues when pervasive evidence of a sales arrangement exists, products
have been delivered, the price is fixed and determinable, collectability is reasonably assured, and the right of return has expired.
Accordingly, we defer revenues recognition until all sale return privileges lapse, which generally occurs in May or June, and until
the selling price has been finalized by our management and confirmation has been issued to the customer, which generally occurs
at the end of our selling season. We sometimes carry a sizeable deferred revenues that reflects the value of our crop seeds delivered
after evidence of a sales arrangement is confirmed, delivery to the customer is made and pre-payments from the customer are received,
but before the final sales price is fixed and determined at the end of the selling season. This aspect of our revenues recognition
policy does not have a significant effect when deferred revenues in the periods being compared remain approximately the same proportion
to overall sales. However, when the proportion of our sales classified as deferred revenues varies significantly from year to year,
as sometimes occurs, our revenues and earnings as reported in our financial statements may not exactly reflect our operating activities.
Impairment of long-lived assets
We perform the Goodwill Impairment Test on an annual basis.
This process is conducted at the reporting unit level, defined as the lowest level of the Company, i.e., business units, subsidiaries,
operating units, divisions, etc. As of September 30, 2016, the remaining goodwill on the books was exclusively arising from the
acquisition of Denong. We conducted the annual Goodwill Impairment Test for the year ended September 30, 2016.
On September 26, 2016, the Company has entered into a
definitive agreement to sell its proprietary China-based commercial corn seed production and distribution business, including
Denong, for RMB400 million (approximately US$60 million) to Beijing Shihui Agricultural Development Co, Ltd (“Beijing
Shihui”). Beijing Shihui is an internet agricultural enterprise that provides agricultural products and technology
services to farmers, suppliers and agriculture-related enterprises in China. This transaction is subject to customary closing
conditions and shareholder approval. It is expected to close in the first calendar quarter of 2017. We considered the implied
fair value, i.e. consideration of the Sale, exceeds the carrying value of the reporting unit. Therefore, goodwill was not
considered to be impaired as of September 30, 2016.
Write-down of Inventories
Our inventories are stated at the lower of cost or market value.
Any excess of the cost over the net realizable value of the inventories is recognized as a provision for reduction in the value
of inventories.
We assess the write-downs of inventories using three criteria:
1) the quality of seeds according to standards promulgated by the PRC government on the germination percentage and purity level
of seeds; 2) a comparison of the inventory unit cost with the market selling price and subsequent write-down of those inventories
where the unit cost exceeds its expected net selling price; and 3) evaluation of the unsold balance of the existing inventory that
cannot be sold in the coming three years, based on sales forecasts and marketing plan.
We have assessed the product quality, unsold quantity
and the amount unit cost exceed the selling price performed by our quality inspectors and sales staff on an annual basis,
and accordingly, determined the inventory write-downs based on the assessment results. We believe that the current
methodologies on impairment assessment are adequate to address the risks of inventory write-downs. For fiscal year 2016, we
had a write down of RMB20.50 million (US$3.1 million) compared to RMB10.97 million for fiscal year 2015, which
was mainly due to written down in related to product quality,and RMB21.98 million for fiscal year 2014.
Due to the nature of the seed industry, we normally produce
seeds according to our annualized production that is developed at least one year before delivery to our customers. If our production
plan is too aggressive, we could produce more seeds than the market demands, resulting in aged seeds. We may decide not to sell
the aged seeds as crop seed products, taking into account factors such as the quality of the seeds and commodity pricing. In that
case, the aged inventory may be sold as common feed products at greatly reduced prices. Aged inventory could result in asset impairment
risk, in which case we would suffer a risk of additional inventory write-downs.
Income taxes
We record a valuation allowance to
reduce our deferred tax assets to the amount that we believe to be more likely than not to be realized. In the event that we were
to determine that we would be able to realize our deferred tax assets in the future, in excess of their recorded amount, an adjustment
to our deferred tax assets would increase income in the period such determination was made. Likewise, should we determine
that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax
assets would be charged to income in the period such determination was made.
In previous years, the Company assessed the contingent tax
liability that might arise from the Share Exchange Transaction (note 1) and considered such contingent tax liabilities are
more-likely-than-not. As of September 30, 2013, contingent tax liability of RMB39,060 including late payment penalty and
interest was included in the income tax payable in the accompanying consolidated balance sheet. The Company does not expect
to incur tax liabilities at the higher end of the range which were estimated to be in the range RMB39,060 to RMB64,218,
based on the information previously available.
In 2009, the Company reviewed the contingent tax position. On
September 23, 2010, the Company filed a revised 2005 tax return (the “Revised Return”) to the United States Internal
Revenue Service (the “IRS”), to modify and supplement the previously filed tax return regarding this tax liability.
While the timeline for the IRS to question on the tax return and assess additional tax due is generally three years, this matter
may take a prolonged period of time to resolve depending on the return time for IRS and the necessity, if any, of future appeals
or re-evaluation.
For the period from the filing date of the Revised Return
(i.e., September 23, 2010) to September 30, 2014, the IRS has not enquired the Company or Chardan to clarify the
redomestication transaction by filing the Revised Return. The Company believes that Chardan has paid all necessary and
required U.S. federal income tax arising out of the Chardan redomestication. The Company also believes that the time limit
for the IRS to assess any additional income tax, which is expired at September 23, 2013, has passed by reason of the
expiration of the stature of limitation. In this stance, the Company concludes no justification to make a reserve in its
accounts for the contingent tax liability of RMB39,060 that might arise out of a redomestication. Accordingly, the contingent
tax liability of RMB39,060 has been derecognized and recorded as a tax benefit in the statement of income and comprehensive
income for the year ended September 30, 2014 due to the cessation of contingent taxable status.
The Company adopted FASB Accounting Standard Codification (“ASC”)
740. The Company’s policy on classification of all interest and penalties related to unrecognized tax benefits, if any, as
a component of income tax provisions.
Stock-based compensation
We adopted FASB ASC 718-10, to measure our issued share
options based on the grant-date fair value of the options and recognized as compensation expense over the requisite service period,
with a corresponding addition to equity. We adopt the Black-Scholes Model to value the fair value of the share options.
Results of Operations
Fiscal Year Ended September 30, 2016 Compared To Fiscal Year
Ended September 30, 2015
Revenues and Gross Margin
Total revenues for the fiscal year ended September 30,
2016 were RMB335.25 million (US$50.20 million), a decrease of 11.0% from RMB376.53 million during the fiscal year ended
September 30, 2015. Overall, the year-over-year decrease in revenues was mainly due to the lower sales in corn and rice seed
business as the result of fierce competition.
The table below lists the change in both
revenues and gross margins exclusive of scrap sales, and conversion and testing services income between fiscal year 2016 and fiscal
year 2015.
Items
|
|
Revenues
|
|
|
Gross Margin
|
|
|
|
Year ended
September
30,
2016
|
|
|
Year ended
September
30,
2015
|
|
|
Change
|
|
|
Year ended
September
30,
2016
|
|
|
Year ended
September
30,
2015
|
|
|
Change
in
percentage
point
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid Corn seeds
|
|
|
306,050
|
|
|
|
329,984
|
|
|
|
(7.3
|
)%
|
|
|
32.7
|
%
|
|
|
34.3
|
%
|
|
|
(1.6
|
)%
|
Hybrid Rice seeds
|
|
|
19,311
|
|
|
|
26,067
|
|
|
|
(25.9
|
)%
|
|
|
(50.3
|
)%
|
|
|
(20.8
|
)%
|
|
|
(29.5
|
)%
|
Hybrid Canola seeds
|
|
|
8,704
|
|
|
|
15,640
|
|
|
|
(44.3
|
)%
|
|
|
42.0
|
%
|
|
|
49.5
|
%
|
|
|
(7.5
|
)%
|
Total normal sales
|
|
|
334,065
|
|
|
|
371,691
|
|
|
|
(10.1
|
)%
|
|
|
28.2
|
%
|
|
|
32.7
|
%
|
|
|
(4.5
|
)%
|
Revenues from our hybrid corn seeds
decreased by 7.3% to RMB306.05 million (US$45.83 million) in fiscal year 2016 from RMB329.98 million in fiscal year 2015,
this year-over-year decrease was mainly due to the lower sales volume as the result of fierce competition in this year. Gross
margin of our corn products decreased by 1.6% in fiscal year 2016 compared with fiscal year 2015, which was mainly due to
higher average unit purchase cost of seed as a result of lower seed production yield for one of our key production centers
this year.
Revenues from our hybrid rice seeds
decreased by 25.9% to RMB19.31 million (US$2.89 million) in fiscal year 2016 from RMB26.07 million in fiscal year
2015, which was mainly due to increasing competition in the rice seed market. Revenues from our canola seeds decreased by
44.3% to RMB8.70 million (US$1.30 million) in fiscal year 2015 compared with RMB15.64 million in fiscal year 2015.
Gross margin
The gross margin was 22.7% in fiscal year 2016 compared
with 29.9% in fiscal year 2015, which was mainly due to higher average unit purchase cost of seed as a result of lower seed
production yield for one of our key production centers this year.
Operating expenses
Operating expenses for fiscal year
2016 increased to RMB137.31 million (US$20.56 million) from RMB111.17 million in fiscal year 2015. Higher operating expense
for fiscal year 2016 was mainly due to one-time stock compensation expense, expenses related to expansion of operation in
North America and corporate restructuring cost of RMB24.08 million, and decrease in other income of RMB11.3 million.
.
Selling and marketing
Selling and marketing expenses for
fiscal year 2016 decreased to RMB38.08 million (US$5.7 million) from RMB39.99 million in fiscal year 2015. Lower expenses
were due to decline in salary as a result of the shift in the marketing strategy.
General and administrative
General and administrative
expenses (“G&A”) increased to RMB62.16 million (US$9.31 million) in fiscal year 2016 from RMB40.68 million
in fiscal year 2015. The increase was mainly due to one-time stock compensation expense of RMB7.20 million, expenses related
to expansion of operation in North America of RMB4.67 million and corporate restructuring cost of RMB12.21
million, respectively.
Research and development
Research and development
expenses (“R&D”) decreased to RMB44.03 million (US$6.59 million) in fiscal year 2016 from RMB48.74 million
in fiscal year 2015. We typically target R&D investment in the range of 7-13% of our total revenues although the actual
investment fluctuates depending on the realization of R&D projects and the level of expansion our R&D will experience
as we focus on biotechnology development.
Other income, net
Other income decreased to RMB6.96
million (US$1.04 million) in fiscal year 2016 from RMB18.24 million in fiscal year 2015. The decrease was mainly due to the
reversal of liabilities aged over five years with amount of approximately RMB9.0 million in last year.
Loss from operations
As a result of the impact of
the components described above, loss from operations were RMB61.31 million (US$9.18 million) in fiscal year 2016 compared
with operating income of RMB1.34 million in fiscal year 2015.
Interest expense
Interest expense was RMB14.25
million (US$2.13 million) for the fiscal year 2016 compared to RMB18.63 million a year ago. This mainly represents
bank loans from the Beijing, Xinjiang and Linze entities this year.
Net Loss
Net loss attributable to Origin for the fiscal year ended
September 30, 2016 were RMB65.58 million (US$9.82 million), compared with the net loss of RMB13.81 million during
the fiscal year ended September 30, 2015. The year-over-year increase in the net loss was mainly due to decrease in revenue
and rise in operating expenses this year described above.
Fiscal Year Ended September 30, 2015 Compared To Fiscal Year
Ended September 30, 2014
Revenues and Gross Margin
Total revenues for the fiscal year ended September 30,
2015 were RMB376.55 million (US$59.19 million), a decrease of 9.3% from RMB415.18 million during the fiscal year ended
September 30, 2014. Overall, the year-over-year decrease in revenues was mainly due to the lower sales in corn and rice seed
business as the result of fierce competition.
The table below lists the change in
both revenues and gross margins exclusive of scrap sales, and conversion and testing services income between fiscal year
2015 and fiscal year 2014.
Items
|
|
Revenues
|
|
|
Gross Margin
|
|
|
|
Year ended
September
30,
2015
|
|
|
Year ended
September
30,
2014
|
|
|
Change
|
|
|
Year ended
September
30,
2015
|
|
|
Year ended
September
30,
2014
|
|
|
Change
in
percentage
point
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid Corn seeds
|
|
|
329,984
|
|
|
|
355,436
|
|
|
|
(7.2
|
)%
|
|
|
34.3
|
%
|
|
|
33.2
|
%
|
|
|
1.1
|
%
|
Hybrid Rice seeds
|
|
|
26,067
|
|
|
|
36,146
|
|
|
|
(27.9
|
)%
|
|
|
(20.8
|
)%
|
|
|
(10.0
|
)%
|
|
|
(10.8
|
)%
|
Hybrid Canola seeds
|
|
|
15,640
|
|
|
|
20,615
|
|
|
|
(24.1
|
)%
|
|
|
49.5
|
%
|
|
|
48.8
|
%
|
|
|
0.7
|
%
|
Total normal sales
|
|
|
371,691
|
|
|
|
412,197
|
|
|
|
(9.8
|
)%
|
|
|
32.7
|
%
|
|
|
30.8
|
%
|
|
|
1.9
|
%
|
Revenues from our hybrid corn
seeds decreased by 7.2% to RMB329.98 million (US$51.87 million) in fiscal year 2015 from RMB355.44 million in fiscal year
2014, this year-over-year decrease was mainly due to the lower sales volume as the result of fierce competition in this year.
Gross margin of our corn products increased by 1.1% in fiscal year 2015 compared with fiscal year 2014, which was mainly
because the average unit sale price increased by approximately 5% this year.
Revenues from our hybrid rice
seeds decreased by 27.9% to RMB26.07 million (US$4.10 million) in fiscal year 2015 from RMB36.15 million in fiscal year
2014, which was mainly due to increasing competition in the rice seed market. Revenues from our canola seeds decreased by
24.1% to RMB15.64 million (US$2.46 million) in fiscal year 2015 compared with RMB20.62 million in fiscal year 2014.
Gross margin
The gross margin was 29.9% in fiscal year 2015 compared
with 27.5% in fiscal year 2014, which was mainly because the average unit sale price of corn seed increased by approximately
5% this year.
Operating expenses
Operating expenses for fiscal year
2015 decreased to RMB111.17 million (US$17.48 million) from RMB138.51 million in fiscal year 2014. Lower operating expense
for fiscal year 2015 was mainly due to lower advertisement and transportation expenses, continuous cost control and higher
other operating income.
.
Selling and marketing
Selling and marketing expenses for
fiscal year 2015 decreased to RMB39.99 million (US$6.3 million) from RMB58.97 million in fiscal year 2014. Lower expenses
were due to the shift in the marketing strategy.
General and administrative
General and administrative
expenses (“G&A”) decreased to RMB40.68 million (US$6.40 million) in fiscal year 2015 from RMB46.43 million
in fiscal year 2014. This reduction in G&A expenses reflects our efforts to improve our operating efficiency and
cost reduction.
Research and development
Research and development
expenses (“R&D”) increased to RMB48.74 million (US$7.66 million) in fiscal year 2015 from RMB40.38 million
in fiscal year 2014. We typically target R&D investment in the range of 7-13% of our total revenues although the actual
investment fluctuates depending on the realization of R&D projects and the level of expansion our R&D will experience
as we focus on biotechnology development.
Other income, net
Other income increased to RMB18.24
million (US$2.87 million) in fiscal year 2015 from RMB7.27 million in fiscal year 2014. The increase was mainly due to the
reversal of liabilities aged over five years with amount of approximately RMB9.0 million (US$1.41 million) this year.
Income from operations
As a result of the impact of
the components described above, income from operations were RMB1.34 million (US$0.21 million) in fiscal year 2015 compared
with operating loss RMB24.48 million in fiscal year 2014. The increase in operating results was mainly due to decline in
operating expenses this year.
Interest expense
Interest expense was RMB18.63
million (US$2.93 million) for the fiscal year 2015 compared to RMB19.74 million a year ago. This mainly represents
bank loans from the Beijing, Xinjiang and Linze entities this year.
Net Loss
Net loss attributable to Origin for the fiscal year
ended September 30, 2015 were RMB13.81 million (US$2.17 million), compared with the net loss of RMB9.53 million during the
fiscal year ended September 30, 2014. The year-over-year increase was mainly due to the reversal of tax liabilities with
amount of RMB39 million in last year.
B.
Liquidity and Capital Resources
.
As of September 30, 2014, 2015 and 2016, we had
approximately RMB46.27 million, RMB66.03 million and RMB54.51 million (US$8.2 million), respectively, in cash and cash
equivalents. Our cash and cash equivalents primarily consisted of cash on hand and short term liquid investments with
maturities of three months or less deposited with banks and other financial institutions. We believe our working capital
is sufficient to meet our present requirements.
We financed our operations through cash generated from
operating activities and bank borrowings. As of September 30, 2016, we had a total short-term borrowings of RMB190
million (US$28.45 million) and long-term borrowings of RMB47.06 million(US$7.05 million). Please see Note 13 to our
consolidated financial statement for the details of bank borrowing.
The following table shows our cash flows with respect to operating
activities, investing activities and financing activities for the 12 months ended September 30, 2012, 2013, 2014, 2015 and 2016.
Item
|
|
September 30
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Net cash provided by (used in) operating activities
|
|
|
82,713
|
|
|
|
(146,109
|
)
|
|
|
(85,639
|
)
|
|
|
52,189
|
|
|
|
47,905
|
|
|
|
7,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(143,383
|
)
|
|
|
(68,279
|
)
|
|
|
(561
|
)
|
|
|
(20,359
|
)
|
|
|
(6,481
|
)
|
|
|
(971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
83,400
|
|
|
|
191,687
|
|
|
|
394
|
|
|
|
(9,466
|
)
|
|
|
(48,816
|
)
|
|
|
(7,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
22,730
|
|
|
|
(22,701
|
)
|
|
|
(85,806
|
)
|
|
|
22,364
|
|
|
|
(7,392
|
)
|
|
|
(1,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
129,942
|
|
|
|
152,789
|
|
|
|
131,978
|
|
|
|
46,268
|
|
|
|
66,025
|
|
|
|
9,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
117
|
|
|
|
1,890
|
|
|
|
96
|
|
|
|
(2,607
|
)
|
|
|
(4,124
|
)
|
|
|
(618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
152,789
|
|
|
|
131,978
|
|
|
|
46,268
|
|
|
|
66,025
|
|
|
|
54,509
|
|
|
|
8,163
|
|
Operating activities:
Net cash provided by operating activities was RMB47.91
million (US$7.2 million) for the fiscal year ended September 30, 2016, compared with RMB52.19 million for the fiscal year
ended September 30, 2015. The cash inflow this year in the operating activities was mainly due to inventory decrease of
RMB50.97 million (US$7.63 million), increase in amount due to related party of RMB58.3 million (US$8.73 million) and
RMB55.70 million (US$8.34 million) lower advance received from the customers.
Investing activities:
Net cash used in investing activities was RMB6.48 million (US$0.97 million) for the fiscal year ended September 30, 2016, compared cash used of RMB20.36 million for the
fiscal year ended September 30, 2015. The decrease was mainly due to deposits received from disposal of commercial seed
business and decline in purchase of equipment and intangible assets.
Financing activities:
Net cash used in financing activities was RMB48.82
million (US$7.31 million) for the fiscal year ended September 30, 2016, compared with RMB9.47 million for the fiscal year
ended September 30, 2015. The increase was mainly due to the repayment of borrowings.
Due to the cyclical nature of cash flow inherent in our business,
the majority of cash flow from operations is received during the second half of the calendar year, which corresponds to the fourth
quarter and the subsequent first quarter of our fiscal year. We use bank credit facilities to cover cash outflow related to operating
expenses during the portion of the year when sales receipts are low. We believe, in longer run, we can generate sufficient cash
flows from operating activities to finance our R&D activities and operating expansions. We also can access sufficient borrowing
capacity from local banks to satisfy our seasonal liquidity needs.
The nature of our business involves cycles in expenses and revenues
that are not always in phase. Most often in the third to fourth quarters of our fiscal year, we may face costs that are in excess
of our cash flow sources during that period. Whether that occurs, and to what extent it occurs, depends on the amount of deposits
received from customers compared with the advanced payments made by us to our seed producing farmers and the final payment for
seed procurement. The exact timing of these payments is determined by the Chinese lunar calendar, which varies from one calendar
year to the next. As a result, in some years our working capital needs are greater than in others. This aspect of the business
is the reason we have customarily relied upon short term loans to cover our expenses pending receipt of cash payment from farmers
at the time of seed purchases. We, on a consolidated basis, have had access to sufficient financing in the past to manage these
cash flow cycles. We have consistently repaid our short-term borrowings at or before maturity.
Relevant PRC laws and regulations permit payments of dividends
by our PRC operating companies only out of their retained earnings, if any, as determined in accordance with PRC accounting standards
and regulations. In addition, the statutory general reserve fund requires that annual appropriations of 10% of net after-tax income
be set aside prior to payment of any dividends. As a result of these and other restrictions under PRC laws and regulations, our
PRC Operating Companies are restricted in their ability to transfer a portion of their net assets to us either in the form of dividends,
loans or advances.
Even though we currently do not require any such dividends,
loans or advances from our PRC Operating Companies, we may in the future require additional cash resources from our PRC Operating
Companies due to changes in business conditions, to fund future acquisitions or developments, or merely to declare and pay dividends
or distributions to our shareholders, although we currently have no intention to do so.
|
C.
|
Research and Development, Patents and Licenses,
etc.
|
We focus our research and development efforts on agro-biotechnology,
crop breeding and the development of new crop seeds. In November 2001, we established a seed research and development center in
Tongzhou, Beijing, which conducts research and development of commercial crop breeding. In September 2005, we established the “Origin
Life Science Research Center” in Zhong-Guan-Cun (ZGC) Life Science Park in Beijing, the principal activities of which include
crop gene engineering, molecular marker-assisted breeding, and molecular identification. We also have ten breeding stations
located in different regions in China.
We have established technological cooperative relationships
with five universities and sixteen research institutes in China, including Beijing University, China Agricultural University, Chinese
Academy of Sciences, and Henan Agriculture University. We employ 81 full-time research personnel.
Our research and development expenditures were RMB37.63
million, RMB42.16 million, RMB40.38 million, RMB48.74 million and RMB44.03 million for fiscal years ended September 30,
2012, 2013, 2014, 2015 and 2016, respectively. Our continued research and development spending is a result of our efforts to
self-develop seed varieties and biotechnology traits both through joint development and in-house efforts.
The company has received government funding for research
and development activities. Such funding was received in the fiscal years 2014, 2015 and 2016 in the amounts of RMB7.61
million, RMB7.08 million and RMB10.37 million(US$1.55 million), respectively.
Other than as disclosed elsewhere in this Annual Report, we
are not aware of any trends, uncertainties, demands, commitments or events in the period from October 1, 2015 to September 30,
2016 that were reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources,
or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions,
or that had the trends relating to the current-year increases in expenses and reduction in revenues and profits.
|
E.
|
Off-balance Sheet Arrangements
.
|
We do not have any off-balance sheet guarantees, interest rate
swap transactions or foreign currency forward contracts or outstanding derivative financial instruments. We do not engage in trading
activities involving non-exchange traded contracts.
|
F.
|
Tabular Disclosure of Commitments and Contingencies.
|
We have various contractual obligations that will affect our
liquidity. The following table sets forth our contractual obligations as of September 30, 2016.
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
Capital Commitment
|
|
|
5,172
|
|
|
|
5,172
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short term Debt Obligations
|
|
|
190,000
|
|
|
|
190,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long term Debt Obligations
|
|
|
47,057
|
|
|
|
27,057
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
Interest on Debt Obligations
|
|
|
17,279
|
|
|
|
17,042
|
|
|
|
237
|
|
|
|
-
|
|
|
|
-
|
|
Operating Lease Obligations
|
|
|
6,691
|
|
|
|
1,642
|
|
|
|
1,124
|
|
|
|
908
|
|
|
|
3,017
|
|
Total
|
|
|
266,199
|
|
|
|
240,913
|
|
|
|
21,361
|
|
|
|
908
|
|
|
|
3,017
|
|
Except for historical facts and financial data, the information
included in Items 5.A through 5.D and 5.F is deemed to be a “forward looking statement” as that term is defined in
the statutory safe harbors. The safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act shall
apply to all forward-looking information provided in this Item 5.
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and Senior Management.
|
The following table sets forth certain information regarding
our directors and executive officers as of September 30, 2016.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
William S. Niebur
|
|
59
|
|
President, Chief Executive Officer and Director
|
Shashank Aurora
|
|
55
|
|
Chief Financial Officer
|
Jihong Liang
|
|
58
|
|
Chief Technology Officer
|
Gengchen Han
|
|
61
|
|
Chairman of the Board
|
James Kang
|
|
57
|
|
Independent Director (through January 2016)
|
Min Tang
|
|
63
|
|
Independent Director
|
Michael W. Trimble
|
|
59
|
|
Independent Director
|
David W. Bullock
|
|
52
|
|
Independent Director
|
James Chen
|
|
51
|
|
Chief Financial Officer (through January 2016)
|
Dr. William S. Niebur
is the President and the
Chief Executive Officer of Origin and joined Origin in April, 2016. Dr. Niebur most recently served with DuPont Pioneer as Vice
President and General Manager with strategic oversight responsibility for China, East Asia and Oceania. Dr. Niebur has been in
the seed business for more than three decades, beginning his career as a corn geneticist in Princeton, Ill. He went on to gain
extensive global experience, first overseeing research and development while living in Europe, then returning to North America
as the company’s global Vice President for R&D, and finally moving into business operations managing seed businesses
in East and North Asia. In 2015, Dr. Niebur was named as one of 50 people “Shaping the Future of the U.S.-China Relationship”
in the Pacific Power Index, publicized by Foreign Policy Group. Dr. Niebur was instrumental in integrating technologies into plant
genetics programs and was granted several patents which led to the commercialization of more than 30 branded products during his
scientific career. Dr. Niebur holds both his Bachelor of Science and Master of Science degrees from Iowa State University. He earned
his doctorate in plant breeding and cytogenetics from the University of Minnesota.
Mr. Shashank Aurora
has been serving as the Chief
Financial Officer of Origin since May, 2016. Mr. Aurora most recently served DuPont Pioneer in the capacity of global services
finance director. With more than two decades of experience with the organization, he led numerous DuPont Pioneer entities across
the globe to strong financial results, including locations in Africa, Canada, China, India, Latin America and Pakistan. Mr. Aurora
earned his Bachelor of Life Sciences degree from Nizam College, Osmania University, in Hyderabad, India, along with certifications
as FCA from The Institute of Chartered Accountants of India and CPA from the American Institute of Certified Public Accountants.
He is fluent in English and Hindi, and is familiar with Arabic.
Dr. Jihong Liang
has been serving as
the Chief Technology Officer of Origin since August, 2016. Prior to Origin, Dr. Liang most recently served as the head
of Syngenta’s global rice seed research and development. He has nearly 25 years of global industry experience,
leading research and development at companies such as Syngenta, Monsanto and the Monsanto-Cargill joint venture Renessen. He
has held leadership positions in multiple disciplines, including technology scouting, global crop strategy planning, market
research and business development in China, Singapore and the United States. Liang’s scientific work has resulted in 10
patents globally and numerous research articles published in world-class scientific journals. Dr. Liang earned his Bachelor
of Science degree in microbiology from China Agricultural University, doctorate in biochemistry from the University
of Wisconsin-Madison, post-doctoral fellowship in molecular biology from the University of Chicago and Master of
Business Administration from Keller Graduate School of Management in St. Louis.
Dr. Gengchen Han
is the Chairman of Origin
and was formerly the President and the Chief Executive of Origin. Dr. Han is also the Executive Chairman of Beijing Origin and
its affiliated companies, a position that he has held since founding the business in 1997. Dr. Han was the Co-Chief Executive
Officer and Chief Executive Officer of the Company from its inception in 1997 until January 1, 2009 and from August
1, 2011 to April 25, 2016. Dr. Han has more than 20 years of experience in research and development of hybrid seed products,
particularly corn seed. From 1982 until 1984, Dr. Han was a lecturer at the Henan Agriculture University. From 1984 to 1987, Dr.
Han received his Ph.D. degree in Plant Breeding and Cytogenics from Iowa State University. From 1989 until 1990 he worked
for the International Maize and Wheat Improvement Center, or CIMMYT, in Mexico. He worked for Pioneer Hi-bred International from
1990 to 1996; his positions there included Regional Technical Coordinator for Asia/Pacific and Regional Supervisor for
China Business.
Dr. Min Tang
has been a director of Origin
since January 2009. Dr. Tang is currently the Executive Vice Chairperson of China Social Entrepreneur
Foundation, a social development and entrepreneurship education initiative. Previously, Dr. Tang sat as the Deputy Secretary General
of the China Development Research Foundation in charge of financial reform, energy conservation, and social development
for the Development Research Center reporting to the State Council of China. Prior to his position, Dr. Tang worked in
Asia Development Bank for 18 years. From 2000-2007, he was the Chief Economist of Asian Development Bank Resident
Mission in China. Dr. Tang received his masters and PhD. degree in Economics from University of Illinois at Urbana Champaign,
USA.
Dr. Michael W. Trimble
has been a director
of Origin since May 2006. Dr. Trimble is the founder of Trimble Genetics International LLC, or Trimble Genetics, and has been the
President of Trimble Genetics since 2001. Trimble Genetics is a plant genetics research company that has expanded business and
research relationships to include activities in North America, South America, Asia, Europe, the Middle East and Africa.
Dr. Trimble is a leader in plant genetics research with over thirty years of experience in crop breeding and the agricultural seed
industry. Dr. Trimble is an inventor of numerous patents in the field of plant genetics. Dr. Trimble graduated with a Ph.D.
degree from the University of Minnesota and also completed graduate programs at Purdue University and Iowa
State University.
Mr. David W. Bullock
, former Chief Financial Officer
of Graham Packaging Company Inc. (“GRM”) and former Chief Operating Officer, Executive Vice President and Chief Financial
Officer of UAP Holding Corporation (“UAPH”),was appointed to Origin’s Board of Directors and will replace Mr.
Larry Kenneth Cordell as the Chair of the Audit Committee and an Independent Director to the Company effective January 1, 2015.
Mr. Bullock served as the CFO of GRM, a global manufacturer of rigid plastics containers, from 2009 until the sale of the company
in 2011. From 2002 to 2008, Mr. Bullock served as Chief Operating Officer, as well as Executive Vice President and Chief Financial
Officer, of UAPH, a distributor of agricultural-related products. Prior to UAPH, Mr. Bullock held various positions with FMC Corporation,
Air Products and Chemicals Inc., and Westinghouse Electric. Mr. Bullock currently serves as a director of Building Materials Holding
Corp. Mr. Bullock received an M.B.A. from Cornell University and a B.S. in Electrical Engineering from Lehigh University.
Dr. Z. James Chen
was the Chief Financial
Officer of Origin from January 2012 to January 2016. Prior to Origin, Dr. Chen served as an Investment Manager at Abu
Dhabi Investment Authority (ADIA) and he worked as an equity research analyst at Morgan Joseph and BB&T Capital Markets. Dr.
Chen also worked as a Product Manager at Celanese and as a License Product Technology Manager at Univation Technologies, a joint
venture between ExxonMobil and Dow Chemical. Dr. Chen received his Ph.D. Degree in Chemical Engineering from the University of
Connecticut and his M.B.A degree from New York University.
The aggregate cash compensation paid to our directors and
executive officers as a group was RMB8.8 million (US$1.3 million) for the twelve months ended September 30, 2016. Options
granted are stated in the chart found below.
2005 Performance Equity Plan
On November 8, 2005 the company adopted the 2005 Performance
Equity Plan, under which we are able to issue equity awards with the right to acquire up to 1,500,000 ordinary shares to our directors,
officers, employees, individual consultants and advisors. The main purpose of the plan was to provide an existing structure and
renewable benefit plan for senior management and directors and others providing services to the company. We had outstanding awards
for nil ordinary shares under the 2005 Plan at September 30, 2016.
2009 Performance Equity Plan
On April 22, 2010, our company adopted the 2009 Performance
Equity Plan, under which we are able to issue equity awards with the right to acquire up to 1,500,000 ordinary shares to our directors,
officers, employees, individual consultants and advisors. The main purpose of the plan was to provide an existing structure and
renewable benefit plan for senior management and directors and others providing services to the company. We had outstanding awards
for1,060,000 ordinary shares under the 2009 Plan at September 30, 2016.
2014 Performance Equity Plan
On December 22, 2014, the company adopted the 2014 Performance
Equity Plan, under which we are able to issue equity awards for up to 5,000,000 ordinary shares to our directors, officers, employees,
individual consultants and advisors. The main purpose of the plan is to provide an existing structure and renewable benefit plan
for senior management and directors and others providing services to the company. In addition to current equity awards to the directors
and officers, we plan to expand our equity awards to a broader range of employees in order to align our employee incentives towards
our stock performance. We had outstanding awards for 1,380,000 ordinary shares under the 2014 Plan at September 30, 2016.
Those awards held by the current directors and officers are
listed below.
Name
|
|
Ordinary
Shares
Underlying
Outstanding
Option
|
|
|
Exercise
Price
|
|
|
Grant Date
|
|
Expiration Date
|
Gengchen Han
|
|
|
120,000
|
|
|
$
|
2.55
|
/Share
|
|
January 3, 2012
|
|
January 2,2017
|
|
|
|
120,000
|
|
|
$
|
1.44
|
/Share
|
|
January 2, 2013
|
|
January 1,2018
|
|
|
|
120,000
|
|
|
$
|
1.27
|
/Share
|
|
January 2, 2014
|
|
January 1,2019
|
|
|
|
120,000
|
|
|
$
|
1.48
|
/Share
|
|
January 2, 2015
|
|
January 1,2020
|
|
|
|
120,000
|
|
|
$
|
1.38
|
/Share
|
|
January 4, 2016
|
|
January 4, 2021
|
William S. Niebur
|
|
|
600,000
|
|
|
$
|
2.05
|
/Share
|
|
April 19, 2016
|
|
April 19, 2026
|
Michael Trimble
|
|
|
5,000
|
|
|
$
|
2.55
|
/Share
|
|
January 3, 2012
|
|
January 2,2017
|
|
|
|
5,000
|
|
|
$
|
1.44
|
/Share
|
|
January 2, 2013
|
|
January 1,2018
|
|
|
|
5,000
|
|
|
$
|
1.27
|
/Share
|
|
January 2, 2014
|
|
January 1,2019
|
|
|
|
5,000
|
|
|
$
|
1.48
|
/Share
|
|
January 2, 2015
|
|
January 1,2020
|
|
|
|
5,000
|
|
|
$
|
1.38
|
/Share
|
|
January 4, 2016
|
|
January 4, 2021
|
Min Tang
|
|
|
5,000
|
|
|
$
|
2.55
|
/Share
|
|
January 3, 2012
|
|
January 2,2017
|
|
|
|
5,000
|
|
|
$
|
1.44
|
/Share
|
|
January 2, 2013
|
|
January 1,2018
|
|
|
|
5,000
|
|
|
$
|
1.27
|
/Share
|
|
January 2, 2014
|
|
January 1,2019
|
|
|
|
5,000
|
|
|
$
|
1.48
|
/Share
|
|
January 2, 2015
|
|
January 1,2020
|
|
|
|
5,000
|
|
|
$
|
1.38
|
/Share
|
|
January 4, 2016
|
|
January 4, 2021
|
Shashank Aurora
|
|
|
200,000
|
|
|
$
|
1.65
|
/Share
|
|
May 16, 2016
|
|
May 16, 2026
|
David W. Bullock
|
|
|
5,000
|
|
|
$
|
1.48
|
/Share
|
|
January 2, 2015
|
|
January 1,2020
|
|
|
|
5,000
|
|
|
$
|
1.38
|
/Share
|
|
January 4, 2016
|
|
January 4, 2021
|
Jihong Liang
|
|
|
200,000
|
|
|
$
|
2.00
|
/Share
|
|
August 3, 2016
|
|
August 3, 2026
|
Terms of directors and executive officers
Our directors are not subject to a specific
term of office and hold office until the next annual meeting of shareholders or until such director’s earlier resignation,
removal from office, death or incapacity. Any vacancy on the board of directors resulting from death, resignation, removal or other
cause and any newly created directorship resulting from any increase in the authorized number of directors between meetings of
shareholders may be filled either by the affirmative vote of a majority of all the directors then in office (even if less than
a quorum) or by a resolution of shareholders.
Our officers are appointed by the board of directors and hold
office until their successors are duly elected and qualified, but may be removed at any time, with or without cause, by resolution
of directors. Any vacancy occurring in any office may be filled by resolution of directors.
Employment Agreements
Dr. Han, our Chairman has an employment agreement with us.
The agreement currently has a term of three years commencing on January 1, 2015. Dr. Han is entitled to insurance benefits,
five weeks’ vacation, a car and reimbursement of business expenses and, if necessary, relocation expenses. The
agreement is terminable by Origin for death, disability and cause. Dr. Han may terminate the agreement and his employment for
good reason, which includes Origin’s breach, the executive’s loss of his seat on the board of directors, and
change of control of Origin. In the event of termination for good reason or without cause, the executive will receive
compensation and benefits under his employment agreement through the earlier of two years from the date of termination or
through the term of the agreement. The agreements contain provisions for the protection of confidential information and a
three-year non-competition period within China.
Dr. Niebur, our President and CEO has an employment agreement
with us. The agreement currently has a term of five years commencing on April 22, 2016. Dr. Niebur is entitled to employee benefits
including medical and life insurance, five weeks of paid vacation, travel expenses, vehicle allowance, and Directors and Officers
insurance. The agreement will terminate upon any of the following: (i) termination upon death; (ii) termination for disability;
(iii) termination for cause; (v) resignation without good reason; and (vi) resignation for good reason. Provided, however that:
(a) Executive must provide notice of a good reason event within thirty (30) days after the act or omission which constitutes good
reason first occurs, (b) the Company shall be provided thirty (30) days following such notice to remedy such or omission, and following
any such notice to remedy Executive shall no longer have good reason to terminate employment, and (c) if the Company does not,
or is not able to, remedy such act or omission, Executive must terminate his employment within sixty (60) days after the occurrence
of such act or omission first occurs.
Mr. Aurora, our CFO has an employment agreement with us.
The agreement currently has a term of five years commencing on May 16, 2016. Mr. Aurora is entitled to employee benefits including
medical and life insurance, five weeks of paid vacation, travel expenses, vehicle allowance, and Directors and Officers insurance.
The agreement will terminate upon any of the following: (i) termination upon death; (ii) termination for disability; (iii) termination
for cause; (v) resignation without good reason; and (vi) resignation for good reason. Provided, however that: (a) Executive must
provide notice of a good reason event within thirty (30) days after the act or omission which constitutes good reason first occurs,
(b) the Company shall be provided thirty (30) days following such notice to remedy such or omission, and following any such notice
to remedy Executive shall no longer have good reason to terminate employment, and (c) if the Company does not, or is not able to,
remedy such act or omission, Executive must terminate his employment within sixty (60) days after the occurrence of such act or
omission first occurs.
Dr. Liang, our CTO has an employment agreement with us.
The agreement currently has a term of five years commencing on August 3, 2016. Dr. Liang is entitled to employee benefits including
medical and life insurance, five weeks of paid vacation, Directors and Officers insurance, and relocation. The agreement will terminate
upon any of the following: (i) termination upon death; (ii) termination for disability; (iii) termination for cause; (v) resignation
without good reason; and (vi) resignation for good reason. Provided, however that: (a) Executive must provide notice of a good
reason event within thirty (30) days after the act or omission which constitutes good reason first occurs, (b) the Company shall
be provided thirty (30) days following such notice to remedy such or omission, and following any such notice to remedy Executive
shall no longer have good reason to terminate employment, and (c) if the Company does not, or is not able to, remedy such act or
omission, Executive must terminate his employment within sixty (60) days after the occurrence of such act or omission first occurs.
Messrs. Niebur, Aurora and Liang each was granted performance-based
restricted stock units (“PSU”) of the Company. Specifically, Mr. Niebur was granted 800,000 PSU, Mr. Aurora was granted
300,000 PSU and Mr. Liang was granted 300,000 PSU. The PSU will vest in two portions. The first portion of the PSU will vest when
certain performance criteria are met. The remaining portion of the PSU will vest on the fifth anniversary of the grant, provided
that certain performance criteria have been met and the employment of the grantee is not terminated prior to the fifth anniversary.
On the vesting date, the grantee is entitled to receive an amount of Ordinary Share of the Company equals to 50%, 100% or 150%
(depending on the performance criteria attained) multiplied by the amount of vested PSU the grantee holds. If the performance
criteria threshold is not met prior to the earlier of the fifth anniversary or the grantee’s termination, then none of the
grantee’s PSU will be vested.
Board committees
Our board of directors has established an Audit Committee, a
Compensation Committee and a Nominations Committee.
Audit Committee
The members of our Audit Committee are David W. Bullock(chairman),
Michael Trimble and Min Tang. Our board of directors has determined that all of our Audit Committee members are independent
directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15) and meet the criteria for independence set forth in Rule 10A-3(b)(1)
of the Securities Exchange Act of 1934.
The board of directors has determined that each of Messrs.
David W. Bullock (chairman),Michael Trimble and Min Tang has an understanding of Generally Accepted Accounting Principles and
financial statements, the ability to assess the general application of such principles in connection with our financial
statements, including estimates, accruals and reserves, experience in analyzing or evaluating financial statements of similar
breadth and complexity as our financial statements, an understanding of internal controls and procedures for financial
reporting and an understanding of Audit Committee functions.
The board of directors believes that Mr. Bullock qualifies as
an “audit committee financial expert” within the meaning of all applicable rules. The board of directors believes that
Mr. Bullock has financial expertise from his degrees in business, his activities as a chief executive officer and chief financial
officer of various companies, and his consulting activities in the areas of accounting, corporate finance, capital formation and
corporate financial analysis.
We adopted an Audit Committee charter, amended by the board
of directors at the board meeting held on August 16, 2007, under which the Audit Committee is responsible for reviewing the
scope, planning and staffing of the audit and preparation of our financial statements. This includes consultation with management,
the auditors and other consultants and professionals involved in the preparation of the financial statements and reports. The Audit
Committee is responsible for performing oversight of our relationship with our independent auditor. The Audit Committee also has
a general compliance oversight role in assuring that our directors, officers and management comply with our code of ethics, reviews
and approves related party transactions, deals with complaints regarding accounting, internal controls and auditing matters, and
oversees compliance with accounting and legal requirements applicable to us.
Pursuant to the terms of its charter, as amended, the Audit
Committee’s responsibilities include, among other things:
|
·
|
annually reviewing and reassessing the adequacy of the Audit Committee’s form of charter;
|
|
·
|
reviewing our annual audited financial statements with our management and our independent auditors and the adequacy of our
internal accounting controls;
|
|
·
|
reviewing analyses prepared by management and independent auditors concerning significant financial reporting issues and judgments
made in connection with the preparation of our financial statements;
|
|
·
|
engaging of the independent auditor;
|
|
·
|
reviewing the independence of the independent auditors;
|
|
·
|
reviewing our auditing and accounting principles and practices with the independent auditor and reviewing major changes to
our auditing and accounting principles and practices as suggested by the independent auditor or our management;
|
|
·
|
appointment of the independent auditor; and
|
|
·
|
approving professional services provided by the independent auditors, including the range of audit and non-audit fees.
|
The Audit Committee pre-approves the services to be provided
by our independent auditors. The Audit Committee also reviews and recommends to the board of directors whether or not to approve
transactions between us and any officer or director that occurs outside the ordinary course of business.
Compensation Committee
The members of our Compensation Committee are Min Tang (interim
chairman), Michael Trimble and David Bullock. The Compensation Committee also administers our equity award plans, including the
authority to make and modify awards under the 2005, 2009 and 2014 Performance Equity Plans. The current charter of the Compensation
Committee, which was adopted March 16, 2007, provides that the committee is responsible for:
|
·
|
reviewing and making recommendations to our board of directors regarding our compensation policies and forms of compensation
provided to our directors, officers and other senior employees;
|
|
·
|
reviewing and determining performance-based awards and compensation for our officers and other employees;
|
|
·
|
reviewing and determining share-based compensation (including the 2005, 2009 and 2014 Performance Equity Plans) for our directors,
officers, employees and consultants;
|
|
·
|
administering our equity incentive plans (including the 2005, 2009 and 2014 Performance Equity Plans) in accordance with the
terms thereof; and
|
|
·
|
such other matters that are specifically delegated to the Compensation Committee by our board of directors from time to time.
|
Nominating Committee
Our Nominating Committee consists of Michael W. Trimble (chairman),
Min Tang and David Bullock. The Nominating Committee is responsible for overseeing the selection of persons to be nominated
to serve on our board of directors. The Nominating Committee will identify, evaluate and recommend candidates to become members
of the Board of Directors with the goal of creating a balance of knowledge and experience. The Nominating Committee
is not a fully independent committee.
Pursuant to a vote by the board of directors taken at a board
meeting held March 16, 2007, the Nominating Committee charter was amended. Pursuant to the terms of its charter, as amended, the
Nominating Committee’s responsibilities include, among other things:
|
·
|
actively seeking and evaluating qualified individuals to become new directors as needed;
|
|
·
|
reviewing current directors’ suitability when their terms expire or one has a significant change in status;
|
|
·
|
making recommendations with respect to succession planning for the co-chief executive officer and other officers; and
|
|
·
|
such other matters that are specifically delegated to the Nominating Committee by our board of directors from time to time.
|
Summary of Significant Differences in Corporate Governance
Practices for Purposes of Rule 5615 of the NASDAQ Marketplace Rules
We are incorporated under the laws of the British Virgin Islands.
Our ordinary shares are registered with the SEC and are listed on the NASDAQ Global Select Market. As a result, our corporate governance
framework is subject to laws of the British Virgin Islands, or BVI, the securities laws and regulations of the United States and
the listing requirements of the NASDAQ Stock Market.
Under Rule 5615 of the Nasdaq Marketplace Rules, a foreign private
issuer may follow its home country practice in lieu of the requirements of the Nasdaq Marketplace Rules. Rule 5605 requires U.S.
domestic listed companies have a majority of independent directors on its board of directors. We are not required to have a majority
of independent directors on our board of directors under BVI laws. However, currently, three of our five directors are independent
directors under applicable NASDAQ rules.
Under Rule 5605 a U.S. domestic listed company is required
to have a nominations committee and compensation committee. We are not required to have such committees under the BVI laws,
however, we do have these two committees, and follow the Nasdaq Marketplace rules in the independence requirements.
Under Rule 5620, a U.S. domestic issuer must solicit
proxies and provide proxy statements for all meetings of shareholders. There are no such mandatory requirements under BVI laws,
and therefore, we are not required to hold an annual meeting of the shareholders. There were no specific items that our board
of directors requested the shareholders to vote on.
Under Rule 5635, a US domestic listed company is required to
obtain shareholder approval of equity award plans and issuances of equity securities in excess of certain amounts when at less
than market or book value. There are no such mandatory requirements under BVI law. We do not plan to get shareholder
approval for future increases in the 2005 Plan, 2009 Plan and 2014 Plan or for any other equity award plan approved by the directors
in the future or for issuances of equity securities that exceed 20% of the outstanding shares of the Company if they are sold at
less than market or book value.
We have filed documentation with NASDAQ exempting the company
under those provisions that BVI law does not require.
We had 474,387 and 349 employees as of September 30, 2014, 2015
and 2016, respectively, excluding Xinjiang Origin. Substantially all of our employees are located in China. The following table
sets forth the number of our employees categorized by our areas of operations and as a percentage of our workforce as of September 30,
2016:
Areas of Operations
|
|
Number of
Employees
|
|
|
Percentage of
Total
|
|
Research and Development
|
|
|
72
|
|
|
|
20.6
|
%
|
Sales and Marketing
|
|
|
71
|
|
|
|
20.3
|
%
|
Production
|
|
|
127
|
|
|
|
36.4
|
%
|
Quality Control
|
|
|
19
|
|
|
|
5.4
|
%
|
Others
|
|
|
60
|
|
|
|
17.3
|
%
|
Total
|
|
|
349
|
|
|
|
100.0
|
%
|
We offer our employees additional annual merit-based bonuses
in accordance with the overall performance of our company, his or her department and the individual. We are required by applicable
PRC regulations to contribute amounts approximate to 20%, 7.7%, 9.7%, 1%, 0.6% and 0.7%, of our employees’ aggregate salary
to a pension contribution plan, a medical insurance plan, a housing fund, an unemployment insurance plan, a personal injury insurance
plan and a maternity insurance plan, respectively, for our employees.
Our employees are not covered by any collective bargaining agreement.
We believe that we have a good relationship with our employees.
Xinjiang Origin, at its corn seed processing facility, had
57, 43 and 40 employees as of September 30, 2014, 2015 and 2016, respectively.
During the last five years, the Company has
initiated corporate wide restructuring programs and operating improvement efforts. During these initiatives, Origin has
reduced the total number of employees from 856 as of September 30, 2011 to 389 as of September 30, 2016. As a result, the
Company has paid out RMB3.05 million, RMB1.83 million, RMB4.50 million, RMB2.0 million and RMB3.54 million as the
severance packages for the fiscal year 2012, 2013, 2014, 2015 and 2016, respectively.
E.
Share ownership
.
The following table sets forth information with respect to the
beneficial ownership of our ordinary shares as of January 4, 2017, by each of our directors and executive officers who beneficially
own our ordinary shares, and other principal shareholders.
|
|
Shares Beneficially Owned
( * )
|
|
|
|
Number
|
|
|
Percentage of
Total
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Gengchen Han,
Chairman of the Board
(1)(2)
|
|
|
4,503,827
|
|
|
|
21.34
|
%
|
Min Tang,
Director
(1)(3)
|
|
|
20,000
|
|
|
|
0.09
|
%
|
Michael W. Trimble,
Director
(4)
|
|
|
105,000
|
|
|
|
0.46
|
%
|
William S. Niebur,
Chief Executive Officer and President
(1)(5)
|
|
|
500,000
|
|
|
|
2.14
|
%
|
Shashank Aurora,
Chief Financial Officer
(1)(6)
|
|
|
66,667
|
|
|
|
0.29
|
%
|
Jihong Liang,
Chief Technology Officer
(1)(7)
|
|
|
66,667
|
|
|
|
0.29
|
%
|
David Bullock,
Director
(1)(8)
|
|
|
10,000
|
|
|
|
0.04
|
%
|
* Beneficial ownership and percentage is determined in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
|
(1)
|
The business address of each of the individuals is c/o 21 Shengmingyuan Road, Changping District, Beijing, PRC 102206 and 666
Walnut Street, Des Moines, IA 50309. See Item 6B. “Directors, Senior Management, and Employees – Compensation”
for discussion of option included in the table granted under the 2005, 2009 and 2014 Performance Equity Plans.
|
|
(2)
|
The shares reported in the above table are held by Dr. Han through a personal holding company, Sinodream Limited, a
company formed under the laws of the British Virgin Islands of which he is the sole shareholder, officer and director.
Therefore, Dr. Han will have voting and dispositive authority over all the shares. Includes 480,000 shares that may be
acquired under stock options held by Dr. Han.
|
|
(3)
|
Includes 20,000 shares that may be acquired under stock options by Mr. Tang.
|
|
(4)
|
The business address of Mr. Trimble is 6159 Brandywine Drive, Johnston, IA 50131. Includes 20,000 shares that may be acquired
under stock options held by Mr. Trimble.
|
|
(5)
|
Includes 500,000 shares that may be acquired under stock options held by Dr. Niebur and excludes 100,000 shares that may
be acquired under stock option by Dr. Niebur.
|
|
(6)
|
Includes 66,667 shares that may be acquired under stock options held by Mr. Aurora. Excludes 133,333 shares that may be acquired
under stock options held by Mr. Aurora.
|
|
(7)
|
Includes 66,667 shares that may be acquired under stock options held by Dr. Liang. Excludes 133,333 shares that may be acquired
under stock options held by Dr. Liang.
|
|
(8)
|
Includes 10,000 shares that may be acquired under stock options held by Mr. Bullock.
|
None of the above shareholders have voting
rights that differ from the voting rights of other shareholders.
A substantial number of the ordinary shares are held in “street
name,” and the company believes that a large portion of these shares represent holdings of non-United States shareholders
through brokers in non-United States jurisdictions. Because these holdings are in street name, the company cannot determine the
actual number or jurisdictions in which these shares are held.
|
ITEM 7
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Please refer to Item 6.E “Directors, Senior Management
and Employees – Share Ownership.”
|
1.
|
Related party transactions
.
|
Stock Consignment Agreements
In order to comply with PRC regulations, we operate our business
in China through our PRC Operating companies. We have entered into stock consignment agreements with our PRC Operating Companies
other than Origin Biotechnology. The following is a summary of the material provisions of these agreements, which are also discussed
under Item 4.C of this Annual Report.
The stock consignment agreements give the consignee corporation,
State Harvest, control over the shares of the three PRC Operating Companies. The agreements give State Harvest the right to manage
in all respects the shares held in title by the shareholders, including all shareholder rights to call meetings of shareholders,
to submit shareholder proposals, to elect directors, to vote the shares on all matters and to exercise all other rights of a shareholder
in respect of the consigned shares. More specifically, the consignment agreements give State Harvest the right to select, replace
and increase the number of the directors, supervisors and recommend new director and supervisor persons, and to exercise management
rights, controlling rights and decision-making power over the shares of the PRC Operating Companies. The shareholders agreed not
to interfere with State Harvest’s exercise of its rights and to cooperate fully and promptly to permit State Harvest to exercise
its authority over the consigned shares. This includes all limitations on the ability of each consignee to transfer or dispose
of the shares other than to State Harvest, give guarantees using the shares, consign the shares to another, alter their ownership
proportions in any way, dispose of any rights in the ownership of the shares, agree to any debt, waive rights or restructure the
shares. State Harvest has the right to take all action in respect of the consigned shares to avoid any damage or infringement of
its rights, including in the event of the consigning shareholder’s bankruptcy. State Harvest, under the consignment agreements,
has all rights in the consigned shares, including rights to profits, interest, dividends, bonuses and residual assets. If in the
future any stock subject to the consignment agreements can be legally transferred to State Harvest, then without further action
or payment by State Harvest, it shall be transferred to State Harvest in whole or in part for no additional consideration to the
consigning shareholder. The term of each consignment agreement is initially three years, but is automatically renewed indefinitely
until both consigners and the consignee agree to terminate. For more information about the stock consignment agreements, See Item
8.01 “Other Events” of our Form 8-K filed with the Securities and Exchange Commission on August 8, 2005. Shares
in the PRC operating companies are pledged under these stock consignment agreements.
Technical Service Agreements
As part of the reorganization of our PRC Operating
Companies in late 2004 and early 2005, all of the intellectual property rights of Beijing Origin, Changchun Origin and Henan
Origin have been and will continue to be transferred to Origin Biotechnology pursuant to technology service agreements dated
December 25, 2004. The purpose of this was to permit the better management and licensing of the intellectual property that
the three assignors have developed. Under the technology service agreements, Origin Biotechnology will provide technical
research and production and distribution services for the seeds produced by the group. These services will include support in
the research and development of agricultural seeds, analysis of breeding technologies, environment and feasibility
suggestions, technical tutorials and breeding field supervision, market analysis and seed promotion, insect prevention and
technical education to distributors and farmers. The initial term is for three years, but the agreements are automatically
renewed unless both parties agree to a termination. The fees payable under the agreements are variable, depending on
differing formulae for different categories of seeds. Generally, the fees will be as follows: RMB1.2 per kilogram of corn
sold by the party receiving the technical services; RMB6 per kilogram of rice sold by the party receiving the technical
services. The fees are to be confirmed and paid at the end of each growing season and only charged fees on the sales related
to the seed rights owned by Origin Biotechnology.
Corn Originator Agreement
Beijing Origin entered into this agreement with Trimble Genetics
International LLC, or Trimble Genetics, a plant genetics research company. Michael W. Trimble, one of our directors, is the founder
and president of Trimble Genetics and currently owns 100% of its equity interest. Under this agreement, Beijing Origin hires Trimble
Genetics as its agent to test, promote, license and collect research fees on hybrids involving inbred lines of corn developed by
Beijing Origin. Trimble Genetics retains fifty percent of such research fees and pays the remaining fifty percent to Beijing Origin.
This agreement is immaterial in amount or significance.
Corn Inbred and Hybrid Transfer and Use Agreement
Beijing Origin entered into this agreement with Trimble
Genetics on September 6, 2002. Under this agreement, Trimble Genetics provides corn inbreds and hybrids to Beijing Origin for
experimental testing purposes. The agreement applies to all corn inbreds and hybrids transferred from Trimble Genetics to
Beijing Origin previously, currently or in the future. If a hybrid from the testing proves to be marketable, the parties will
negotiate a license agreement. If for any reason, it is not possible to conclude a license agreement, Beijing Origin agrees
to return all remnant inbred seed and to destroy any inbreds or hybrids that may have originated from the material provided
by Trimble Genetics. This agreement is immaterial in amount or significance.
New Corn Seed Liyu 35 Joint Development Agreement
Beijing Origin entered into three Joint Development agreements
with Liyu on March 30, 2006 to jointly develop a new hybrid corn seed, Liyu 35. The proprietary right to the seed developed under
this agreement belongs to Liyu but Beijing Origin has exclusive production and marketing rights to this variety of seed. The agreement
has no fixed term or termination date, but the agreement automatically terminates if the seeds produced by Beijing Origin are less
than 3 million kilograms for three consecutive years, subject to limited exceptions. The fees payable by Beijing Origin represent
a percentage of revenues from the sale of the varieties and plus a flat fee.
Joint Development Agreements
Beijing Origin is a party to three joint development agreements
with Corn Research Institute of Li County in Hebei Province, China, to develop new hybrid corn seeds. Corn Research Institute of
Li County was incorporated as Liyu on May 2004, of which a 30% equity interest was owned by Yang Yasheng, one of our major shareholders
and a former director. Yang Yasheng transferred his 30% interest to Beijing Origin on September 2004. On March 11, 2004, Corn Research
Institute of Li County, Liyu and Beijing Origin entered into an agreement pursuant to which all the rights and obligations of Corn
Research Institute of Li County under the three joint development agreements were assumed by Liyu after the dissolution of Corn
Research Institute of Li County. In accordance with these joint development agreements, the parties agreed to jointly develop six
varieties of new corn hybrid seeds, Liyu 26, Liyu 16, Liyu 6, Liyu 15, Li 168, and Liyu 35. The proprietary rights to the varieties
of seeds developed under these agreements belongs to Corn Research Institute of Li County, now Liyu but Beijing Origin has exclusive
right to production and marketing of these seeds. The fees payable by Beijing Origin represent a percentage of revenues from the
sale of the varieties, and plus a flat fee with respect to Liyu 26 and Liyu 16. The agreements have no fixed term or termination
date. The agreements may be terminated for breach by either party. We may terminate the agreements at any time, in effect, by not
producing seeds, without penalty.
Xinjiang Origin
In May 2011 Beijing Origin established Xinjiang Origin for seed
production and distribution. Beijing Origin invested RMB51 million for a 51% ownership of Xinjiang Origin.
Technology Transfer Agreement
Beijing Origin, or its predecessor, entered into this
agreement with Henan Agriculture University in 1998. Henan Agriculture University currently owns a 2.04% equity interest in
Beijing Origin. Under this agreement, the proprietary right to the new variety of seed, Yuyu 22, belongs to Henan Agriculture
University. Beijing Origin has the right to propagate, produce and sell the new corn variety. The fee payable under this
agreement is RMB20 per mu (unit of area equivalent to 0.164 of an acre) of seed production area per year. There is no fixed
term or termination date of this agreement.
IT and Distribution Arrangements with Beijing Shihui Agricultural
Development Co, Ltd.
Based in Beijing, China, Beijing Shihui Agricultural Development
Co, Ltd (“Shihui”) was established in 2010 by the brother of the Company’s Chairman, Dr. Han Gengchen. As of
the date of this report, Dr. Han’s son and brother are the principal shareholders of Shihui. Shihui is mainly engaged in
crop seed sales, information technology services and internet operations. Shihui has been providing seed distributing services
to Origin since 2014.
During fiscal year 2015, the Company acquired information systems
of RMB2.0 million from Shihui.
During 2014 and 2015, Shihui took over Origin’s
sales employees and sales centers in Hubei, Sichuan, Xuzhou, Shenyang, Zhengzhou, Hunan and Shandong. During the fiscal year
2016, the sales to Shihui were RMB102.23 million (US$15.31 million), which accounted for 30.5% of the sales of the
Company.
From time to time, the Company has provided security to the
institutional lenders of Shihui, none of which has been called upon by the lenders.
Shihui’s office is located at the headquarters of Origin
in Beijing, China. The rent charged to Shihui was RMB 0.25 million (US$0.04 million).
Master Transaction Agreement with Beijing Shihui
On September 26, 2016, the Company entered into a
definitive agreement to sell its proprietary China-based commercial corn seed production and distribution business for RMB400
million (approximately US$60 million) to Shihui. This transaction is subject to customary closing conditions and shareholder
approval. It is expected to close in the first calendar quarter of 2017. Shihui is a company of which the
principal shareholders are the brother and son of Dr. Han Gengchen, our chairman of the board and of which the brother of Dr.
Han is the principal executive officer.
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2.
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Interests of experts and counsel
.
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Not applicable.
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ITEM 8.
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FINANCIAL INFORMATION
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A
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Consolidated statements and other financial information
.
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We have appended consolidated financial statements filed as
part of this Annual Report. See Item 18 “Financial Statements.”
Legal Proceedings
We may from time to time be subject to various legal or administrative
proceedings, either as plaintiff or defendant, arising in the ordinary course of our business. Except otherwise disclosed in this
report, we are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim that, in the view of
our management, is likely to materially and adversely affect our business, financial position or results of operations.
Dividend Policy
We have never declared or paid any dividends, nor do we have any
present plan to pay any cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain most, if
not all, of our available funds and any future earnings to operate and expand our business.
Our board of directors by resolution may authorize payment of dividends
if the directors are satisfied, on reasonable grounds, that Origin will, immediately after the distribution of dividends, (i) satisfy
the solvency test as stipulated in Section 56 of the BVI Business Companies Act, (ii) any of our applicable contractual obligations
and (iii) the laws of China. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend
upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions
and other factors that the board of directors may deem relevant.
Significant changes
.
No significant changes since September 30, 2016
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ITEM 9.
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THE OFFER AND LISTING
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A.
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Offering and listing details
.
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Origin’s ordinary shares are listed on the NASDAQ Global Select
Market where they trade under the SEED ticker symbol.
The following table provides the historical high and low trading
United States dollar prices for Origin’s ordinary shares for the periods indicated below:
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Nasdaq
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Price per Share (US$)
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High
|
|
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Low
|
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Annual Market Prices
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|
|
|
|
|
|
|
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Year 2012 (until September 30, 2012)
|
|
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4.49
|
|
|
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1.30
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Year 2013 (until September 30, 2013)
|
|
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1.89
|
|
|
|
1.34
|
|
Year 2014 (until September 30, 2014)
|
|
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3.47
|
|
|
|
1.17
|
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Year 2015 (until September 30, 2015)
|
|
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2.89
|
|
|
|
1.02
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Year 2016 (until September 30, 2016)
|
|
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3.19
|
|
|
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1.07
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|
|
|
|
|
|
|
|
|
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Quarterly Market Prices
|
|
|
|
|
|
|
|
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First Quarter 2015, ended December 31, 2014
|
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2.25
|
|
|
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1.19
|
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Second Quarter 2015, ended March 31, 2015
|
|
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1.86
|
|
|
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1.02
|
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Third Quarter 2015, ended June 30, 2015
|
|
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2.89
|
|
|
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1.41
|
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Fourth Quarter 2015, ended September 30, 2015
|
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2.00
|
|
|
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1.12
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First Quarter 2016, ended December 31, 2015
|
|
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1.78
|
|
|
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1.30
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Second Quarter 2016, ended March 31, 2016
|
|
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1.64
|
|
|
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1.07
|
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Third Quarter 2016, ended June 30, 2016
|
|
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2.65
|
|
|
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1.32
|
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Fourth Quarter 2016, ended September 30, 2016
|
|
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3.19
|
|
|
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1.76
|
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Monthly Market Prices
|
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NASDAQ
Price per Share (US$)
|
|
|
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High
|
|
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Low
|
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Jul-16
|
|
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2.38
|
|
|
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1.76
|
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Aug-16
|
|
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2.40
|
|
|
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1.90
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Sep-16
|
|
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3.19
|
|
|
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2.11
|
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Oct-16
|
|
|
2.75
|
|
|
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2.35
|
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Nov-16
|
|
|
2.87
|
|
|
|
2.39
|
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Dec-16
|
|
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2.66
|
|
|
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2.23
|
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B.
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Plan of distribution
.
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Not applicable.
See Item 9.A above.
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D.
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Selling shareholders
.
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Not applicable.
Not applicable.
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F.
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Expenses of the issue
.
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Not applicable.
ITEM 10.
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ADDITIONAL INFORMATION
|
|
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Not applicable.
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B.
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Memorandum and articles of association
.
|
We incorporate by reference into this Annual Report the description
of our amended and restated memorandum and articles of association contained in our 20-F annual report, as amended, initially filed
with the Commission on July 14, 2006.
We have not entered into any material contracts other than in the
ordinary course of business and other than those described in Item 4, “Information on the Company,” Item 7, “Major
Shareholders and Related Party Transactions,” filed (or incorporated by reference) as exhibits to this Annual Report or otherwise
described or referenced in this Annual Report.
British Virgin Islands
There are no material exchange controls restrictions on payment
of dividends, interest or other payments to the holders of our ordinary or preferred shares or on the conduct of our operations
in the BVI, where we are incorporated. There are no material BVI laws that impose any material exchange controls on us or that
affect the payment of dividends, interest or other payments to nonresident holders of our ordinary or preferred shares. BVI law
and our amended and restated memorandum and articles of association impose no material limitations on the right of non-residents
or foreign owners to hold or vote our ordinary or preferred shares.
China
Under the Foreign Currency Administration Rules promulgated in 1996
and revised in 1997, and various regulations issued by State Administration of Foreign Exchange, or SAFE, and other relevant PRC
government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the extent of current
account items, such as trade related receipts and payments, interest and dividends and after complying with certain procedural
requirements. The conversion of RMB into other currencies and remittance of the converted foreign currency outside PRC for the
purpose of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior approval
from SAFE or its local office. Payments for transactions that take place within China must be made in RMB. Unless otherwise approved,
PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange
in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved,
domestic enterprises must convert all of their foreign currency proceeds into RMB.
On October 21, 2005, SAFE issued the Notice on Issues Relating to
the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore
Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special purpose company, or
SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose of carrying out
financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control of an SPV,
each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures
with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established or acquired
control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas investment
foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with the relevant
SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment or assets of
a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material change in the
capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result in restrictions
being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends and other
distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange administration
regulations.
On August 29, 2008, SAFE promulgated Notice 142 which regulates
the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted RMB may be used. Notice
142 requires that RMB funds converted from the foreign currency capital of a foreign-funded enterprise may only be used for purposes
within the business scope approved by the applicable governmental authority and may not be used for equity investments within the
PRC unless specifically provided for otherwise. In addition, SAFE strengthened its supervision over the flow and use of RMB funds
converted from the foreign currency capital of a foreign-funded enterprise. The use of such RMB capital may not be changed without
SAFE’s approval, and may not, in any case, be used to repay or prepay RMB loans if such loans are outstanding. Violations
of Notice 142 will result in severe penalties, such as heavy fines as set out in the relevant foreign exchange control regulations.
The following is a general summary of certain material British
Virgin Islands and U.S. federal income tax considerations. The discussion is not intended to be, nor should it be construed as,
legal or tax advice to any existing or prospective shareholder. The discussion is based on laws and relevant interpretations thereof
in effect as of the date hereof, all of which are subject to change or different interpretations, possibly with retroactive effect.
The discussion does not address United States state or local tax laws, or tax laws of jurisdictions other than the British Virgin
Islands and the United States.
Taxation in British Virgin Islands Taxation
The British Virgin Islands, or BVI, does not impose a tax on dividends
paid by us to holders of our ordinary or preferred shares, nor does the BVI levy any capital gains or income taxes on us.
A holder of our ordinary or preferred shares who is not a resident
of the BVI is exempt from the BVI income tax on dividends paid with respect to the ordinary or preferred shares. Holders of ordinary
or preferred shares are not subject to the BVI income tax on gains realized on the sale or disposition of the ordinary or preferred
shares.
Our ordinary and preferred shares are
not subject to transfer taxes, stamp duties or similar charges in the BVI. However, as a business company, we are required to pay
the BVI government an annual license fee based on the number of shares we are authorized to issue.
There is no income tax treaty or convention currently in effect
between the United States and the BVI.
Taxation in China
We are a holding company incorporated
in the BVI, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation rules,
both of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax rate of
25%, and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally
be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s jurisdiction
of incorporation and China to reduce such rate.
According to the Notice Regarding Interpretation
and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a person who has the
right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner”
may be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit
company is not a “beneficial owner.” The term “conduit company” refers to a company which is usually established
for purposes of dodging or reducing taxes, and transferring or accumulating profits. Such a company is only registered in the country
of domicile to satisfy the organizational form as required by law, but it does not engage in such substantial business operations
as manufacturing, distribution and management.
Under the EIT Law, an enterprise established
outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally
be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies”
as “an establishment that exercises, in substance, overall management and control over the production, business, personnel,
accounting, etc., of a Chinese enterprise.”
It remains unclear whether the PRC tax
authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently
consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income
would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends
paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax,
have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
United States Federal Income Taxation
This discussion describes the material U.S. federal income tax consequences
of the purchase, ownership and disposition of our ordinary shares. This discussion does not address any aspect of U.S. federal
gift or estate tax, or the state, local or foreign tax consequences of an investment in our ordinary shares. This discussion applies
to you only if you hold and beneficially own our ordinary shares as capital assets for tax purposes. This discussion does not apply
to you if you are a member of a class of holders subject to special rules, such as:
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·
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dealers in securities or currencies;
|
|
·
|
traders in securities that elect to use a mark-to-market method of accounting for securities holdings;
|
|
·
|
banks or other financial institutions;
|
|
·
|
tax-exempt organizations;
|
|
·
|
partnerships and other entities treated as partnerships for U.S. federal income tax purposes or persons holding ordinary shares
through any such entities;
|
|
·
|
persons that hold ordinary shares as part of a hedge, straddle, constructive sale, conversion transaction or other integrated
investment;
|
|
·
|
U.S. Holders (as defined below) whose functional currency for tax purposes is not the U.S. dollar;
|
|
·
|
persons liable for alternative minimum tax; or
|
|
·
|
persons who actually or constructively own 10% or more of the total combined voting power of all classes of our shares (including
ordinary shares) entitled to vote.
|
This discussion is based on the U.S. Internal Revenue Code of 1986,
as amended, which we refer to in this discussion as the Code, its legislative history, existing and proposed regulations promulgated
there under, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a
retroactive basis. In addition, this discussion relies on our assumptions regarding the value of our shares and the nature of our
business over time.
You should consult your own tax advisor concerning the particular
U.S. federal income tax consequences to you of the purchase, ownership and disposition of our ordinary shares, as well as the consequences
to you arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income tax discussion below, you
are a “U.S. Holder” if you beneficially own ordinary shares and are:
|
·
|
a citizen or resident of the United States for U.S. federal income tax purposes;
|
|
·
|
a corporation, or other entity taxable as a corporation, that was created or organized in or under the laws of the United States
or any political subdivision thereof;
|
|
·
|
an estate the income of which is subject to U.S. federal income tax regardless of its source; or
|
|
·
|
a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or
more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in
effect to be treated as a U.S. person.
|
If you are not a U.S. person, please refer to the discussion below
under “Non-U.S. Holders.”
For U.S. federal income tax purposes, income earned through a foreign
or domestic partnership or other flow-through entity is attributed to its owners. Accordingly, if a partnership or other flow-through
entity holds ordinary shares, the tax treatment of the holder will generally depend on the status of the partner or other owner
and the activities of the partnership or other flow-through entity.
U.S. Holders
Dividends on ordinary shares
Subject to the “Passive Foreign Investment Company”
discussion below, if we make distributions and you are a U.S. Holder, the gross amount of any distributions you receive on your
ordinary shares will generally be treated as dividend income if the distributions are made from our current or accumulated earnings
and profits, calculated according to U.S. federal income tax principles. Dividends will generally be subject to U.S. federal income
tax as ordinary income on the day you actually or constructively receive such income. However, if you are an individual and have
held your ordinary shares for a sufficient period of time, dividend distributions on our ordinary shares will generally constitute
qualified dividend income taxed at a preferential rate as long as our ordinary shares continue to be readily tradable on the NASDAQ
Global Select Market and certain other conditions apply. You should consult your own tax adviser as to the rate of tax that will
apply to you with respect to dividend distributions, if any, you receive from us.
We do not intend to calculate our earnings and profits according
to U.S. tax accounting principles. Accordingly, distributions on our ordinary shares, if any, will generally be taxed to you as
dividend distributions for U.S. tax purposes. Even if you are a corporation, you will not be entitled to claim a dividends-received
deduction with respect to distributions you receive from us. Dividends generally will constitute foreign source passive income
for U.S. foreign tax credit limitation purposes.
Sales and other dispositions of ordinary shares
Subject to the “Passive Foreign Investment Company”
discussion below, when you sell or otherwise dispose of ordinary shares, you will generally recognize capital gain or loss in an
amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the
ordinary shares, both as determined in U.S. dollars. Your adjusted tax basis will generally equal the amount you paid for the ordinary
shares. Any gain or loss you recognize will be long-term capital gain or loss if your holding period in our ordinary shares is
more than one year at the time of disposition. If you are an individual, any such long-term capital gain will be taxed at preferential
rates. Your ability to deduct capital losses will be subject to various limitations.
Passive Foreign Investment Company
If we were a PFIC, in any taxable year in which you hold our ordinary
shares, as a U.S. Holder, you would generally be subject to adverse U.S. tax consequences, in the form of increased tax liabilities
and special U.S. tax reporting requirements.
We will be classified as a PFIC in any taxable year if either: (1)
the average percentage value of our gross assets during the taxable year that produce passive income or are held for the production
of passive income is at least 50% of the value of our total gross assets or (2) 75% or more of our gross income for the taxable
year is passive income (such as certain dividends, interest or royalties). For purposes of the first test: (1) any cash, cash equivalents,
and cash invested in short-term, interest-bearing debt instruments or bank deposits that is readily convertible into cash, will
generally count as producing passive income or held for the production of passive income and (2) the average value of our gross
assets is calculated based on our market capitalization. We will be treated as owning our proportionate share of the assets and
earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by
value) of the stock.
We believe that we were not a PFIC for the taxable year 2016. However,
there can be no assurance that we will not be a PFIC for the taxable year 2016 and/or later taxable years, as PFIC status is re-tested
each year and depends on the facts in such year. For example, we would be a PFIC for the taxable year 2016 if the sum of our average
market capitalization, which is our share price multiplied by the total number of our outstanding shares, and our liabilities over
that taxable year was not more than twice the value of our cash, cash equivalents, and other assets producing passive income or
held for production of passive income. We could also be a PFIC for any taxable year if the gross income that we and our subsidiaries
earn from passive investments is substantial in comparison with the gross income from our business operations.
If we were a PFIC, you would generally be subject to additional
taxes and interest charges on certain “excess distributions” we make and on any gain realized on the disposition or
deemed disposition of your ordinary shares, regardless of whether we continue to be a PFIC in the year in which you receive an
“excess distribution” or dispose of or are deemed to dispose of your ordinary shares. Distributions in respect of your
ordinary shares during a taxable year would generally constitute “excess distributions” if, in the aggregate, they
exceed 125% of the average amount of distributions in respect of your ordinary shares over the three preceding taxable years or,
if shorter, the portion of your holding period before such taxable year.
To compute the tax on “excess distributions” or any
gain, (1) the “excess distribution” or the gain would be allocated ratably to each day in your holding period, (2)
the amount allocated to the current year and any tax year before we became a PFIC would be taxed as ordinary income in the current
year, (3) the amount allocated to other taxable years would be taxable at the highest applicable marginal rate in effect for that
year, and (4) an interest charge at the rate for underpayment of taxes for any period described under (3) above would be imposed
with respect to any portion of the “excess distribution” or gain that is allocated to such period. In addition, if
we were a PFIC, no distribution that you receive from us would qualify for taxation at the preferential rate discussed in the “Dividends
on ordinary shares” section above.
If we were a PFIC in any year, and if you are a U.S. Holder, you
would be required to make an annual return on IRS Form 8621 regarding your ordinary shares. However, we do not intend to generate,
or share with you, information that you might need to properly complete IRS Form 8621. You should consult with your own tax adviser
regarding reporting requirements with regard to your ordinary shares.
If we were a PFIC in any year, you would generally be able to avoid
the “excess distribution” rules described above by making a timely so-called “mark-to-market” election
with respect to your ordinary shares provided our ordinary shares are “marketable.” Our ordinary shares will be “marketable”
as long as they remain regularly traded on the NASDAQ Global Select Market. If you made this election in a timely fashion, you
would generally recognize as ordinary income or ordinary loss the difference between the fair market value of your ordinary shares
on the first day of any taxable year and their value on the last day of that taxable year. Any ordinary income resulting from this
election would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of tax applicable to
qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously included income as
a result of the mark-to-market election, if any. Your basis in the ordinary shares would be adjusted to reflect any such income
or loss. You should consult with your own tax adviser regarding potential advantages and disadvantages to you of making a “mark-to-market”
election with respect to your ordinary shares. Separately, if we were a PFIC in any year, you would be able to avoid the “excess
distribution” rules by making a timely election to treat us as a so-called “Qualified Electing Fund”, or QEF.
You would then generally be required to include in gross income for any taxable year (1) as ordinary income, your pro rata
share of our ordinary earnings for the taxable year, and (2) as long-term capital gain, your pro rata share of our net capital
gain for the taxable year. However, we do not intend to provide you with the information you would need to make or maintain a QEF
election and you will, therefore, not be able to make or maintain such an election with respect to your ordinary shares.
Non-U.S. Holders
If you beneficially own ordinary shares and are not a U.S. Holder
for U.S. federal income tax purposes, or a Non-U.S. Holder, you generally will not be subject to U.S. federal income tax or withholding
on dividends received from us with respect to ordinary shares unless that income is considered effectively connected with your
conduct of a U.S. trade or business and, if an applicable income tax treaty so requires, as a condition for you to be subject to
U.S. federal income tax with respect to income from your ordinary shares, such dividends are attributable to a permanent establishment
that you maintain in the United States. You generally will not be subject to U.S. federal income tax, including withholding, on
any gain realized upon the sale or exchange of ordinary shares, unless:
|
·
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that gain is effectively connected with the conduct of a U.S. trade or business and, if an applicable income tax treaty so
requires as a condition for you to be subject to U.S. federal income tax with respect to income from your ordinary shares, such
gain is attributable to a permanent establishment that you maintain in the United States; or
|
|
·
|
you are a nonresident alien individual and are present in the United States for at least 183 days in the taxable year of the
sale or other disposition and either (1) your gain is attributable to an office or other fixed place of business that you maintain
in the United States or (2) you have a tax home in the United States.
|
If you are engaged in a U.S. trade or business, unless an applicable
tax treaty provides otherwise, the income from your ordinary shares, including dividends and the gain from the disposition of ordinary
shares, that is effectively connected with the conduct of that trade or business will generally be subject to the rules applicable
to U.S. Holders discussed above. In addition, if you are a corporation, you may be subject to an additional branch profits tax
at a rate of 30% or any lower rate under an applicable tax treaty.
U.S. information reporting and backup withholding rules
In general, dividend payments with respect to the ordinary shares
and the proceeds received on the sale or other disposition of those ordinary shares may be subject to information reporting to
the IRS and to backup withholding (currently imposed at a rate of 28%). Backup withholding will not apply, however, if you (1)
are a corporation or come within certain other exempt categories and, when required, can demonstrate that fact or (2) provide a
taxpayer identification number, to certify as to no loss of exemption from backup withholding and otherwise comply with the applicable
backup withholding rules. To establish your status as an exempt person, you will generally be required to provide certification
on IRS Form W-9, W-8BEN or W-8ECI, as applicable. Any amounts withheld from payments to you under the backup withholding rules
will be allowed as a refund or a credit against your U.S. federal income tax liability, provide that you furnish the required information
to the IRS.
HOLDERS OF OUR ORDINARY SHARES SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES
RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF THE ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS
OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS.
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F.
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Dividends and paying agents
.
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Not applicable.
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G.
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Statement by experts
.
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Not applicable.
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H.
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Documents on display
.
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We have filed this Annual Report on Form 20-F with the SEC under
the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements made in this Annual Report as to the contents
of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this Annual
Report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
We are subject to the informational requirements of the Exchange
Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information filed by us
with the SEC, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of the SEC at
450 Fifth Street N.W. Washington D.C. 20549.
You can also obtain copies of this Annual Report on Form 20-F by
mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Additionally,
copies of this material may be obtained from the SEC’s Internet site at http://www.sec.gov. The SEC’s telephone number
is 1-800-SEC-0330.
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I.
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Subsidiaries information
.
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See Item 4. “Information on the Company, Subpart C –
Organizational Structure.”
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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Interest rate risk
Our significant interest-bearing financial liabilities are bank
borrowings. Short-term and long-term borrowings account for 80% and 20%, respectively, of total borrowings as of September 30,
2016. Short-term borrowings will mature at various dates within the year ending September 30, 2016, which does not expose us to
interest rate risk. Our interest rate risk arises primarily from long-term borrowings. During the year ended September 30, 2016,
all of our long-term borrowings were issued at variable rates, hence exposing us to cash flow interest rate risk which is partially
offset by cash held at variable rates.
Our exposure to market rate risk for changes
in interest rates also relates to the interest income generated by excess cash invested in short term money market accounts and
certificates of deposit. We have not used derivative financial instruments in our investment portfolio. Interest earning instruments
carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes
in interest rates. However, our future interest income may fall short of expectations due to changes in interest rates.
Foreign currency risk
Substantially all our revenues and expenses are denominated in Renminbi
and a substantial portion of our cash is kept in Renminbi, but a portion of our cash is also kept in U.S. dollars. Although we
believe that, in general, our exposure to foreign exchange risks should be limited, the value of our shares will be affected by
the foreign exchange rate between U.S. dollars and Renminbi. For example, to the extent that we need to convert U.S. dollars into
Renminbi for our operational needs and the Renminbi appreciate against the U.S. dollar at that time, our financial position and
the price of our shares may be adversely affected. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose
of declaring dividends on our shares or otherwise and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent
of our earnings in China would be reduced.
We have recorded RMB4.08 million (US$0.61 million) of
foreign exchange gain in our net income for the twelve months ended September 30, 2016, due to fluctuations in the currency
exchange rate. The PRC government may further readjust the current rate at which Renminbi-U.S. dollar exchanges are
exchanged, as well as re-evaluate its policy of using a fixed-rate regime to a basket of currencies govern foreign currency
transactions, although the PRC government has not committed itself to take any such action currently. Since we have not
engaged in any hedging activities, we may experience economic loss as a result of any foreign currency exchange rate
fluctuations.
Inflation
In
recent years, China has not experienced significant inflation, and thus inflation has not had a significant effect on our
business during the past three years. According to the China Statistical Bureau, China’s overall national inflation
rate, as represented by the general consumer price index, was approximately 3.1%, 1.6%, 1.6% and 1.9% in the fiscal year
ended September 30, 2013, 2014, 2015 and 2016 respectively. Sustained or increased inflation in China could have an adverse
impact on China’s economy, which could affect demand for our products or services or increase our cost of services or
operating expenses. As we have not previously operated during a period of significant inflation, we cannot predict with
confidence the effect that such inflation may have on our business.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not Applicable.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
On December 1, 2004, State Harvest
established BioTech, a wholly-owned foreign enterprise (“WOFE”) under the laws of the PRC with an operating period
of 20 years.
Under PRC law, foreign entities are
not currently permitted to own more than 49% of a seed production company. In order to address those restrictions, State Harvest
conducts substantially all of its business through contractual agreements with its variable interest entity (“VIE”),
Beijing Origin. These agreements are summarized in the following paragraphs.
As discussed above in “Foreign
Ownership Restrictions,” under Chinese law, foreign ownership of businesses engaged in the breeding of new varieties, development,
production, marketing, distribution and sale of hybrid food crop seeds is limited to 49% pursuant to the Regulation on the Approval
and Registration of Foreign Investment Enterprises in Agricultural Seed Industry and The Foreign Investment Industrial Guidance
Catalogue. State Harvest, as a non-Chinese corporation, may not directly own more than 49% of any of the PRC Operating Companies.
However, Chinese law does not forbid the owner of stock to consign rights associated with the stock, as long as the owner does
not transfer title to the stock. To gain control over the PRC Operating Companies, State Harvest entered into a series of
stock consignment agreements with shareholders of those companies.
State Harvest has been assigned 97.96%
voting rights by the shareholders of Beijing Origin through a consignment agreement which includes the following terms: (1) The
shares of Beijing Origin cannot be transferred without the approval of State Harvest; (2) State Harvest has the right to appoint
all directors and senior management personnel of Beijing Origin and (3) The shareholder rights including voting rights require
the transfer of the shares of Beijing Origin to State Harvest or any party designated by State Harvest within three years upon
the removal of the PRC legal restriction.
Beijing Origin entered into Technical
Service Agreements with BioTech dated December 25, 2004. Under these agreements, BioTech shall provide, with its own technical
research resource and team, technical services for the production and distribution of agricultural seeds during the period of the
agreements. In return, Beijing Origin is required to pay BioTech service fee calculated according to the weight of corn, rice and
cotton seeds sold by the Beijing Origin.
Through the contractual agreements
described above, State Harvest is deemed the sole beneficiary of Beijing Origin resulting in Beijing Origin being deemed a subsidiary
of State Harvest under the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification
(“ASC”) 810-10-05. The agreements described above provided for effective control of Beijing Origin to be transferred
to State Harvest at December 25, 2004. Neither State Harvest nor BioTech had any operating activity prior to entering into the
consignment agreements with Beijing Origin. In substance, State Harvest has substantially all the same shareholders of Beijing
Origin. This transaction has been accounted for on a basis similar to reorganization between entities under common control. Accordingly,
State Harvest’s consolidated financial statements are prepared by including the consolidated financial statements of Beijing
Origin through December 24, 2004, and subsequently the Company’s consolidated financial statements include the financial
statements of State Harvest, its majority owned subsidiary and Beijing Origin through the date of the Share Exchange Transaction.
Three of our PRC operating subsidiaries
are controlled subsidiaries through stock consignment agreements rather than by direct ownership of shares, the terms of which
may have to be enforced, which would require us to incur extra costs, create uncertainty as to ownership of the operating businesses
involved and risk the possible loss of rights. There is the risk, however, that a consigning shareholder will not fulfill its obligations
under the stock consignment agreement. In that event, we may need to resort to the PRC courts to have our rights under the applicable
agreement enforced. Such enforcement will cause us to incur legal expenses. In addition, while a case is pending there will be
uncertainty regarding our rights as to the three PRC operating subsidiaries involved. In addition, a PRC court may decide not to
enforce the agreements in whole or in part. To the extent these agreements are neither observed nor enforced as intended, the PRC
operating subsidiaries will not be controlled by us as intended, which will affect our enterprise value and restrict our ability
to obtain the income and other rights of ownership associated with the consigned stock. It may also prevent the consolidation of
our financial statements with the PRC operating subsidiaries, which would reduce the reported earnings of the consolidated companies.
The uncertainty of ownership may also adversely affect the market value of our ordinary shares.
Whether or not a stock consignment
agreement is terminated depends on the consensus of our Board and the consignees. Any such termination could result in a possible
loss of certain rights or assets held by us without receiving fair value in return. The stock consignment agreements relating to
our control of the stock of our PRC operating subsidiaries may be terminated after three years upon mutual agreement between us
and the consignees. Holding this amount of stock will allow these officers to control or greatly influence the selection of directors
and matters submitted to a vote of our shareholders, including voting to terminate the stock consignment agreements.
There are corporate protections in
place designed to protect our interests, such as an independent Board of Directors, an audit committee comprised of independent
directors that must approve insider transactions, a code of conduct requiring fair dealing with the Company, and the British Virgin
Islands statutory provision that a disposition of more than 50% of the assets of a company must be approved by a majority of the
shareholders. Moreover, if consigned stock is transferred to us as provided in the stock consignment agreements when the restrictions
under PRC law are lifted, that stock will no longer be subject to the stock consignment agreements, and the termination of the
stock consignment agreements would then have no effect on the ownership of that stock. However, if the stock consignment agreements
are terminated, then we would lose our rights with respect to the consigned stock and the profits from the issuing corporation.
Such a loss would impair the value of the Company and would reduce our ability to generate revenues.
The Company has aggregated the financial
information of Beijing Origin and its subsidiaries in the table below. The aggregated carrying amount of assets and liabilities
of Beijing Origin and its subsidiaries after elimination of intercompany transactions and balances consolidated in the Company’s
consolidated balance sheets as of September 30, 2015 and 2016 are as follows:
As of September 30, 2015 and
2016, consolidated assets of RMB243,469 and RMB247,231, respectively, are collateral for the VIE’s obligations.
These consolidated assets consisted of land use right of RMB18,519, and RMB17,867, plant and equipment of RMB197,627 and
RMB192,928, and inventory of RMB27,323 and RMB36,436 as of September 30, 2015 and 2016, respectively.
The consolidated revenues of the
Company has been generated from the VIE and its subsidiaries for the year ended September 30, 2014, 2015 and 2016 are 99.93%, 99.92%
and 99.86%, respectively. The VIE and its subsidiaries also account for 98.95%and 98.98% of the total assets of the Company as
at September 30, 2015 and 2016, respectively.
On September 26, 2016, we entered
into an Master Transaction Agreement, the with Beijing Shihui Agricultural Development Co., Ltd. ( “Beijing Shihui”
or the “Buyer”, a related party being controlled
by close family members of the
Company’s Chairman
), formerly known as Beijing Shihui Agricultural Ltd., under which the Buyer agreed to purchase
the corn seed production and distribution assets, the office building in Beijing, PRC, and generally the business of commercial
corn seed production and sales now operated by the Company as further described in note 25.
The consolidated financial statements
of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”); include the assets, liabilities, revenues, expenses and cash flows of all subsidiaries and variable interest entities.
Intercompany balances, transactions and cash flows are eliminated on consolidation.
The consolidated financial
statements are presented in Renminbi. The translation of Renminbi amounts into United States dollar amounts has been made for
the convenience of the reader and has been made at the exchange rate quoted by the middle rate by the State Administration of
Foreign Exchange in China on September 30, 2016 of RMB6.6778 to US$1.00. Such translation amounts should not be
construed as representations that the Renminbi amounts could be readily converted into United States dollar amounts at that
rate or any other rate.
The preparation of the consolidated
financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Estimates are adjusted to reflect actual
experience when necessary. Significant accounting estimates reflected in the Company’s consolidated financial statements
include inventory valuation, account receivable valuation, useful lives of plant and equipment and acquired intangible assets,
the valuation allowance for deferred income tax assets, valuation of goodwill, valuation of long-lived assets and share-based compensation
expense. Actual results could differ from those estimates.
Cash and cash equivalents consist
of cash on hand, cash accounts, interest bearing savings accounts, time certificates of deposit and debt securities with a maturities
of three months or less when purchased.
Inventories are stated at the lower
of cost, determined by weighted-average method, or market. Work-in-progress and finished goods inventories consist of raw materials,
direct labor and overhead associated with the manufacturing process.
The Company periodically performs
an analysis of inventory to determine obsolete or slow-moving inventory and determine if its cost exceeds the estimated market
value. Write down of potentially obsolete or slow-moving inventory are recorded based on management’s analysis of inventory
levels.
Land use rights are recorded at cost
less accumulated amortization. Amortization is provided over the term of the land use right agreements on a straight-line basis
for the beneficial period.
Plant and equipment are recorded
at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Depreciation
is calculated on a straight-line basis over the following estimated useful lives:
The Company constructs certain of
its facilities. In addition to costs under construction contracts, external costs directly related to the construction of such
facilities, including duty and tariff, and equipment installation and shipping costs, are capitalized. Depreciation is recorded
at the time assets are placed in service.
Leases are classified at the inception
date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions
exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease
term is at least 75% of the property’s estimated remaining economic life or d) the present value of the minimum lease payments
at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date.
A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception
of the lease. All other leases are accounted for as operating leases. The Company has no capital leases for any of the periods
presented.
Goodwill represents the excess of
aggregate purchase price over the fair value of net assets acquired in a business combination. Goodwill is not amortized, but instead
tested for impairment at least annually or more frequently if certain circumstances indicate a possible impairment may exist. The
Company adopted FASB ASC 350-10 and performs its annual impairment review of goodwill on September 30 of each year. Management
evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level, which is determined
to be the enterprise level. In the first step, the fair value of the reporting unit is compared to its carrying value including
goodwill. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any
excess of the carrying amount of the goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a manner similar to a business combination.
The carrying amount of the goodwill
at September 30, 2015 and 2016 represents the cost arising from the business combinations in previous years and no impairment on
goodwill was recognized for any of the periods presented for the Company. The movement for goodwill is as follow:
Acquired intangible assets primarily
consist of purchased technology rights and distribution network and are stated at cost less accumulated amortization. Amortization
is calculated on a straight-line basis over the estimated useful lives of these assets and recorded in operating expenses. Amortization
is calculated on a straight-line basis over the following estimated useful lives for the main acquired intangible assets:
Trademarks, which have indefinite
lives are not amortized but are reviewed for impairment at least annually, at year end date, or earlier upon the occurrence of
certain triggering events.
Equity method investment is accounted
for using the equity method whereby they are initially recognized at cost and thereafter, their carrying amount are adjusted for
the Company’s share of the post-acquisition change in the net assets of equity method investments less impairment losses,
if any. The dividend received was accounted for as a reduction in equity investments.
The Company reviews the carrying
value of long-lived assets to be held and used, including other intangible assets subject to amortization, when events and circumstances
warrants such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market
value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses
on long-lived assets and intangible assets to be disposed are determined in a similar manner, except that fair market values are
reduced for the cost to dispose.
The Company derives its revenues
primarily from the sale of various branded conventional seeds and branded seeds with biotechnology traits.
Revenue is recognized when pervasive
evidence of an arrangement exists, products have been delivered, the price is fixed or determinable, collectability is reasonably
assured and the right of return has expired. The Company generally determines the final selling price after a period the goods
are delivered to the customers. Accordingly, the Company defers revenues recognition until the selling price has been finalized
with the customers. The estimated amounts of revenues billed in excess of revenues recognized are recorded as deferred revenues.
A government subsidy is not recognized
until there is reasonable assurance that: (a) the enterprise will comply with the conditions attached to the grant; and (b) the
grant will be received.
When the Company received the
government subsidies but the conditions attached to the grants have not been fulfilled, such government subsidies are deferred
and recorded under other payables and accrued expenses, and other long-term liability. The reclassification of short-term or long-term
liabilities is depended on the management’s expectation of when the conditions attached to the grant can be fulfilled.
The Company
received several financial supports from various levels of the government. At fiscal years ended 2015 and 2016, the Company
received government subsidies of RMB7,076 and RMB10,368, respectively for R&D and others. Government subsidies
recognized as other income in the statement of income for the years ended September 30, 2014, 2015 and 2016, were RMB2,764,
RMB5,525 and RMB4,582, respectively.
Cost of revenues consists of
expenses directly related to sales, including the purchase prices and development costs for seeds and, during the fiscal years
ended September 30, 2014, 2015 and 2016, agricultural chemical products, depreciation and amortization, impairment of inventory,
shipping and handling costs, salary and compensation, supplies, license fees, and rent.
Research and development costs
relating to the development of new products and processes, including significant improvements and refinements to existing products,
are expensed as incurred.
Advertising costs are expensed
when incurred and included in selling and marketing expenses. For the years ended September 30, 2014, 2015 and 2016, advertising
costs were RMB15,918, RMB5,655 and RMB6,919, respectively.
The Company includes shipping
and handling costs as either cost of goods sold or selling and administrative expenses depending on the nature of the expenses.
Shipping and handling costs which relate to transportation of products to customers’ locations is charged to selling and
marketing expenses and shipping and handling which relate to the transportation of goods to factories from suppliers and from one
factory to another is charged to cost of revenues.
For the years ended
September 30, 2014, 2015 and 2016, shipping and handling cost included in selling and marketing expenses were RMB9,561,
RMB7,238, and RMB8,168 respectively.
Borrowing costs attributable
directly to the acquisition, construction or production of qualifying assets which require a substantial period of time to be ready
for their intended use or sale, are capitalized as part of the cost of those assets. Income earned on temporary investments of
specific borrowings pending their expenditure on those assets is deducted from borrowing costs capitalized. All other borrowing
costs are recognized in interest expenses in the statement of income and comprehensive income in the period in which they are incurred.
The Company regularly monitors
and assesses the risk of not collecting amounts owed to the Company by customers. This evaluation is based upon a variety of factors
including: an analysis of amounts current and past due along with relevant history and facts particular to the customer. Based
upon the results of this analysis, the Company records an allowance for doubtful accounts for this risk.
Deferred income taxes are recognized
for the future tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts
in the consolidated financial statements, net of operating loss carry forwards and credits. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant tax authorities.
The Company adopted FASB ASC
740-10. The Company’s policy on classification of all interest and penalties related to unrecognized tax benefits, if any,
as a component of income tax provisions.
The functional currency of the
Company excluding Agritech and State Harvest is Renminbi. Monetary assets and liabilities denominated in currencies other than
Renminbi are translated into Renminbi at the rates of exchange ruling at the balance sheet date. Transactions in currencies other
than Renminbi are converted into Renminbi at the applicable rates of exchange prevailing the transactions occurred. Transaction
gains and losses are recognized in the consolidated statements of income and comprehensive income.
The functional currency of Agritech
and State Harvest are maintained in United State dollars. Assets and liabilities are translated at the exchange rates at the balance
sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated
using the average rate for the period. Translation adjustments are reported as cumulative translation adjustments and are shown
as a separate component of other comprehensive (loss)/income. The Company has chosen Renminbi as its reporting currency.
Comprehensive
income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.
Comprehensive income for the years has been disclosed within the consolidated statements of income and comprehensive income for
presentational purpose of the disclosure of comprehensive income attributable to Agritech and the non-controlling interests respectively.
Basic income per share is computed
by dividing net income by the weighted average number of common shares outstanding during the years. Diluted income per share gives
effect to all dilutive potential common shares outstanding during the years. The weighted average number of common shares outstanding
is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common
shares had been issued. In computing the dilutive effect of potential common shares, the average stock price for the period is
used in determining the number of treasury shares assumed to be purchased with the proceeds from the exercise of options.
The Company adopts FASB ASC 718-10.
ASC 718-10 requires that share-based payment transactions with employees, such as share options, be measured based on the grant-date
fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, with a corresponding
addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured
at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to
provide service in exchange for the award, which generally is the vesting period.
The Company adopted FASB ASC
820-10, and which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. ASC 820-10 does not require any new fair value measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of the information.
ASC 820-10 establishes a three-level
valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value
and include the following:
Level 1 - Quoted prices in active
markets for identical assets or liabilities.
Level 2 - Inputs other than Level
1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Classification within the hierarchy
is determined based on the lowest level of input that is significant to the fair value measurement.
For the year ended
September 30, 2016, the Company recognized licensing, and conversion and testing services as revenue to align with the
Company’s strategy to develop these businesses. Conversion and testing services income of RMB286 and RMB303 for the
years ended September 30, 2014 and 2015, respectively, have been reclassified from other income to revenue to conform to
current year presentations. There was no change to previously reported shareholders’ deficit or net loss.
The
Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and liquidation of liabilities during the normal course of operations. The Company incurred net losses
of RMB10,140, RMB17,814 and RMB76,833 in the years ended September 30, 2014, 2015 and 2016, respectively. Working capital
deficit was RMB90,381 and RMB136,399 as of September 30, 2015 and 2016, respectively. Accumulated deficit was RMB116,808
and RMB182,386 as of September 30, 2015 and 2016, respectively.
On September 26, 2016, the
Company entered into an agreement to sell its proprietary China-based commercial corn seed production and distribution
business and related assets and the office building in Beijing as further described in note 25. Based on the agreement, the
management expects to receive RMB400,000 in the next 12 months which provide the additional cash needed to meet the
Company’s obligation as they become due, fund its operations and will allow the development of its business in
biotechnology trait and seed germplasm research and development. The transaction is required to obtain the shareholder
approval . Based on the management’s assessment, the shareholders approval is more likely than not to be
solicited.
As management believes it can
secure financial resources to satisfy the Company’s current liabilities and the capital expenditure needs in the next 12
months,our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue
as a going concern.
The FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, in August 2015. The amendments in this
update defer the effective date of ASU No. 2014-09. Public business entities, certain not-for-profit entities, and certain employee
benefit plans should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including
interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that reporting period.
Further to ASU No. 2014-09 and
ASU No. 2015-14, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net), in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing, in April 2016, and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients, in May 2016, respectively. The amendments in ASU No. 2016-08 clarify the implementation
guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls
a specified good or service before it is transferred to the customers. ASU No. 2016-10 clarifies guideline related to identifying
performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The updates in
ASU No. 2016-10 include targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition
and other stakeholders. It seeks to proactively address areas in which diversity in practice potentially could arise, as well as
to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. ASU
No. 2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts
at transition. Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition
and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.
The effective date and transition requirements for ASU No. 2016-08, ASU No. 2016-10 and ASU No. 2016-12 are the same as ASU No.
2014-09. The Company is currently in the process of evaluating the impact of the adoption of ASU No. 2014-09, ASU No. 2016-08,
ASU No. 2016-10 and ASU No. 2016-12 on its consolidated financial statements and related disclosures.
Specifically, the amendments
(1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim
periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain
disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an
express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period
of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU
are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. The Company is evaluating the effects, if any, that the adoption of the amendments in this
ASU will have on the disclosure of the consolidated financial statements.
Note (i): The balance as of September
30, 2016 represented the advance from Beijing Shihui for its seed sales.
Note
(ii): Xinjiang Origin, the subsidiary of the Company, has received a cash advance of RMB10,000 from Xinjiang Ginbo Seeds
Center during the year ended September 30, 2016, which is unsecured, interest-free and repayable on demand.
The above amounts related to
technology usage fees paid to certain related party research centers for the exclusive right to use certain seed technologies.
The Company acquired intangible assets of RMB1,968
from Beijing Shihui for the year ended September 30, 2015.
As further described in Note
25, on September 26, 2016, the Company entered into a Master Transaction Agreement to sell its proprietary China-based commercial
corn seed production and distribution business for RMB400 million to Beijing Shihui.
Accounts receivable consists
of trade receivables resulting from sales of products during the normal course of business.
Advances to suppliers mainly
represent deposits paid but related materials and services have not been provided to the Company.
Inventory with net values of
RMB27,323 and RMB36,436 have been pledged as collateral for bank loans as of September 30, 2015 and 2016.
As of September 30, 2015
and 2016, goods already delivered to customers but still recorded in finished goods, amounted to RMB6,198 and RMB3,681
respectively. As the Company does not recognize revenues until the selling prices of respective goods have been finalized
with the customers, goods delivered to customers as mentioned above will only be recognized as cost of revenues when related
revenues is recognized.
Land use rights with net
values of RMB18,519 and RMB17,867 have been pledged as collateral for bank loans as of September 30, 2015 and
2016. Amortization expenses for the years ended September 30, 2014, 2015 and 2016 were RMB1,027, RMB978 and RMB981,
respectively.
Included in plant and building
with net values of RMB197,627 and RMB192,928 have been pledged for bank loans as of September 30, 2015 and 2016.
The depreciation expenses for
the years ended September 30, 2014, 2015 and 2016 were RMB21,832, RMB21,901, and RMB22,531, respectively.
Construction in progress mainly
refers to the new office buildings, production lines and other production facilities under construction.
In previous years, the Company
owned 23% equity interest in Jinong and accounted for equity method investment. In 2012, one shareholder of Jinong increased its
investment in Jinong’s shares, thereby the equity interests held by the Company were reduced to 17.94%and the Company is
considered to no longer have a significant influence on Jinong. Therefore, the investment in Jinong was accounted for the cost
method investment as of September 30, 2015 and 2016.
Amortization expenses for
the years ended September 30, 2014, 2015 and 2016 were RMB5,665, RMB7,670 and RMB7,710, respectively. No impairment
provision has been charged for the years ended September 30, 2014, 2015 and 2016.
Amortization expense on these
intangible assets for each of the next five years is as follows:
The Company enters into technology
transfer and usage agreements with strategic partners and pays up-front fees for the exclusive rights to certain seed technologies.
Technology rights are amortized over an average usage period of 5 years and are charged to general and administrative expenses.
As of September 30, 2016,
short-term borrowings were comprised of secured and unsecured bank loans of RMB125,000 and RMB65,000, respectively.
A secured bank loan of RMB60,000 with an interest rate of 4.57% per annum, is represented by the bank borrowing under
Beijing Origin, which was secured by a land use right of RMB2,300 (note 8) and plant and equipment of RMB31,733 (note
9).
A secured bank loan
of RMB15,000 with an interest rate of 5.87% per annum, is represented by the bank borrowing under Zhengzhou Branch, which
was secured by land use right of RMB3,111(note 8), plant and equipment of RMB9,501 (note 9) and two guarantee contracts.
Another secured bank loan of RMB50,000 with an interest rate of 5.71% per annum, is represented by the bank borrowing under
Linze Origin, which was secured by inventory of RMB36,436 (note 6), and plant and equipment of RMB7,510 (note 9).
Unsecured short-term loans
of RMB30,000 are represented by the bank borrowings with an interest rate range from 5.00% to 5.22%per annum under Beijing
Origin. These loans were guaranteed by Chairman of the Company. While, the rest of unsecured short-term loans of RMB35,000
under Linze Origin were guaranteed by Chairman of the Company and Beijing Origin. The interest rates of these loans were
ranged from 4.57% per annum.
As of September 30, 2016,
long-term borrowings were comprised of secured and unsecured bank loans of RMB4,023 and RMB43,034, respectively. A secured
bank loan of RMB4,023 is represented by the bank borrowing under Xinjiang Origin, which was secured by a land use right of
RMB12,456(note 8) and plant and equipment of RMB144,184 (note 9) and a guarantee contract. The interest rate was 4.99% per
annum.
Unsecured long-term bank
loans of RMB23,000, with an interest rate from 5.23% to 6.18% per annum, are represented by the bank borrowings under
Beijing Origin and Xinjiang Origin, which were guaranteed by the Chairman of the Company, Beijing Origin and Xinjiang AiBiHu
Agricultural Industrial Commercial Enterprise, which is an affiliate of
Xinjiang
Production and Construction Corps
5th Division (“XPCC 5th Division”).While the rest of unsecured long-term
bank loans of RMB20,034, with an interest rate of 2.38% per annum, was supported by fixed deposit of RMB21,181 and Standby
letter of Credit.
As of September 30, 2015, short-term
borrowings were comprised of secured and unsecured bank loans of RMB105,000 and RMB115,000, respectively. A secured bank loan of
RMB60,000 with an interest rate of 5.88% per annum, is represented by the bank borrowing under Beijing Origin, which was secured
by a land use right of RMB2,361 (note 8) and plant and equipment of RMB32,692 (note 9).
A secured bank loan of RMB15,000
with an interest rate of 6.885% per annum, is represented by the bank borrowing under Zhengzhou Branch, which was secured by land
use right of RMB3,203 (note 8), plant and equipment of RMB10,241 (note 9) and two guarantee contracts. Another secured bank loan
of RMB30,000 with an interest rate of 5.936% per annum, is represented by the bank borrowing under Linze Origin, which was secured
by inventory of RMB27,323 and two guarantee contracts.
Unsecured short-term bank loans
of RMB30,000 are represented by the bank borrowings with an interest rate of 5.1% to 6.42% per annum under Beijing Origin. These
loans were guaranteed by Chairman of the Company. While, the rest of unsecured short-term bank loans amounting to RMB85,000 under
Linze Origin were guaranteed by Chairman of the Company and Beijing Origin. The interest rates of these loans were ranged from
4.85% to 6.068% per annum.
As of September 30, 2015, long-term
borrowings were comprised of secured and unsecured bank loans of RMB14,523 and RMB50,449, respectively. A secured bank loan of
RMB14,523 is represented by the bank borrowing under Xinjiang Origin, which was secured by a land use right of RMB12,955 (note
8) and plant and equipment of RMB154,694 (note 9) and a guarantee contract. The annual interest rate was 6.72%.
Unsecured long-term bank loans
of RMB36,500, with an interest rate from 7.04% to 7.8% per annum, are represented by the bank borrowings under Beijing Origin and
Xinjiang Origin, which were guaranteed by the Chairman of the Company, Beijing Origin and Xinjiang AiBiHu Agricultural Industrial
Commercial Enterprise, which is an affiliate of
Xinjiang Production and Construction
Corps
5th Division (“XPCC 5th Division”).While, the rest of unsecured long-term bank loans of RMB13,949,
with an interest rate of 2.3832% per annum, was supported by fixed deposit of RMB20,280 and Standby letter of Credit.
During the fiscal year 2011, the Company received
government subsidies from the local PRC government for plant and equipment projects of RMB14.00 million and land
use right of RMB10.90 million; in fiscal year 2015, the Company received government subsidies from the local
PRC government for equipment projects of RMB2.62 million. In fiscal year 2016, the Company received government
subsidies from the local PRC government for equipment projects of RMB8.63 million (US$0.82 million). The non-current portion of
such government subsidies are recorded as long-term liability for, which will be amortized over the estimated useful lives related
to the plant and equipment and land use right.
On November 8, 2005, the Company
adopted the 2005 Performance Equity Plan (the “2005 Plan”) which allows the Company to offer a variety of incentive
awards to employees to acquire up to 1,500,000 ordinary shares under the 2005 Plan. On April 22, 2010, the Company adopted
the 2009 Performance Equity Plan (the “2009 Plan”) and is authorized to issue equity based awards for up to 1,500,000
ordinary shares to the Company’s employees and senior managements. On December 22, 2014 the Company adopted the 2014 Performance
Equity Plan, under which we are able to issue equity awards with the right to acquire up to 5,000,000 ordinary shares to our directors,
officers, employees, individual consultants and advisors. The main purpose of the plan is to provide an existing structure and
renewable benefit plan for senior management and directors and others providing services to the company. In addition to current
equity awards to the directors and officers, we plan to expand our equity awards to a broader range of employees in order to align
our employee incentives towards the stock performance. The main purpose of the two plans is to provide an existing structure and
renewable benefit plan for senior management and directors, employees and consultants.
Under the terms of the 2005 Plan
on January 4, 2010 the Company granted its employees options to purchase 125,000 ordinary shares at the price of US$12.23 (“Tranche
5”).Under the terms of the 2009 Plan, on January 3, 2011, the Company granted its employees options to purchase 120,000 ordinary
shares at the price of US$10.84 (“Tranche 6”); and on January 3, 2012, the Company granted its employees options to
purchase 365,000 ordinary shares at the price of US$2.55 (“Tranche 7”), and on January 2, 2013, the Company granted
its employees options to purchase 360,000 ordinary shares at the price of US$1.44 (“Tranche 8”) Subject to the modifications
discussed below, and on January 2, 2014, the Company granted its employees options to purchase 350,000 ordinary shares at the price
of US$1.27 (“Tranche 9”).
Under the terms of the 2014 Plan,
on January 2, 2015 the Company granted its employees options to purchase 195,000 ordinary shares at the price of US$1.48 (“Tranche
10”), on January 4, 2016 the Company granted its employees options to purchase 185,000 ordinary shares at the price of US$1.38
(“Tranche 11”), on April 19, 2016 the Company granted its employees options to purchase 600,000 ordinary shares at
the price of US$2.05 (“Tranche 12”), on May 16, 2016 the Company granted its employees options to purchase 200,000
ordinary shares at the price of US$1.65 (“Tranche 13”),on August 3, 2016 the Company granted its employees options
to purchase 200,000 ordinary shares at the price of US$2.0 (“Tranche 14”),
All the options have an expiration
date that is 5 to 10 years from the date of grant and vest immediately or over a period of 1 to 5 years. 1,175,000 and 1,060,000
options under the 2009 Plan, and 195,000 and 1,380,000 options under the 2014 Plan were outstanding as of September 30, 2015 and
2016, respectively.
After the adjusted awards, all
the option awards have an exercise price of USD 1.27 to USD 12.23 and expire 5 to 10 years from the date of grant and vest immediately
or over a period of 1 to 5 years.
On December 22, 2014 and January
2, 2016, the compensation committee of the Board of Directors approved the substitution of restricted stock for outstanding grants
under Tranche 5& 6 that no longer offer the kind of incentive opportunity originally sought for valued employees given the
fall in the market price of the ordinary shares during recent years. The revised terms of the stock options were accounted for
as a modification in accordance with ASC 718-20.For the purpose of determining the amount of any incremental share-based compensation
cost that may have resulted from the modification of the exercise prices, the Company compared the fair value of modified awards
and that of the original awards, determined that RMB616 and RMB542 (US$83) of the modifications required the recognition of additional
share-based payment expense, respectively.
For the options outstanding at
September 30, 2015 and 2016, the weighted average remaining contractual lives are 2.4 and 5.1 years, respectively.
The Company recorded share-based
compensation expense of RMB1,324, RMB1,612 and RMB8,796 for the years ended September 30, 2014, 2015 and 2016 respectively. As
of September 30, 2015 and 2016, there were RMB238 and RMB2,676 of total unrecognized compensation expense related to non-vested
share-based compensation arrangement under the 2014 Plan. The unrecognized compensation expense is expected to be recognized over
a weighted-average period of 0.52 year.
A summary of the share option activity
under the 2005, 2009 and 2014 Plans is as follows:
The fair value of each option granted is estimated
on the date of grant using the Black-Scholes Option Pricing Model:
The aggregate intrinsic value as
of September 30, 2015 and 2016 is USD nil and USD1,476, respectively.
During the year ended September
30, 2007, the Company repurchased 498,851 common stock of the Company with a total cost of RMB29,377 under the approval of the
Board of Directors. In February 2013, the board of directors approved a share repurchase program for open market and negotiated
transactions for a 12 month period in the amount of USD5 million, under which 611,386 and 167,385 shares with a total cost of RMB6,286
and RMB1,782 were bought in the NASDAQ market during the year ended September 30, 2013 and 2014, respectively, in compliance with
U.S. securities laws. The Company recorded the entire purchase price of the treasury stock as a reduction of equity.
Agritech and its subsidiary,
State Harvest are incorporated in the British Virgin Islands and are exempted from the income tax under the laws of the British
Virgin Islands. State Harvest’s subsidiary and State Harvest’s variable interest entity, Beijing Origin and its majority
owned subsidiaries (together, the “PRC entities”) were incorporated in the PRC and governed by the PRC laws.
The applicable tax rate of the
PRC Enterprise Income Tax (“EIT”) was changed from 33% to 25% on January 1, 2008, according to the Corporate Income
Tax Law. The preferential tax rate previously enjoyed by the PRC entities is gradually transitioned to the new standard rate of
25% over a five-year transitional period. In addition, article 28 of the new tax law stated that the income tax rate of a “high
technology” company (high-tech status) is to remain at 15%.
Preferential tax treatment of
Beijing Origin as “high technology” company (High-tech Status) from October 28, 2011 to October 27, 2017 has been granted
by the relevant tax authorities. Beijing Origin is entitled to a preferential tax rate of 15% which is subject to annual review.
As a result of these preferential tax treatments, the reduced tax rates applicable to Beijing Origin Seed Limited for 2014, 2015
and 2016 are 15%.Xinjiang Origin is entitled to a preferential tax of 2 years exemption and 3 years of half EIT from January 1,
2012 to December 31, 2016 in accordance with Cai Shui [2011] No. 53 and Cai Shui [2011] No. 60 issued by the PRC State Administration
of Taxation and Xin Cai Fa Shui [2011] No. 51 issued by the Xinjiang Local Taxation Bureau. Xinjiang Origin is currently in the
status of ‘halfEIT’ for the year ended September 30, 2016.Linze Origin is entitled to a preferential tax rate of 15%
from January 1, 2016 and December 31, 2016 in accordance with Cai Shui [2011] No. 58 issued by the PRC Ministry of Finance, General
Administration of Customs and the State Administration of Taxation which is subject to annual review. Linze Origin is currently
in the status of a preferential tax rate of 15% for the year ended September 30, 2016.
Had all the above tax
holidays and concessions not been available, the tax charges would have been lower by RMB(750), RMB(1,149) and RMB(3,822),
and the basic net loss per share would have been lower (higher) by RMB(0.01), RMB(0.13) and RMB0.17 for the years ended
September 30, 2014, 2015 and 2016, respectively. The diluted net loss per share for the years ended September 30, 2014, 2015
and 2016 would have been lower (higher) by RMB(0.01), RMB(0.13) and RMB0.17, respectively.
The Company’s liability
for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject
to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed. The completion
of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s
liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly
or annual period based, in part, upon the results of operations for the given period. Until September 30, 2016, the management
considered that the Company had no uncertain tax positions affected its consolidated financial position. The Company’s uncertain
tax positions are related to tax years that remain subject to examination by the relevant tax authorities and the major one is
the China tax authority. The open tax years for examinations in China are 5 years.
The principal components of the
deferred income tax assets are as follows:
The Company did not have any
significant temporary differences relating to deferred tax liabilities as of September 30, 2015 and 2016.
A significant portion of the
deferred tax assets recognized relates to net operating loss and credit carry forwards. The Company operates through the PRC entities
and the valuation allowance is considered on each individual basis.
The net operating loss attributable
to those PRC entities can only be carried forward for a maximum period of five years. Tax losses of non-PRC entities can be carried
forward indefinitely. The expiration period of unused tax losses is as follows:
Reconciliation between total
income tax expenses and the amount computed by applying the statutory income tax rate to income before taxes is as follows:
In previous
years, the Company assessed the contingent tax liability that might arise from the share exchange transaction with Chardan and
considered such contingent tax liabilities as more-likely-than-not. As of September 30, 2013, a contingent tax liability of RMB39,060
including late payment penalty and interest was included in the income tax payable in the accompanying consolidated balance sheet.
The Company did not expect to incur tax liabilities at the higher end of the range which were estimated to be in the range RMB39,060
to RMB64,218, based on the information previously available.
In 2009,
the Company reviewed the contingent tax position. On September 23, 2010, the Company filed a revised 2005 tax return (the “Revised
Return”) to the United States Internal Revenue Service (the “IRS”), to modify and supplement the previously filed
tax return regarding this tax liability. The timeline for the IRS to question on the tax return and assess additional tax due is
generally three years.
For the period from the filing
date of the Revised Return (i.e., September 23, 2010) to September 30, 2014, the IRS did not enquire of the Company or Chardan
to clarify the redomestication transaction reflected in the Revised Return. The Company believes that Chardan paid all necessary
and required U.S. federal income tax arising out of the Chardan redomestication. The Company also believes that the time limit
for the IRS to assess any additional income tax expired at September 23, 2013,by reason of the expiration of the statute of limitations.
The management considered not practical to complete a detail independent reassessment in order to obtain sufficient evidence to
support a potential change of tax position in a short period of time, given that no additional evidence is obtained during the
year ended September 30, 2013, the Company considered to retain the contingent tax liability in the balance sheet as of September
30, 2013. During the year ended September 30, 2014, the Company has completed an independent review to assess the tax position
as of September 30, 2014 and concluded that the three years statute of limitations has expired. As a result, the Company concludes
that there is no justification to continue to make a reserve in its accounts for the contingent tax liability of RMB39,060 in relation
to the share exchange transaction. Accordingly, the contingent tax liability of RMB39,060 has been derecognized and recorded as
a tax benefit in the statement of income and comprehensive income for the year ended September 30, 2014 due to the cessation of
contingent taxable status.
For the year ended September
30, 2014, 2015 and 2016, the effect of the outstanding options was anti-dilutive.
Full time employees of the PRC
entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits,
medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor
regulations require the Company to accrue for these benefits based on certain percentages of the employees’ salaries. The
total provisions for such employee benefits were RMB16,212,RMB13,873 and RMB12,576 for the years ended September 30, 2014, 2015
and 2016, respectively.
Pursuant to the laws applicable
to the PRC, domestic PRC entities must make appropriations from after-tax profit to non-distributable reserves funds including:
(i) the statutory surplus reserve and; (ii) the statutory public welfare fund. Subject to the limits of 50% of the entity’s
registered capital, the statutory surplus reserve fund requires annual appropriations of 10% of after-tax profit (as determined
under accounting principles generally accepted in the PRC (“PRC GAAP”) at each year-end). The Company’s wholly
foreign owned subsidiary, BioTech, however subject to the law applicable to foreign invested enterprises in the PRC, was required
annual appropriation of the general reserve fund, no less than 10% of after-tax profit (as determined under PRC GAAP at each year-end).
These reserve funds can only be used for specific purposes of enterprise expansion and staff welfare and are not distributable
as cash dividends. No appropriation has been made for the years ended September 30, 2014, 2015 and 2016. There was no after-tax
profit recorded in the PRC statutory accounts for 2015 and 2016. On the other hand, the amount set aside as of September 30, 2015
and 2016 were RMB24,789 and RMB24,789.
As
of September 30, 2015 and 2016, capital commitments for the purchase of long-term assets are as follows:
The Company leased certain
land use rights for seed development and office premises under non-cancellable leases. Rental expenses under operating leases for
the years ended September 30, 2014, 2015 and 2016 were RMB3,185, RMB2,990 and RMB4,598 respectively.
As of September 30, 2016, the
Company was obligated under operating leases requiring minimum rental as follows:
The carrying amounts of cash
and cash equivalents, restricted cash, accounts receivable, accounts payable and borrowings are reasonable estimates of their fair
value. All the financial instruments are for trade purposes. No level 2 or 3 fair value assessment has been made.
From June 2015, the Company announced
that it has successfully transitioned from a traditional seed company to a biotechnology seed company and is now organized into
two business lines: agri-biotech and product development and production and distribution of hybrid seeds. The Company’s reportable
segments are strategic business units that require different technology and marketing strategies and offer different products and
services. The primary income (loss) measure used for assessing segment performance and making operating decisions is income (loss)
from operations (i.e., earnings before non-operating income (expenses), interest and income taxes). The Company’s chief operating
decision maker, the Chief Executive Officer, receives and reviews the results of the operations of each separate segment, assesses
and manages their performance and makes decisions based on the measures of revenues, cost of revenues, gross profit, operating
expenses, net and income (loss) from operations. Other than the information provided below, the Company’s chief operating
decision maker does not use any other measures by segments.
The accounting policies of the
segments are the same as those described in the summary of significant accounting policies. The Company accounts for intersegment
sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Following a change in
the identification of the Company’s reportable segments as aforementioned, the Company has also presented the corresponding
items of segment information for the years ended September 30, 2015 and 2016 for comparative purposes.
Net revenues, income (loss)
from operations and total assets of the Company’s reportable segments are as follows:
As we primarily generate our revenues from customers
in the PRC, and all of our sales and all of our identifiable assets are located in the PRC, no geographical segments are presented.
Financial instruments that subject
the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and
cash equivalents with high-quality institutions. Generally these deposits may be redeemed upon demand and therefore bear minimal
risk.
The interest rates and terms
of repayment of bank and other borrowings ranged from 2.38% to 6.18%, which are fixed at the inception of the borrowings. Other
financial assets and liabilities do not have material interest rate risk.
We believe our working capital
is sufficient to meet our present requirements. We may, however, require additional cash due to changing business conditions or
other future developments, including any investments or acquisitions we may decide to pursue. In the long-term, we intend to rely
primarily on cash flow from operations and additional borrowings from banks to meet our anticipated cash needs. If our anticipated
cash flow is insufficient to meet our requirements, we may also seek to sell additional equity, debt or equity-linked securities.
The Company has significant investments
in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in
the PRC and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods taxation, among other things. There can be no assurance; however, those
changes in political and other conditions will not result in any adverse impact.
On September 26, 2016, the Company
entered into a Master Transaction Agreement to sell its seed production and distribution business to Beijing Shihui, a related
party. The overall transaction will be conducted in two steps. The first step will be the sale of the equity held by Beijing Origin
of each of the Denong, Changchun Origin and Linze Origin companies, and the second step will be the sale of a company holding the
assets of Beijing Origin’s branch in Zhengzhou (“Zhengzhou Branch”) and the office building in Beijing, PRC.
Beijing Origin will also orchestrate with the parties that own minor percentages of Changchun Origin, not now owned by Beijing
Origin, to purchase their ownership equity amounts so that the Buyer acquires from Beijing Origin all of the equity of Changchun
Origin in the first step of the transaction. The second step requires Beijing Origin to effect a restructuring to form a company
to own the current office building located in Beijing, PRC and certain other assets (together the “Zhengzhou Branch Assets”),
which company will be sold to the Buyer so as to transfer the building and assets to the Buyer. By separate agreement the Buyer
will enter into license arrangements to pay Beijing Origin a royalty for the present and future seed portfolio and a technology
access fee for the research and development effort that Beijing Origin will provide going forward in the areas of product discovery
and development, hybrid registration, trait integration and intellectual property protection.
At the first closing, the Buyer
will pay to Beijing Origin RMB200 million, for the 98.58% equity ownership interest in Denong, 100% equity ownership interest in
Changchun Origin and 100% equity ownership interest in Linze Origin (together the “VIE Subsidiaries”). The first closing
is conditioned (among other things) on Beijing Origin acquiring the current minority percentage ownership of Changchun Origin that
is held by
the Company’s Chairman
, so as to deliver to the Buyer 100% of the
equity ownership of Changchun Origin. The minority interest of Denong will continue to be held by two third parties and will not
be sold to the Buyer. At the second closing, the Buyer will pay to Beijing Origin RMB190 million and the RMB10 million deposits,
which has been received in September 2016, will be used to settle for the 100% ownership interest in an entity formed by Beijing
Origin as part of its reorganization to hold the Zhengzhou Branch Assets. The total consideration to be paid to Beijing Origin
will be RMB400 million.
The Buyer will assume the outstanding
liabilities of the VIE Subsidiaries and the Zhengzhou Branch Assets, except for certain outstanding bank loans. The current bank
loans aggregating RMB100 million will be transferred to Beijing Origin, subject to the approval and agreement of the bank lenders.
If the bank loans cannot be transferred, then the purchase price will be reduced for the outstanding amount due, but any guarantees
provided by the Company’s Chairman, Dr. Han Gengchen(“Dr. Han”) will be terminated without liability to Beijing
Origin or Dr. Han.
Beijing Origin has agreed to
use its reasonable best efforts (i) to complete the restructuring of the Company so as to be able to complete the second closing,
to acquire the portion of Changchun Origin that it does not own, and to transfer certain assets, the assets of Beijing Origin’s
branch in Linze, to Linze Origin. Additionally, all intercompany accounts between Beijing Origin and its retained affiliates, on
the one hand, and the VIE Subsidiaries, on the other hand, regardless of any due dates, existing prior to the first closing will
be paid in full before or at the first closing. The Buyer and Beijing Origin will negotiate separate license agreements regarding
the Buyer’s continued use of the trademarks and trade names owned by Beijing Origin and licensing designated seeds developed
by Beijing Origin or Beijing Biotechnology. Origin Agritech and Beijing Origin are jointly responsible for all transfer, documentary,
sales, use, stamp, recording, value added, registration, conveying taxes and fees in connection with the sale of the various types
of assets to Buyer.
Beijing Origin has agreed that
for ten years after the closing, without the written consent of the Buyer, it and its affiliated entities will not directly conduct
any business in the distribution of crop seeds in the PRC, except for the distribution of crop seeds in Xinjiang province by Xinjiang
Origin. This limitation will not prohibit Origin, Beijing Origin or BioTech from conducting the businesses of crop seed licensing,
transgenic materials licensing, transgenic traits licensing or other activities related to its intellectual property in the PRC.
This non-competition provision will terminate if more than 50% of the equity interest or assets of the Company are acquired by
an independent third party during the restrictive period.
To be able to complete the transaction,
the transaction will need to be approved by shareholders.
The condensed financial statements
of Origin Agritech Limited (the “parent company”) have been prepared in accordance with accounting principles generally
accepted in the United States of America. Under the PRC laws and regulations, the Company’s PRC subsidiaries are restricted
in their ability to transfer certain of their net assets to the parent company in the form of dividend payments, loans or advances.
The amounts restricted include paid-in capital, capital surplus and statutory reserves, as determined pursuant to PRC generally
accepted accounting principles, totaling RMB109,651 and RMB109,651 as of September 30, 2015 and 2016, respectively.
The following represents condensed
unconsolidated financial information of the parent company only:
The condensed financial information has been prepared
using the same accounting policies as set out in the Company’s consolidated financial statements except that the parent company
has used equity method to account for its investments in subsidiaries.