ITEM 1. DESCRIPTION OF BUSINESS
In this Annual Report, unless the context
requires otherwise, references to the “Company,” “Sino Agro,” “SIAF,” “we,” “our
company” and “us” refer to Sino Agro Food, Inc., a Nevada corporation together with its subsidiaries.
BUSINESS
Sino Agro Food, Inc.
SIAF is an agriculture technology and natural
food holding company with principal operations in the People’s Republic of China. The Company acquires and maintains equity
stakes in a cohesive portfolio of companies that SIAF forms according to its core mission to produce, distribute, market and sell
natural, sustainable protein food and produce, primarily seafood and cattle, to the rapidly growing middle class in China. SIAF
provides financial oversight and strategic direction for each company, and for the interoperation between companies, stressing
vertical integration between the levels of the Company’s subsidiary food chain. The Company owns or licenses patents, proprietary
methods, and other intellectual properties in its areas of expertise. SIAF provides technology consulting and services to joint
venture partners to construct and operate food businesses, primarily producing wholesale fish and cattle. Further joint ventures
market and distribute the wholesale products as part of an overall “farm to plate” concept and business strategy.
Revenues by division were as follows
(in millions of U.S. dollars):
Division (on Sales of Goods)
|
|
2019
|
|
|
2018
|
|
Fisheries (CA) (Discontinued operation from October 5, 2016)
|
|
$
|
|
|
|
$
|
-
|
|
Organic Fertilizer (HSA, SJAP & QZH)
|
|
|
26.9
|
|
|
|
28.9
|
|
(QZH derecognized as variable interest entity from December 30, 2017)
|
|
|
|
|
|
|
|
|
Cattle (MEIJI)
|
|
|
36.2
|
|
|
|
29.6
|
|
Plantation (JHST)
|
|
|
4.6
|
|
|
|
3.6
|
|
Corporate, Marketing & Trading (SIAF)
|
|
|
|
|
|
|
|
|
Total Revenues derived on sales of goods
|
|
|
66.2
|
|
|
$
|
68.5
|
|
Division (on consulting & services)
|
|
2019
|
|
|
2018
|
|
CA (Fishery related developments)
|
|
$
|
|
|
|
$
|
|
|
Total Revenues derived on consulting & services
|
|
$
|
1.7
|
|
|
$
|
11.1
|
|
History
The Company, which was formerly known as
Volcanic Gold, Inc. and A Power Agro Agriculture Development, Inc., was incorporated on October 1, 1974 in the State
of Nevada. The Company was formerly engaged in the mining and exploration business but ceased the mining and exploring business
in 2005. On 24 August 2007, the Company entered into a merger and acquisition agreement with CA, a Belize corporation and
its subsidiaries CS and CH. Effective of the same date, CA completed a reverse merger transaction with the Company.
For two years after its introduction in
China, the Company operated in the dairy segment, but sold the dairy business in December of 2009 and began to implement its
five-year plan to develop its vertically integrated business operations consisting of (i) cattle fattening and production
of beef products and (ii) cultivation of fish and prawn and related products.
Our principal executive office is located
at Room 3520, 35th Floor, Block A, China Shine Plaza, No. 9 Lin He Xi Road,
Tianhe District, Guangzhou City, Guangdong Province, PRC, 510610.
The table below provides an overview of
key events in the development of the business of the Company.
Year
|
|
Event
|
2006
|
|
•
|
Initiates agriculture and aquaculture consulting activities in China.
|
2007
|
|
•
|
Changes name from A Power Agro Agriculture Development, Inc. to Sino Agro Food, Inc.
|
|
|
•
|
Acquires the Belize holding company Capital Award. Today, Capital Award is the Company’s subsidiary operating many of the Company’s aquaculture activities.
|
|
|
•
|
Acquires the dairy operations through a 78 percent ownership stake in ZhongXing Agriculture and Husbandry.
|
|
|
•
|
Acquires the HU Plantation through a 75 percent ownership stake in Jiang Men City Heng Sheng Tai Agriculture Development.
|
2009
|
|
•
|
Conducts a strategic review and divests the dairy business in December due to poor industry fundamentals with control of the industry concentrated in a few very large value-added manufacturers.
|
|
|
•
|
Founded Qinghai Sanjiang A Power Agriculture (“SJAP”). SJAP manufactures bioorganic fertilizer, livestock feed and develops other agriculture projects in the County of Huangyuan, in the vicinity of Xining City, Qinghai Province.
|
2010
|
|
•
|
Creates a five-year plan to develop vertically integrated businesses in primary production, distribution and marketing of beef cattle, beef products and seafood through proprietary recirculating aquaculture systems.
|
|
|
•
|
Begins construction of the Company’s first fish farm, Fish Farm 1, with targeted capacity of 1,000 metric tons per year.
|
2011
|
|
•
|
Begins construction of Prawn Farm 1 & 2, Cattle Farm 1 and Fish Farm 2.
|
|
|
•
|
Becomes a fully reporting SEC company on the OTCQB (as defined below).
|
2012
|
|
•
|
Acquires a 75 percent ownership in Fish Farm 1 and Cattle Farm 1. Advances construction of Cattle Farm 2 and Wholesale Center 1 in Guangzhou.
|
|
|
•
|
Produces 1,800 MT of seafood and raises 6,000 head of cattle.
|
2013
|
|
•
|
Closes the Zhongshan Prawn Farm agreement, targeting production of 10,000 MT of prawn p.a. in 2016/2017 and 100,000 MT in 2024.
|
|
|
•
|
SJAP awarded Dragon Head Enterprise status by the Qinghai provincial government.
|
|
|
•
|
Mr. George Yap and Mr. Nils-Erik Sandberg join SIAF’s Board of Directors, as independent directors.
|
|
|
•
|
Produces 4,700 MT of seafood and raises 15,000 head of cattle.
|
2014
|
|
•
|
SJAP’s abattoir and meat processing facilities commence operations. SJAP signs supplier and concession agreements with Tesco, PLC China for packaged meat products.
|
|
|
•
|
Advances construction of a wholesale and distribution center in Shanghai, targeting ultimate capacity of 12,000 MT of meat and 6,000 MT of seafood per annum.
|
|
|
•
|
Mr. Anthony Soh and Mr. Dan Ritchey join SIAF’s Board of Directors as independent directors.
|
|
|
•
|
Ms. Olivia Lai is hired as Chief Financial Officer.
|
|
|
•
|
Produces 5,600 MT of Seafood and raises 26,000 head of cattle during 2014.
|
2015
|
|
•
|
The Company announces a long-term vision to become a leading sustainable aquaculture company focused on organically farmed fish and prawns.
|
|
|
•
|
Wholesale Center 2 in Shanghai initiates operations
|
|
|
•
|
Mr. Bertil Tiusanen is hired as Chief Financial Officer. Ms. Lai becomes the Company’s Chief Corporate Affairs Officer.
|
|
|
•
|
The Company announces contemplated plan to divest its aquaculture operations and seek a separate listing on the Oslo Stock Exchange.
|
2016
|
|
•
|
The Company was admitted to the Merkur market in Oslo.
|
|
|
•
|
The Company upgraded to OTCQX Premier from the OTCQB® Venture Market.
|
|
|
•
|
Mr. Bertil Tiusanen resigned as Chief Financial Officer and appointed as SVP Business Development, New Ventures Europe
|
|
|
•
|
Officer and Mr. Dan Ritchey appointed as Chief Financial Officer.
|
|
|
•
|
The Company’s carve-out of Tri-way resulting in categorization of Tri-way as an Investor in Associate from a subsidiary status. As such, the Company’s fully owned subsidiary namely, Capital Award Inc (CA), retains its main business activity in the sector of technology and engineering consulting and related services, and Tri-way has assumed all activity regarding aquaculture operations and the sale of all products produced by them.
|
|
|
•
|
Tri-way has purchased Master Developer and Operating licensing rights from CA for purposes of future development of aquaculture projects in China utilizing CA’s APM-indoor and ODRAS technology, and has contracted with CA to provide its turnkey contractor services for those projects in China.
|
2017
|
|
•
|
Mr. George Yap resigned as independent director and Audit Committee chairman and member of Nomination Committee.
|
|
|
•
|
The Company increased its equity interest in Tri-way from 23.89% to 36.6% in the fourth quarter by converting the amount due from Tri-way into equity interest.
|
|
|
•
|
On December 30, 2017 the Company sold its (35.36%) equity in QZH to a third party.
|
2018
|
|
•
|
Mr. Dan Ritchey passed away on December 1, 2018. As of the date of this Annual Report, the Company has yet to appoint a CFO; consequently, Mr. Solomon Lee currently serves as the Company’s interim CFO.
|
|
|
•
|
Mr. Nils Erik Sandberg resigned
as independent director and Audit Committee chairman
|
2019
|
|
•
|
Mr. Colanukuduru Ravindran was appointed as an independent director and the Audit Committee chairman on March 29, 2019.
|
|
•
|
Mr. Muson Cheung was appointed as an independent
director on April 11th 29, 2019.
|
|
•
|
The company’s common stocks were delisted from
the Merkur Market (OSLO) from September 10th 2019.
|
|
•
|
Mr. Anthony Soh resigned as independent director
on September 30th 2019.
|
|
•
|
On September 30th 2019, the Company contracted
out the following businesses’ operations to the existing management of the corresponding operations: (i). SJAP’s integrated
cattle activity to Mr. Zhao Y L, the legal representative and MD of SJAP, (ii). HSA’s manufacturing of fertilizer to
Mr. Lee Ping the existing manager of HSA and (iii). JHST’s plantation operation and MEIJI’s cattle operations
to Mr. Fang ZhiJun, the existing manager of both operations.
|
|
•
|
On September 30th 2019, Mr. Solomon
Lee resigned as the Chairman of SJAP resulting in categorization of SJAP as an Investor in Associate from a subsidiary status.
|
|
•
|
On September 30th 2019, Tri-way terminated
the farms’ management contracts and ceased the operation of Aqua-farm 4 and 5 due to the unsatisfactory performances of
the said farms of the past 3 years (from 2017 to 2019)
|
Background
After successfully developing many aquaculture
fishery farms, cattle farms and related business operations (along with sales and marketing of produce and products) in Australia
and Malaysia since 1998, SIAF’s management team introduced our business activities in China in 2006.
To accomplish this, we use our expertise
and know how in specific agriculture and aquaculture technologies. Our “A Power Re-circulating Aquaculture System,”
sometimes referred to herein as APRAS, is a patented and proven technology for indoor fish farming. We have developed modern techniques
and technologies to grow, feed and house both fish and cattle. These are engineered into the designs of, and the management systems
for, indoor and outdoor fishery and cattle farms. Our experience managing crops, and employing technologies, including hydroponic,
to work within climate and growing conditions optimizes production of organic, green and natural agricultural produce.
We have acted as the master engineer, pioneering
the construction and building of farms, from raw land into fully operational facilities. We complete the construction and building
of infrastructure including staff quarters, offices, processing facilities, storage, and all related production facilities. Our
management teams are responsible for developing all business activities into effective and efficient operations.
During the past years, SIAF has matured
into a company dedicated to the agriculture and aquaculture industry in China.
Up until 30th September 2019,
we maintained operation of our HU Plantation as well as our services in engineering consulting, specializing in the development
of two major products, namely meat derived from the rearing of beef cattle and seafood derived from the growth of fish, prawns,
eel and other marine species.
From October 1, 2016, onward, Tri-way
has assumed the role as developer of aquaculture projects in China with CA contracted to provide turnkey contracted services for
those projects.
Sino Agro Food Sweden AB Sweden (SIAF AB)
was formed in 2016 to provide services to the European shareholders when SIAF listed on the Merkur Market in 2016 and SIAF AB was
dissolved in October 2019 after the Company effectively delisted from the Merkur Market in September 2019.
However the fully integrated 2nd
Cattle and Beef business was gradually being scaled down from year 2016 onward after the China Government relaxed its importation
policies to allow many countries (i.e. Australia, NZ, Countries of South America and Canada etc.) to import beef into China affecting
its domestic cattle rearing and beef industry. SJAP lost in excessive of US$30 million by year ended December 31st
2017 and by June 30th 2019, it reduced its large fully integrated activity into a small operation keeping and maintaining
the production of fertilizer at less than 8,000 MT per year comparing to over 35,000 MT per year in 2015 and the production of
concentrated live-stock feed at less than 3000 MT per year compares to over 15,000 MT in 2016 and fattening less than 1500 heads
of live cattle at its own farm compares to 2015’s around 25,000 heads of live cattle reared and fattening by 20 corporative
farms that consisted over 2,000 individual farmers collectively. From 1st October 2019 onward, SJAP contracted
the said small maintaining operation to its existing management.
The Company currently maintains operations
of its services in engineering consulting and specializing in the development of agriculture and aquaculture projects whereas operations
of its HU Plantation, Asian “Yellow cattle” demonstration farm, and HSA’s manufacturing of fertilizer were contracted
to their respective farm’s management since 30th September 2019.
Financial information of all management
contracts are being described in the MD&A section of this report.
The Company is now the investor in two
Associates originated from subsidiary status namely SJAP and Tri-way; whereas Tri-way is in the aquaculture segment contracting
out it’s aqua-farms’ operations (inclusive Aqua-farm 1, 2 and 3a & b) to respective farm’s managements
and JFD, it’s fully owned subsidiary in China, has the sole right to market and distribute the said Aqua-farms’ productions
by buying from and selling all fishery productions of the said contracted aqua-farms.
Operation of Aqua-farm 4 and 5 of the Zhongshen
Mega Farm Development ceased since September 30th 2019 failing the Company’s original ambition to become
one of the biggest prawn producers in the world by year end of 2024.
Therefore from 1st October 2019
onward, Revenues of the Company are generated from (i). Incomes derived from CA’s Engineering Consulting and services, (ii).
Incomes derived from the contractual agreements of JHST, MEIJI and HSA, (iii). CA’s (or the Corporate) marketing and Trading
business and (iv). Incomes generated from its investments in SJAP and Tri-way.
Corporate Acquisitions
On September 5, 2007, we acquired
two businesses in the People’s Republic of China (“PRC”):
(a) Tri-Way Industries Ltd., Hong
Kong (“TRW”) (formerly known as Tri-way Industries Limited), a company incorporated in Hong Kong; and
(b) Macau EIJI Co. Ltd., Macau (“MEIJI”)
(formerly known as Macau Eiji Company Limited), a company incorporated in Macau, and the owner of 75% equity interest in Enping
City Juntang Town Hang Sing Tai Agriculture Co. Ltd. (“HST”), a PRC corporate Sino Foreign joint venture.
On November 27, 2007, MEIJI and HST
established a corporate Sino Foreign joint venture, Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd, China (“JHST”)
(formerly known as Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd.), a company incorporated in the PRC with MEIJI
owning a 75% interest and HST owning a 25% interest. HST was dissolved in 2010.
In September 2009, we formed a 100%
owned subsidiary in Macau, A Power Agriculture Development (Macau) Ltd., China (“APWAM”) (formerly known as
A Power Agro Agriculture Development (Macau) Limited). APWAM presently owns 45% of a corporate Sino Foreign joint venture, Qinghai
Sanjiang A Power Agriculture Co. Ltd. (“SJAP”). On March 23, 2017, a third party, Qinghai Quanwang Investment
Management Company Limited acquired a 8.3% equity interest and APWAM owned 41.25% equity interest of SJAP as of December 31,
2017. SJAP is engaged in the business of manufacturing bioorganic fertilizer, livestock feed and development of other agriculture
projects in the County of Huangyuan, in the vicinity of the Xining City, Qinghai Province, PRC.
On February 28, 2011, TRW applied
to form a corporate joint venture, Enping City A Power Prawn Culture Development Co. Ltd., China (“EBAPCD”)
(formerly known as Enping City Bi Tao A Power Fishery Development Co., Limited), which is incorporated in the PRC. TRW initially
owned a 25% equity interest in EBAPFD. On November 17, 2011, TRW formed Jiangmen City A Power Fishery Development Co. Ltd,
China (“JFD”) (formerly known as Jiang Men City A Power Fishery Development Co., Limited) in which it acquired
a 25% equity interest, while withdrawing its 25% equity interest in EBAPFD. As of December 31, 2011, we had invested $1,258,607
in JFD. JFD operates an indoor fish farm. On January 1, 2012, we acquired an additional 25% equity interest in JFD for total
cash consideration of $1,662,365. On April 1, 2012, we acquired an additional 25% equity interest in JFD for the amount of
$1,702,580. Prior to October 5th 2016 we owned a 75% equity interest in JFD
and control its board of directors. As of September 30, 2012, we had consolidated the assets and operations of JFD. From October 5th
2016 we brought out the remaining 25% equity interest in JFD for consideration of $4,517,426 and sold the 100% equity interest
in JFD to Tri-way (inclusive all original assets of its one farm namely Fish Farm 1 that was changed to name Aqua-Farm 1 and of
other additional assets transferred from work in progress etc.) for $33,538,480; and converted JFD into a Wholly Owned Foreign
Entity (WOFE) such that Tri-way is holding 100% equity interest in JFD; and simultaneously (on October 5th
2016) JFD completed the acquisition: of the assets and operation from owners and investors of four other aquaculture farms (namely
Aqua-farm 2, 3 and 4) for $277,055,897 collectively; and the acquisition of a Master License from CA for the rights of future development
and operation of our APRAS farms in China for $30,000,000 resulting that we were owing 23.89% equity interest in Tri-way as at
October 5th 2016. The Company converted the amount due from unconsolidated
equity investee into equity interest during the fourth quarter of 2017, which resulted in equity interest in TRW from 23.89% to
36.60%.
On April 15, 2011, MEIJI applied to
form Enping City A Power Beef Cattle Farm 2 Co. Ltd., China (“EAPBCF”) (formerly known as Enping City A Power
Cattle Farm Co., Limited), all of which we would indirectly own a 25% equity interest in as of November 17, 2011. On September 13,
2012 MEIJI formed Jiangmen City Hang Mei Cattle Farm Development Co. Ltd., a company incorporated in the PRC (“JHMC”)
(formerly known as Jiang Men City Hang Mei Cattle Farm Development Co., Limited) in which it owns 75% equity interest with an investment
of $3,636,326, while withdrawing its 25% equity interest in ECF. As of September 30, 2012, we had consolidated the assets
and operations of JHMC.
Cross-Listing on the Merkur Market
On January 13, 2016, securities representing
beneficial interests in the shares of common stock on the Company, referred to as VPS Shares, began to be traded on the Oslo Børs’
Merkur Market under the symbol “SIAF-ME.” The Company’s common shares continued to trade on the OTCQB under the
symbol “SIAF.”
The Merkur Market is a multilateral trading
facility operated by Oslo Børs ASA. The Merkur Market is subject to the rules in the Norwegian Securities Trading Act
and the Securities Trading Regulations that apply to such marketplaces. These rules apply to companies admitted to trading
on the Merkur Market, as do the marketplace’s own rules, which are less comprehensive than the rules and regulations
that apply to companies listed on Oslo Børs and Oslo Axess. The Merkur Market is not a regulated market, and is therefore
not subject to the Norwegian Stock Exchange Act or to the Stock Exchange Regulations. Investors should take this into account when
making investment decisions.
Uplisting to the OTC QX Premier
On January 19, 2016, the Company’s
shares of common stock began to be traded on the OTCQX® Best Market in the
U.S. under its existing ticker symbol “SIAF.” The Company upgraded to OTCQX Premier from the OTCQB®
Venture Market.
The OTCQX®
Market is the top tier of the U.S. over-the-counter markets operated by OTC Markets Company. It is reserved for established investor-focused
companies meeting high financial and governance standards, and sponsored by professional third party advisors. SIAF has qualified
to trade on OTCQX U.S. Premier, for which eligibility standards are higher still. For comparison, as of December 31, 2015,
there were 942 companies traded on the OTCQB, 425 companies traded on the OTCQX and 98 companies traded on OTCQX U.S. Premier,
of which only 17 are non-bank companies.
With OTCQX admission, OTC Market Company’s
Blue Sky Monitoring Service provides the Company with a customized daily audit of its compliance status in all 50 states. Blue
Sky compliance is mandatory for broker-dealers and registered investment advisors to solicit or recommend a security to investors.
U.S. investors can find current financial
disclosure and Real-Time Level 2 quotes for the Company on www.otcmarkets.com.
However since January 22nd 2020, it
was due to the Covid-19 events prevented the Company to complete the 10K 2019 audited report, the Company was forced to drop down
to OTC Pink-Sheet Market for failing to meet the high financial and governance standards of the OTCQX and OTCQB market. The shares
of common stock of the Company are now trading in OTC Pink-sheet market currently.
Delisting from the Merkur Market
In January of 2019 the Company applied
to Oslo Børs ASA for the delisting from the Merkur Market. The principal reason for the delisting from the Merkur is the
difference in the disclosure rules that the Merkur requires; the Merkur requires the disclosure of information prior to occurrence
of a particular event which is inherently forward-looking in nature and thus potentially speculative; consequently, any such disclosure
could thus be in conflict with US securities laws. On September 10th 2019, the Company was effectively delisted
from the Merkur Market with all shares of common stock of the Company were trading in the OTC QX Premier Market.
Emerging Growth Company
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the
last day of the fiscal year (a) in which we have total annual gross revenue of at least $1.0 billion or (b) in which
we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates
exceeded $700.0 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible
debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS
Act” and references herein to “emerging growth company” shall have the meaning associated with it in the JOBS
Act.
As an emerging growth company, we may take
advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These
provisions include:
·
|
only two years of audited consolidated financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” disclosure;
|
·
|
reduced disclosure about our executive compensation arrangements;
|
·
|
no requirement that we hold non-binding advisory notes on executive compensation or golden parachute arrangements; and
|
·
|
exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.
|
We have taken advantage of some of these
reduced burdens, and thus the information we provide stockholders may be different from what you might receive from other public
companies in which you hold shares.
In addition, Section 107 of the JOBS
Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of
the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay
the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are
choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107
of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting
standards is irrevocable.
Legal structure
The Company is primarily a holding company
whose operations are carried out through its subsidiaries.
The table below sets out information about
the entities in which the Company, as of the date of this Annual Report, holds (directly or indirectly) more than 10 percent of
the outstanding capital and votes.
The table below sets out a brief description
of the companies within the Company as well as the Company’s respective holdings within such companies and their domiciles.
Company
|
|
Country of
incorporation
|
|
Field of activity
|
|
% Holding
|
|
Sino Agro Food, Inc.
|
|
US
|
|
General types of agricultural developments, business management, trading, sales and marketing
|
|
|
|
|
Capital Award Inc. (CA)
|
|
Belize
|
|
Engineering consulting in development of fishery, management of fishery operation, marketing and sales of fishery produces and products
|
|
|
100
|
|
Tri-way Industries Limited (TRW)
|
|
Hong Kong
|
|
Holding company and holder of technology licenses
|
|
|
36.6
|
|
Macau Eiji Company Limited (MEIJI)
|
|
Macau
|
|
Developments of cattle farming and vegetable farming), management service and marketing and sales of cattle and related products
|
|
|
100
|
|
A Power Agro Agriculture Development (Macau) Limited (APWAM)
|
|
Macau
|
|
Holding company
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Capital Stage Inc. (CS)
|
|
Belize
|
|
Dormant
|
|
|
100
|
|
Capital Hero Inc. (CH)
|
|
Belize
|
|
Dormant
|
|
|
100
|
|
Jiangmen City A Power Fishery Development Co. Ltd. (JFD)
|
|
China
|
|
(1): Operator in growing of fish (sleepy cod species), eels (flower pattern species) and prawns; Research and Development of growing technique and knowhow of live-seafood and (2) Marketing and Trading of seafood
|
|
|
100% owned by Tri-way
|
|
Jiangmen City Hang Mei Cattle Farm Development Co. Ltd. (JHMC or Cattle Farm 1)
|
|
China
|
|
A demonstration farm for growing cattle in a semi-tropical climate
|
|
|
75
|
|
Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd. (JHST)
|
|
China
|
|
HU plantation, immortal vegetable and cash crops of vegetables planting, processing and sales of produces and products
|
|
|
75
|
|
Hunan Shenghua A Power Agriculture Co. Ltd. (HSA)
|
|
China
|
|
Existing activities: manufacturing of organic fertilizer, 100% pure organic mixed fertilizer and lake fish farming organic fertilizer. Cattle rearing.
|
|
|
76
|
|
In addition to the legal entities included
in the chart and table above, the Company is providing technology know-how with consulting service and turnkey contracting services
(“C&S”) to various Chinese owned Project Companies (“C&S Project Company”) which
mainly are private companies formed in China with Chinese citizens acting as legal representatives. The Company does not have any
ownership in these C&S Project Companies. However, in consideration of the Company’s right to protect its technology
and know-how granted to the C&S Project Companies, the Company has an option to acquire equity stakes in the future SFJVC at
an agreed value equivalent to the project’s development cost.
In addition, regarding the investment agreement
between QZH and QQI, (i) QQI enjoyed 6% annual interest on its capital contribution, but not any profit distribution; (ii) investment
period was 3 years, and (iii) SJAP shared 100% (2016: 100%) on profit or loss after 6% interest payment to QQI and
enjoyed 100% (2016: 100%) voting rights of QZH’s board and stockholders meetings.
As of December 30, 2017, the Company
register authority approved the transferred of the Company’s (35.36%) equity interest in QZH to an unrelated third party,
such that as from December 30, 2017 QZH was derecognized as a variable interest entity. (Further related information is provided
throughout this report).
Business model
The Company works with Chinese investors
to form operating companies, in which the Company retains the option to acquire equity interest. After a certain period of time
and successful operating results, the Company and the Chinese investor may form a Sino Foreign Joint Venture Company (“SFJVC”).
Prior to the formal naming, registration, and incorporation of an anticipated SFJVC, the Company prepays a deposit toward the consideration
of its future SFJVC stake as a percentage of the assets of the fully developed farm. Upon conversion, the prepayments become equity
capital.
Prior to September 30th
2019, the Company oversees financing and provides interoperating strategies, encouraging vertically integrated growth. China
has problems with quality assurance in primary production, distribution and poor origin traceability, as well as low food quality.
This has created a market where consumers will eventually pay significant price premiums for “BAP (Best Aquaculture Practice)
Certified” seafood with brands guaranteeing quality and consistency.
A vertically integrated operation in a
fragmented and poorly regulated environment such as in China is the strategy that will yield the most success for the Company.
Integration into fertilizer and feed production
for rearing of beef cattle together with breeding of prawn brood stock help decrease primary production operational risks as well
as helping to offset price fluctuations that sometimes occur in raw product input prices.
The Company uses expertise and know-how
in specific agriculture for indoor fish farming. The Company has developed modern techniques and technologies to grow, feed and
house both fish and cattle. These are engineered into the designs of, and the management systems for, indoor and outdoor fishery
and cattle farms. In all developments the Company acts as the master engineer, pioneering the construction and building of farms,
from raw land into fully operational facilities. The Company builds the infrastructure including staff quarters, offices, processing
facilities, storage, and all related production facilities; then, manages developing of all business activities into effective
and efficient operations. The Company’s largest customer represents a Company of thirty separate live seafood wholesalers
at the Guangzhou wholesale markets.
The Company holds patents for fertilizer
and aromatic feed formulas, 6 enzyme patents, and for 5 indoor fish farm techniques, including a “master license” in
China for “A Power Technology” (“APT”), a modular land-based fish growing system and technology
utilizing RAS.
The Company partners with Chinese investors
in food projects as a turnkey project manager
The Company engages in projects as a technological
and engineering expert, partnering with local and regional investors in food related projects. The Company generally has exclusive
marketing, sales and distribution rights for each project company. For example, MEIJI purchases all marketable cattle from Cattle
farm 2 and distributes them to wholesale markets. Up until September 30, 2016,
prior to SIAF becoming an investment associate of Tri-way (i.e. post-carve-out), CA had been purchasing all seafood produced by
the fishery farms and also supplied the fishery farms with fingerling, baby or adult fish or prawns and stock feed. Thus, CA is
no longer involved in any sales, marketing and supplies of fishery goods being operated by Tri-way yet will continue to carry out
its current contracts with other entities, as well as developing other business ties that are interested in utilizing its services.
Generally, the Company exercises an option
to acquire a majority equity stake in the project company once development of the operating company has matured and successful
operating results are demonstrated. Upon acquisition and conversion into a SFJVC, the pre-payments together with a cash consideration
become equity capital, with the Company becoming a major shareholder.
Acquired project companies are operated
and managed by the management team and the Chinese investor, and overseen by the Company.
Presently, as from October 1st
2019 onward, it is due to the collapse of the cattle industry domestically in China, the poor performances of Tri-way’s
aqua-farm 4 and 5 and the delisting from Merkur Market etc.; as such by year ended 31st December 2019 the Company
reduced its quantum of operation into a small scale described in the earlier chapter.
Subsequently, it is due to the impacts
caused by the Covid-19 events in 2020, the Company further scaled down its operations whilst working on means to initiate business
opportunities for the Company.
Business overview
Introduction
The Company is an agriculture technology
and natural food holding company with principal operations in China participating in the ongoing transformation of China’s
fragmented agrarian sector into a modern food production industry using sustainable and profitable methods. The Company focuses
on seafood and beef production with integrated wholesale distribution. The Company acquires and maintains equity stakes in a cohesive
portfolio of companies that the Company forms according to its core mission to produce, distribute, market and sell natural, sustainable
protein food and produce, primarily seafood and cattle, to the rapidly growing middle class in China.
The Company employs a strategy of vertical
integration from primary production through processing, distribution and marketing of high quality, organic food products in the
food value chain. China’s fast growing middle class is creating rapidly rising demand for gourmet and high-quality protein
food. The Company’s core products are live prawns, live eels, whole beef cattle and packaged beef meat.
The Company’s operations and strategy
are executed through a number of subsidiaries located in China, and the Company contributes financial oversight and strategic direction
to otherwise independent management teams which employ the Company’s intellectual property and proprietary methods.
The Company has enjoyed strong growth
since the Company initiated its business activities in China in 2006. During the fiscal year of 2019, the Company’s consolidated
revenues amounted to USD $135,598,314. The four principal factors
that have enabled the growth are:
|
·
|
Joint venture investment models with existing local Chinese investors in agriculture and aquaculture;
|
|
·
|
Technological competitive advantages in recirculating aquaculture, beef rearing and livestock slaughter;
|
|
·
|
Strong growth in Chinese consumers’ demand for quality protein food; and
|
|
·
|
The Chinese Government’s policy to consolidate the agrarian sector and increase the efficiency of China’s food production industry.
|
The Company provides consulting and services
to a number of private Chinese third party companies to construct and operate primary production facilities for fish, prawn and
beef cattle, as well as wholesale marketing and distribution centers. As part of its consulting and service agreements, the Company
has the option to acquire these operations in order to expand the Company’s proprietary production and wholesaling capacity.
Revenues are generated from activities as follows:
1.
|
Beef cattle rearing and fattening,
live-stock feed and fertilizer under SJAP
|
SJAP’s business operations
are consisting beef cattle rearing and fattening, the bulk and concentrated livestock feed producing and manufacturing and the
production of organic fertilizer.
However SJAP has slowed down its beef cattle
rearing and fattening division since 2017 and is no longer involved with the corporative growers in the fattening of beef cattle
due primarily to the depressed markets of the local cattle and beef industry caused mainly by the opening of the beef imports from
a great number of developed countries that un-balanced the local cattle industry in turn, the revenues derived from production
of livestock feed and fertilizer also went down accordingly.
Revenue for fiscal year ended December 31,
2019 was USD 11.29 million or 8.3 percent of the Company’s total sales of goods revenue of USD 135.60 million in the same
period. Gross profit for same division in the fiscal year ended December 31,2019 was at USD3.02 million, or 14.66% of the
Company’s total gross profit in sales of goods of USD 20.60 million in the same period.
SJAP now has in its own property twelve
cattle houses, housing a minimum of 200 to 350 heads of cattle in each building fattening up to 2000 heads of cattle per year.
As from 1st October 2019, SJAP became an investee of the Company when Mr. Solomon Lee resigned as chairman and losing
management control of SJAP, as such SJAP is an unconsolidated associate of the Company. Also from 1st October 2019, SJAP leased
its business operations to Mr. Zhou Yi Lim & Co. (the existing management team of SJAP) as such SJAP’s main
revenue is derived from the said leasing incomes.
2.
|
The Organic fertilizer of HSA:
|
HAS’s main business operation is
in the manufacturing of organic fertilizer having other incomes generated from leasing of its pig farm complex situated on 35,000
m2 of land and building of 10,000 m2 to a third party to rear pigs and leasing of land of 13,200 m2 to another third party to
do sand processing.
HSA’s fertilizer division’s
revenue for fiscal year ended December 31, 2019 was USD 15.58 million or 11.48 percent of the Company’s total sales
of goods revenue of USD 135.6 million in the same period. Gross profit for same division in the fiscal year ended December 31,
2019 was USD 2.3 million or 11.1% of the Company’s total gross profit in sales of goods of USD 20.60 million in the same
period.
From 1st October 2019, HSA leased its fertilizer operation
to Mr. Lee Ping (the head of the existing management team) as such HSA’s revenues are derived from leasing contracts
thereon. (Please see MD&A Sector for more details of the Leasing Contract).
3. Cattle
farms (MEIJI) division
The business division Cattle Farms, or
MEIJI, refers to SIAF’s cattle rearing operations in Jiangmen, Guangdong Province. Revenue for fiscal year ended December 31,
2019 was $36.19 million, or 26.69%, of the Company’s total sales of goods revenue of USD 135.60 million in the same period.
Gross profit for the Cattle Farm (MEIJI) division for the 12 months ended December 31, 2019 was $6.9 million, or 33.5% percent
of the Company’s total gross profit on sales of goods of $20.60 million in the same period.
Up until 30th September 2019, the
Cattle Farms (MEIJI) division has two operational farms namely Cattle Farm 1 and Cattle Farm 2, whereas.
Cattle Farm 1: Cattle Farm 1 was
built as a demonstration farm to show that cattle can be raised in a semi-tropical climate using the Company’s semi-grazing
and housing method. Using the Company’s semi-free growing management system, the cattle are allowed to graze in the field
during the early morning and kept indoors and out of the sun during the hot summer days. This method has proven reliable, with
the growth rate of the cattle measuring slightly higher than the cattle at SJAP (i.e., averaging around 0.28 kg per day per cattle).
Cattle Farm 2: Cattle Farm 2 is
a beef cattle farm situated in Guangdong Province, Guangzhou City. Cattle Farm 2 is operated by a private company formed in China
with Chinese citizens acting as its legal representative as required by Chinese law. Cattle Farm 2 is complementary to Cattle Farm
1, having an additional 76 acres of land suitable for growing the Company’s type of pasture (a cross between elephant grass
and yellow grass) that has a very high yield rate of over 35 MT per 1/6 acre per year, and containing an average of over 9 percent
protein that is very suitable for consumption by cattle. Between the two farms, under normal seasons, they have a capacity to produce
up to 30,000 MT of pasture/year collectively that is capable to feed up to 5,000 head of cattle/year based on the consumption rate
on average of 6 MT/head.
These farms are carrying on with the growing
and fattening mainly AYC.
MEIJI is the marketing and distribution
agent for all cattle farms that have been and will be developed by MEIJI using its “Semi-free growing” management systems
and aromatic-feed programs and systems to grow beef cattle.
MEIJI purchases fully-grown cattle from
Cattle Farm 1 and sells them to the cattle wholesalers. MEIJI also buys young cattle from other farmers and sells the young stock
to Cattle Farm 1. All cattle farms developed by MEIJI will utilize its “semi-free growing” management system and aromatic-feed
programs and systems (which is a feeding program with special selected Chinese herbs to improve the health of the cattle to avoid
the use of antibiotics) to raise beef cattle, such that cattle raised under this program have a distinct aromatic flavor sought
by many restaurants in the Guangdong Provinces.
From 1st October 2019, MEIJI leased
its Cattle farms’ operation to Mr. Fan Xin June (the head of the existing management team) as such MEIJI’s
revenues are derived from leasing contracts thereon. (Please see MD&A Sector for more details of the Leasing Contract
4. Plantation (JHST) division
The business division Plantation refers
to SIAF’s produce production, situated at Enping City, Guangdong Province. Revenue for 12 months ended December 31,
2019 was $4.59 million or 22.28% of the Company’s total sales of goods revenue of $135.6 million in the same period. Gross
profit for the plantation division for the 12 months ended December 31, 2019 was $0.88 million, or 4.27% percent of the Company’s
total gross profit for sales of goods of $20.60 million in the same period.
JHST is an SFJVC that is 75% owned by SIAF
consolidated as a subsidiary, and up until 30th September 219, was the owner and operator of a Plantation where mainly Hylocereus
Undatus, or Dragon Fruit, and cash crop vegetables, are grown. It was due mainly to the suffering and combating of plant disease
over a long period of time (2015 to 2019) and the heavy damages resulted from the strong typhoon in 2017 and 2018 , the Company
found it no longer viable to keep working on the plantation. Therefore from 1st October 2019, JHST leased its Cattle farms’
operation to Mr. Fan Xin June (the head of the existing management team) as such MEIJI’s revenues are derived from
leasing contracts thereon. (Please see MD&A Sector for more details of the Leasing Contract).
5. Marketing & Trading Division
Revenue for 12 months ended December 31,
2019 was $66.23 million or 48.8% of the Company’s total sales of goods revenue of $135.6 million in the same period. Gross
profit for the plantation division for the 12 months ended December 31, 2019 was 7.36 million, or 35.72% of the Company’s
total gross profit for sales of goods $20.60 million in the same period.
Primarily, the Company distributes beef
meat imported from Australia and live-seafood from other countries through its distribution agents in China under their import
and export permits conditioned under the China Government’s regulations.
Over the years this division has developed
many reliable suppliers and supplied sources that are supplying quality foods to our trust-worthy customers / agencies. Therefore
it is within reason to assume that this division will eventually become an effective and major revenue drive of the group once
when some of the financing plans will have materialized to allow more working capital being employed in the division.
6. Project
Development Division
The project developments (or Technology engineering consulting
and services) works are carried out by CA on aquaculture related projects and by SIAF and MEIJI on non-aquaculture and agriculture
projects:
The Project Development division earns
revenue by providing turnkey project management, engineering services and financing mainly within aquaculture and related up and
down-stream activities. Project development revenue for the12 months ended December 31 2019 was $1.72 million or 1.26% of
the Company’s total revenue of $135.06 million and gross profit for project development for the same period was $0.13 million
or 0.6% of the Company’s total gross profit of $20.6 million representing minimal financial contribution due primarily to
the Company’s policy of recent years, (since end of year 2017), to restrict employment of capital development funds such
that there was hardly any development being carried out since, affecting revenues and gross profits of this division.
7.
Investments in investee associates:
The Company presently has investments in
two associates that their financials are not being consolidated into the Company’s consolidated financials; from 1st
October 2016 the carve-off of Tri-way mentioned in earlier 10Ks and 10Qs reports that the Company is holding 36.6 % equity
interest in Tri-way and from 1st October 2019, the Company lost management control of and is the minority shareholder
holding 45% equity stake in SJAP.
Historical events:
Historical Information and status of CA’s
consulting and engineering service are shown in the table below:
Number
|
|
Year
|
|
Name
|
|
Stage of completion
|
1
|
|
2010
|
|
Fish Farm 1 (JFD)
|
|
Completed and acquired by SIAF
|
2
|
|
2011
|
|
Fish Farm 2
|
|
Under expansion by Tri-way
|
3
|
|
2011
|
|
Cattle Farm 1 (JHMC)
|
|
Completed and acquired by SIAF
|
4
|
|
2011
|
|
Prawn Farm 1 (EBAPCD)
|
|
Completed with hydroponic farm to go
|
5
|
|
2011
|
|
Prawn Farm 2 (ZSAPP)
|
|
Under expansion by Tri-way
|
6
|
|
2012
|
|
Cattle Farm 2 (EAPBCF)
|
|
Completed
|
7
|
|
2012
|
|
Wholesale Center 1 - Guangzhou (APNW)(Phase 1 & 2)
|
|
Completed
|
8
|
|
2012
|
|
Central kitchen, distribution network, signature restaurants
|
|
Completed
|
9
|
|
2014
|
|
Zhongshan New Prawn Project (ZSNP)
|
|
Commencing construction
|
10
|
|
2014
|
|
Wholesale Center 2 - Shanghai (APNW) (Phase 1)
|
|
Completed
|
11.
|
|
2016
|
|
Aqua-farm 4 & 5 of the (ZSNP)
|
|
90% completed under Tri-way’s direction
|
Together with its subsidiaries, the Company
essentially constitutes an engineering company providing services in engineering consultancy, supervision and management on the
development of agriculture and food based projects in China. These include the construction of farms (or other facilities) as well
as the development of business operations of related projects that are apply and use the Company’s principal technologies,
including the following:
|
·
|
An indoor recirculating aquaculture system (APM-RAS) and designs for the growing of aquatic animals (fishery indoor);
|
|
·
|
An open-dam recirculating Aquaculture System (ODRAS) for the growing of aquatic animals (Fishery outdoor);
|
|
·
|
Semi-free range cattle growing systems and design for raising cattle and sheep in China tropical climate locations, (e.g. Cattle Farm 1 at Enping district); and
|
|
·
|
Other associated technologies.
|
CA’s standard principal terms and
conditions for its Aquaculture project development consulting and service contracts are outlined below:
|
·
|
CA is the consulting and service provider as the turnkey contractor of the project;
|
|
·
|
The Chinese businessmen are the clients of CA and the investors and owners of the project company;
|
|
·
|
CA creates and manages development schedules for the project;
|
|
·
|
CA is responsible to build the Aquaculture project (including development of its business operation) using the Company’s APRAS technology, systems, know-how, and management expertise and systems for and on behalf of the developer;
|
|
·
|
The developer is responsible to pay CA for its work, including all subcontractors and suppliers appointed by CA in a timely manner, normally a 60-day term;
|
|
·
|
Provision clauses allow CA to appoint and to select sub-contractors and suppliers;
|
|
·
|
Clauses allow extra work and additional work and extra cost provisions; and
|
|
·
|
Contracts generally include i) warranty and limitation of liabilities, ii) scope of work and lists of supplies (including all plant and equipment), iii) installation, training and commissioning of the developments and business operation; and iv) granting to CA rights to management of operation, and marketing and sales of the produce and products from the farm’s operation.
|
The Company’s services are comprehensively
supportive with vertically integrated operational activities to provide service for the construction of and the business development
of the projects to joint ventures. Consulting services include research and development on grown and growing animals, supply of
foundation animals (baby calves, fingerling and breeding stocks etc.), supplying designed and configured plants and equipment to
the marketing and sales of the end product.
Aquaculture Project Development
Engineering consulting and services provide
a comprehensive range of services in the field of aquaculture. These include research and development, brood stock supply, nurturing
of fish fingerlings and prawn post-larvae as well as growing of fish and prawns, engineering designs and planning of farms and
associated operations, technology and related implementation, supervision, training and conducting trials, management of farm operation
and construction, supply of plants and equipment, training of maintenance and operational services, sales, transportation and marketing
of fish and prawns, as well as financing. The Company’s management team and staff in Guangzhou conduct the engineering and
consulting work. The Company directs the scope of work so that building subcontractors deliver projects efficiently and cost effectively.
Using locally manufactured equipment, parts and components customized to the Company’s proprietary designs and engineering
specifications, production costs for machinery and facilities are far lower compared to foreign aquaculture systems. The Company
believes that it delivered the first indoor re-circulated aquaculture prawn farm in Asia.
From October 1, 2016, onward:
CA has granted to Tri-way a Technology
Master License for China, such that starting from October 1, 2016, all future fishery project development in China using APM-RAS
or ODRAS will be developed by Tri-way. CA has been hired by Tri-way as the Company’s turnkey contractor to provide consultation
respective of Tri-way’s operations.
CA’s aim, in addition to providing
quality service to Tri-way in China, is expecting to expand its reach to introduce and help implement its APM-RAS and ODRAS plant
and equipment and services, worldwide.
2017 Research and development (R&D) works on technologies
and associated future developments
The Mexican White Prawns (MWP)
During Q4 2017, CA started the construction
and development of an indoor APM-RAS experimental farm (“MWEF”) at Enping’s Aqua-farm (1) (or FF1)
for the growing of Mexican White prawns (“MWP”) which is a salt water spices of prawns grown mostly in China
or other countries in open dams and channels that have access to sea water. However, due to the rapid growth of industrialization
and the increase of prawn growing farms over the past years, pollution has been affecting the quality of sea water in terms of
increasing diseases and other associated problems to the MWP industry, thus, reducing the economic viability of the prawn industry
by reducing its productivity. The aim of the MWEF is to achieve the growing of MWP economically and commercially in stable environmental
conditions supported by economic sustainability so that they can be developed at a lower capital expenditure and returning on capital
investments within a reasonable period of time (targeting within 18 to 24 months).
Our teams (including some newly recruited
technicians and experts) are working diligently on the project having already overcome various problems in construction and associated
preparation work on growing MWP, expecting to stock prawn fingerling (PL7days) within the 1st
week in April 2018 and if all goes according to plan, are anticipating harvests to begin taking place 7 weeks later (beginning
of June 2018) for the smaller sized prawns (i.e. 50/60 pieces/Kg) and final harvest on or before end of June for the
larger sized prawns (i.e. 20/25 pieces/Kg). This MWEF is being constructed on a 1000 m2 surface area that has 4 grow-out tanks
(to contain 480 m3 of water, collectively) with each tank to have 120m3 of water that is being recycled and serviced by 2 tanks
(each of 25m3) that have inbuilt filtration and water treatment systems aiming to produce 3Kg of small sized prawns/m3 of water
within 7 weeks and 6Kg/m3 of larger sized prawns within 10 weeks. This production aims to enhance harvests by approximately 3,000
Kg (or 3 MT) per harvest (15 MT/year) of larger sized prawns based on 5 harvests per year. In 2017, the average of wholesale prices
of (MWP) prawns is RMB50/kg for small sized prawn and RMB150/Kg for larger sizes. This will mean that there will be RMB2.25 million
sales revenues generated per year per 1,000 m2 of developed floor area. We are optimistic to achieve this milestone of securing
sound fundamentals for the growing MWP in high salinity water in China under our APRAS system. Up to the end December 2018,
at AF1 we had conducted 5 trials in growing MWP in high salinity water (up to 26/1000) with mixed results. We had three trials
associated with high mortality, low yield and disease problems, one trial affected by heavy minerals in the water and the final
trial with good results where 85% of MWP reached an average body weight of 25 gram per piece during a grow-out period of 100 days
from 10 days old where the quality of the MWP were excellent and had a great natural taste.
Although the final trial’s result
was encouraging, the Company’s desire to develop and construct a production plant on 100 Mu of land next to AF1 using green-house
construction systems has been put on temporary hold until such time that the Company improves its cash-flow.
·
|
The Fresh Water Prawns (BJP)( M. Rosenbergii) & AF4/AF5
|
|
|
During 2017, the Aqua-farm (4) (“AF4”)
at the Mega Farm Project tried to grow multiple batches of Fresh Water Prawns (“BJP”) in commercial quantity
(i.e. stocked over 1 million fingerling (of PL24 days) per APM tank of 200m3 of water to nurture the fingerling up to 54 days old
supported with 4 other APM tanks for further grow-out up to 18 weeks old) but did not obtain optimal results mainly due to the
BJP having not reached their desired size on schedule, with the majority of them not showing any further growth occurring after
week 12. As such, AF 4 had to alter its plan of growing mainly BJP to growing fish (i.e. Jade Perch, Silver cods and other mixed
fish) within some of the APM tanks in order to maintain a certain level of productivity at the farm. In conjunction with this exercise,
AF4 had to develop 800 Mu of open dams (“ODRAS”) that were built using CA’s 2nd generation open dam recirculating
aquaculture systems) to grow fish to certain sizes before they were transferred to the indoor APM farm for final grow-out, and
allow the transfer of the 12 week old BJP grown in the indoor APM tanks to be moved to the ODRAS dams for further grow-out in a
larger area.
Also, in Q3 2017, AF4’s ODRAS open
dams suffered damage to its temporary built properties (i.e. the staff quarters, offices, laboratory, etc.) as well as use
of AF4, itself, losing many fish and prawns stocked in the open ODRAS dams by one of the strongest typhoons in the past decade
hitting the Mega Farm property and other areas of the southern coast of Guangdong Province. Although there was no structural damage
done to the main APM farm buildings the damage had interrupted production until repairs were performed to both the APM tanks and
ODRAS dams for the transfer of the prawn and fish, and, as such, AF4 decided in Q4 2017 to slow down its grow-out activities until
after the Chinese New Year (ended end of February 2018) and in the interim to concentrate on its research and development
work on the grow-out of BJP in the APM tanks aiming to find a solution to improve the growth rates and grow-out sizes of BJP to
18-weeks. Research will be focused on system design and water quality limitations. Progress is being made to improve in-tank water
chemical and physical characteristics, and source water mineral composition for prawn growth. In addition, progress has been made
to understand and manipulate in-tank bacterial populations to create a healthier overall rearing environment. During the first
quarter of 2018, research will also assess the biological and economic feasibility of all-female and all-male populations of prawns,
using patented endocrine disruptor technologies from third-party collaborators. Such non-GMO technologies result in overall faster
and more uniform growth of cohorts compared to mixed populations of both males and females.
In fact, the operation of AF4 (Production
factory 1), the operation of AF5 (Production factory 2) and the open dams at the Mega Farm Project had a poor start and performed
badly in 2017. During the first half of 2018, we incurred debts over RMB 30 million due the followings events and reasons:
|
(i).
|
Unsuccessful management coordination resulting in low
productivity and sales of products.
|
|
(ii).
|
Over spending on capital expenditure on Phase (1) of
the Mega Farm Project which exceeded the original budget of US$50 million by more than 60%.
|
|
·
|
As a result, it limited cash-flow to support the needs of working capital that affected the overall
production and sales.
|
|
·
|
And as a result, there were not enough funds to complete some of the supporting facilities needed
by the APM farms (i.e., the external filtration systems, lighting, electrical wiring, external drainages for waste water and connection
and fitting for the supply of fresh water etc.), supporting external water dams and waste water treatment dams, the heating facility
and part of the internal filtration systems that made it difficult for the farms to carry out their production efficiently.
|
(iii). AP4 and AP5 are the biggest AP farms that the Company built and the Company did not have a sufficient management team to support their production operations; most of the newly recruited APM farm management personnel & workers did not have the knowledge and experience with the APRAS technology and systems and as a result, there were many mistakes made during their learning curve affecting the farms’ production.
(iv). The two APM farms are the biggest indoor farms that we have ever built, and we didn't have enough experienced personnel to support their operation; and managers of other smaller sized APM farms could not work with the Mega Farm’s top management or his team under his management.
(v). The production operation of the AF4 and AF5 started prematurely before all the completion of their construction & development works leading to the situation that, at times, the property management team of the Mega Farm Project gave direction to the farm production operation teams resulting in wrong decisions that caused many mistakes.
(vi).
Guangzhou experienced a very hot summary in 2017 that killed and retarded many stocks in the open dams and one of the big
typhoons during August 2017 caused flooding that washed away hundreds of tons of fish and prawns in the open dams that
would have been ready for harvest in September & October of 2017. Also, the extremely strong Typhoon in
September 2018 caused power stoppage that killed hundreds of tons of stock including some valuable brood stock.
·
|
By May 2018, our CEO & teams (the “Team”) at head office took
the following actions:
|
1.
|
Stop all production & operation of all farms
(covering both in-door APM farms and open dam farms).
|
2.
|
Sell off most inventories in all farms.
|
3.
|
Trim down its work force by 85% or more from 155 persons.
|
4.
|
Trim down all operational expenditures of the farms
|
5.
|
Stop all capital expenditure of the MFP
|
6.
|
Reorganize the management team
|
7.
|
Form a selective team to start talking to the creditors.
|
·
|
By July 2018 the Team managed to rectify the following:
|
1.
|
All open dam operations stopped with about two tanks
of stock remaining in the APM farms.
|
2.
|
There were just 20 workers remaining at the farm complex.
|
3.
|
Closed the operation at the head quarter office at Zhongshan
City.
|
4.
|
Cut down the Mega Farm’s monthly expenditures from
RMB1.5 million/month to within RMB 450,000/month.
|
5.
|
Cut off more than 95% in capital expenditure spending.
|
6.
|
Temporary clamming down many creditors and reduced the
Mage Farm’s debt of RMB 30 million to just under RMB 21 million financed by other Segments of operation and loans granted
by friendly third parties.
|
7.
|
Starting to look into the revitalized plan of the MFP.
|
·
|
By August 2018, the Team initiated the interim direction of the MFP aiming to achieve the
following objectives & directions as soon as possible:
|
|
1.
|
Production of the APM farms are the most important fundamentals and it will not mean anything if
that cannot be achieved within a short space of time considering that the Mega Farm Project still has a monthly operational expenditure
of RMB 450,000/month excluding depreciation & amortization and the Research and Development (R&D) Team monthly wages
and expenses are adding an extra (RMB 230,000 to RMB 240,000/month) making the total operation expenses at RMB 690,000/month collectively.
|
|
2.
|
Must develop an operational team that can work effectively and cohesively for the benefit of the
Company without fraction among one another and be friendly with one another to help each other to develop efficiency and proficiency
as a team that can be relied upon. The Team must be able to work hard, relentlessly and diligently under the Chinese farming customs
and practice that is a 24/7 hours per week such that management must keep that in mind and organize their respective roster schedule
accordingly.
|
|
3.
|
All management must try to do all interim retrofitting, remodeling, and reconstruction work at
the lowest cost as possible and to use whatever is available from inventory without having to buy more new plants and equipment,
materials and parts and component etc. The moral of the spirit is that no matter how hard and difficult, the priority is production
that must be made to happen, and watch every penny that needs to be spent and don't spend any unless it is absolutely necessary.
|
|
4.
|
To have all production sections find some extra-funds (whether from its own savings or from friendly
investors) to support part of the working capital and capital expenditure needs during the interim periods. In this respect, the
past attitude of looking at hand - out from the head quarter is definitely out.
|
|
5.
|
There is no borrowing unless production will have the ability to repay the borrowings satisfactorily.
|
|
6.
|
All production must be profitable ultimately within schedule; and any mistakes (if any) must be
rectified within the shortest time possible and repetition of the same mistakes will not be tolerated.
|
|
7.
|
A suitable program in "Award and Penalty" must be formulated to provide incentives to
all working teams.
|
|
·
|
By end August 2018 the Interim Revitalization Plan was formulated and put into motion.
|
The revitalization plan has
the following basic fundamentals:
Essentially, the current Mega Farm Project
has two major divisions: (i) the Property Management division and (ii) the Production division:
|
·
|
The Property Management division is managing the properties of the Mega Farm Project by leasing
out all of the land either to external operators or internal divisional operators at rental fees according to leasing market values
(includes the open dams, in-door APM production factories and plantation land, etc.). This division supports the leases with
basic maintenance, security and supplies of utilities, etc.
|
|
·
|
The Production division will have the following subdivisions:
|
At AF4 (Factory 1)
|
1.
|
Fish fingerling production
|
|
2.
|
Mexican White Prawn (“MWP”) production
|
|
3.
|
Research and Development (R&D) and Bio-security Operation.
|
At AF5 (Factory 2)
|
1.
|
Nurturing of fish fingerling
|
At the end of December 2018, the early
winter of the Guangdong districts slowed down the revitalization programs planned for AF4 and AF5 due primarily to the external
supporting facilities (i.e. water holding dams, waste water treatment dams, external disinfection tanks and proper heating facilities
etc.) were not completed. As such, the revitalization plan of these two farms was delayed. In the meantime, operations on a small
scale are being carried out in both AF4 and AF5 with the aim of slowly recruiting the right personnel to move ahead after the spring
of 2019.
However, by August 2019, efforts of
the Company trying to revitalize Aqua-farm 4 and 5 failed due primarily to the lack of capital funding to continue to support farms’
developments and the necessity in adding new talents into the existing management teams to carry out the revitalization works,
the Company finally decided to cease operation of Aqua-farm 4 and 5 during September 2019.
·
|
R&D work and development the 3rd generation ODRAS.
|
During Q1 2017 CA acted as the turnkey
contractor to Tri-way’s Aqua-Farm 3 (formerly, PF2) helping it complete the construction and development of a 150 Mu open
dam farm (with effective production dams totaled to 90 Mu) using its 3rd generation
ODRAS technology and system (ODRAS (3G) Farm 1) at a sea-shore property in YangJiang district of Guangdong Province (the “YangJiang
Farm”) to grow Mexican White Prawns (MWP). This farm started operation in Q2 2017 and by the end of Q4 2017, it produced
over a 9 month-period a total of 600 MT of small to large sized MWP generating sales revenue of RMB7.2 million (or $1.152 million)
representing an average yield of 6 MT/Mu/9 months/3 harvests (annually yielding 8 MT/Mu) on 100 Mu of net-effective grow-out areas.
This farm was operating smoothly in 2018; however, its productivity was not as high as anticipated (i.e. current figures show 5
MT/Mu/year instead of the planned 8 MT/Mu/year). This was due mainly to the inconsistent quality of the sea water over the year
affecting the growing conditions in the open dams; as a result, we could not restock at the planned frequencies thereby reducing
the productiveness of the farm.
On December 2017, CA also acted as
a turnkey contractor to AF3 starting the construction and development of ODRAS (3G) Farm 2 on 186 Mu of land located opposite to
AF3’s old open dam farm’s property at Shenwan Town, Zhongshan City, Guangdong Province. ODRAS (3G) farm (2) is
expecting to start production operation within April 2018 targeting annual production to exceed 1000 MT (annually yielding
8 MT/Mu) on net-effective grow-out area of 130 Mu. Up to date the farm is doing better than Yangjiang farm and on target (to get
8 MT/Mu/Year) judging on its harvest during Q2 2018 due to its location where there are good sources of water underground for supply
of both salt and fresh water.
AF3’s old open dam farm’s property
located at Shenwan Town, Zhongshan City, Guangdong Province was originally 390 Mu that had been expanded to 600 Mu in 2016 and
among which 350 Mu are still operating on its old ODRAS systems, wherein 250 Mu was retrofitted into ODRAS (2G) using CA’s
2nd generation ODRAS technology and systems, starting production in Q2 2017. It
is the intension of Tri-way to retrofit the original 350 mu farm into ODRAS (3G) within 2019, again dependent on when Tri-way will
secure long-term financing. Up to date AF3 didn’t retrofit the 350 Mu due to limited funds allocated for capital expenditures
such that these dams were stocked with mixed fish (i.e. mainly fresh water Carp species and other low priced fish with constant
demands and stable prices).
At the same time since 2017, CA has been
servicing groups of farmers aiming to develop some of their properties (estimated over 600 Mu collectively) in nearby regional
districts as well as over 400 Mu of land next to ODRAS (3G) farm (1). In so far only a fraction of the land (up to 200 Mu) has
been developed in 2018.
During 2017, CA improved its designs in
ODRAS (3G) technology to have more frequencies in water flows, smaller sized grow-out dams (i.e. average of 6 Mu per dam reduced
to 2.5 Mu) that will reduce energy costs by having the dams covered by greenhouse designed structures shaded by trees in between
to act as wind breakers and weather adjusters that we think will be very adaptable in southern China to grow both MWP and BJP.
These ODRAS (3G) farms can be built at 1/3 of the price of the MWP Farm (1) mentioned earlier for approximately RMB700/m2.
Other Project Development (historical)
The Company has also, acting as a turnkey
project developer, built 8 restaurants with central kitchen and bakery facilities in the greater Guangzhou area.
|
·
|
Restaurant 1, at River South District, Guangzhou. Operated since Q1 2012.
|
|
·
|
Restaurant 2, at the UU Park Complex in Tianhe District, Guangzhou. Operated since Q3 2012.
|
|
·
|
Restaurant 3, at the Sporting Complex in Tianhe District, Guangzhou. Operated since Q1 2013. The Company stopped operating Restaurant 3 in Q3 2013 due to landlord’s failure to provide a Fire Safety Permit.
|
|
·
|
Restaurant 4, at Harbor City Shopping Center, Guangzhou. Operated since Q3 2013.
|
|
·
|
Restaurant 5, at the center of Zhungzhen City. Operated since Q1 2014.
|
|
·
|
Restaurant 6, at the Li Wan District and next to Wholesale Center 1, Guangzhou. Operated since 2014.
|
|
·
|
Restaurant 7, at Xining City which is the 2nd “BULL” restaurant established in Qinghai Province operated since 2015.
|
|
·
|
Restaurant 8, at JianJiang City, JianJiang District, Guangdong Province, operated since August 2015.
|
Intellectual Property Rights
The Company and its business are, to some
extent, dependent on patents, licenses and other intellectual property rights. As of the date of this Annual Report, the Company
holds intellectual property for fertilizer formulas, livestock feed fermenting formulas and indoor fish farm techniques. These
include an enzyme technology master license registered under a Chinese patent for the manufacturing of livestock feed and bioorganic
fertilizer, and an aromatic-feed formula technology for the production of aromatic cattle, and a bacterial cellulose technology
license.
On 12 November 2008, Tri-way Industries
Limited entered into a Sales and Purchase of Technology Master License Agreement with the inventor of a patent, Mr. Shan Dezhang,
concerning the sale and purchase of the master license rights of a patent registered in China under the name of “Zhi Wu Jei
Gan Si Liao Chan Ye Hua Ji Qi Zhi Bei Fang Fa”, with patent number ZL200510063039.9.
The patent relates to methods of processing
plant straw into animal fodder and industrialization of product of plant straw fodder. Under the agreement, Tri-way Industries
Limited is licensed to use and to license others to use the secrets, copyrights processes and other intellectual property rights
associated with the patent in any territories in the world free from all encumbrances with all rights to the patented intellectual
property and related brand and label as provided under the laws of China. The total purchase price of the patent was USD 8,000,000,
to be paid in several installments. As Tri-way Industries Limited is not a Chinese company, relevant Chinese authorities must,
under applicable Chinese law, approve the assignment. The patent assignment has not been registered. Consequently, under Chinese
law, the patent shall not take priority over the interests of third parties who are in good faith.
On 15 May 2009, Tri-way Industries
Limited (as licensor) entered into a sub-license agreement with SJAP (as licensee) concerning the sub-licensing of the above-mentioned
patent (ZL200510063039.9). The license period is 50 years, and the annual license fee is stipulated at USD 450,000. However, as
effective patent protection for the patent is 20 years, the excess part of the term is void under Chinese law. The contracting
parties of the aforesaid sub-license agreement have never performed the terms of the said agreement and no payment has ever been
made by the licensee to the licensor. The parties have no intention to perform the sub-license agreement, and the contracting parties
have terminated the said agreement accordingly.
Rights to this technology has been transferred
to HSA by SIAF after SIAF obtained it, as well as other assets, in exchange for assumed liabilities of Tri-way as a result of the
carve-out.
On 20 June 2011, SJAP entered into
an agreement with Guangzhou City Garwor Trading Company Limited, pursuant to which Guangzhou City Garwor Trading Company Limited
transferred its trademarks with registration numbers, 3713869 and 3713868, as well as a microbial patent with patent number ZL200610033295.8.
The total transfer fee for the trademarks and the patent was RMB 12 million and the transfer fee for the technology secrets was
RMB 1 million. According to the said agreement, the transfer fees shall be paid by the interest generated from the utilization
of the patent. Moreover, the said agreement stipulates that any new technology improvements of the invention shall belong to both
parties, and that any resulting profits shall be shared equally. Guangzhou City Garwor Trading Company Limited is a shareholder
in the transferee and therefore a related party. An evaluation report was not filed with the transaction. Although this is not
a formal requirement under Chinese law and the contract is valid, this may lead to the contract being challenged in the future
on the basis of unfairness. Moreover, as the transferor, Guangzhou City Garwor Trading Company Limited, is not the owner of the
trademark, the said agreement is void under Chinese law and SJAP has therefore not obtained ownership of the aforementioned trademarks.
This may be corrected if and when SJAP enters into an agreement with the trademark owner. If SJAP uses the trademark without prior
consent of the trademark owner, this would constitute trademark infringement. However, SJAP is intending to write off said trademark,
and does not intend to use the trademark in question.
Material Agreements
Joint Venture Agreements
The Company has two types of SFJVCs established under Chinese
law:
|
·
|
Contractual Joint Ventures (“CJV”); and
|
|
·
|
Equity Joint Ventures (“EJV”).
|
Of the five Chinese joint venture project companies which are
CJVs or EJVs, four are CJVs (JFD, JHMC, JHST and SJAP) and one is an EJV (HSA).1
The main difference between an EJV and
a CJV is that in a CJV, the obligation of capital contribution shall be determined by the contractual parties themselves. The proportions
of capital contribution do not have to be fixed between the Chinese and foreign parties. Profit distribution and risk sharing ratio
shall also be determined by the contracting parties themselves which do not have to be the same proportions as the parties’
capital contribution or shareholding therein. The capital contributing parties may specify their profit and risk sharing ratio
only and may or may not specify their shareholdings in the CJV. One party may make capital contribution by way of non-monetary
assets such as rights in lands, factories and machineries etc. while the other party may make capital contribution by way of cash.
In an EJV, the shareholders contribute
capital and operate business jointly, and share profits, risks and losses in proportion to their equity contributions. Foreign
investor’s capital contribution shall not be less than 25 percent of the total registered capital.
The Company engages in projects based on
consulting and service agreements (as described under “Consulting and Services Agreements” below), whereby the Company
can choose whether the cooperation shall continue under a consulting and service agreement or be acquired by the Company.
Consulting and Services Agreement
Consulting and service (“C&S”)
agreements are important for the operation of the Company’s subsidiaries and partners. Only the Company’s subsidiaries
SJAP and HSA do not and have not operated under C&S agreements.
Initially, agriculture and aquaculture
investors invite the Company to act as a developer and project manager of an agribusiness or food-related project. If the management
of the Company sees the proposal as interesting, the Company carries out an in-depth study of the target company including legal
due diligence, business plan, budget and projected financial information. The Company makes the decision through a resolution
of the Board of Directors. If the Company determines to proceed, the Chinese investor forms a private Chinese company dedicated
to the project and the parties sign a C&S agreement.
1 According to the official documents of the Company’s
Chinese subsidiary JHMC, the registered capital of such subsidiary is USD 2 million that was paid in full by year ended 31 December
2014. As of the date of this Annual Report, MEIJI, a subsidiary of the Company, has contributed USD 400,000 of the subscribed
capital, whereas USD 1.6 million of the subscribed capital has not been paid. Moreover, according to the official documents of
the Company’s Chinese subsidiary HSA, the registered capital of such subsidiary is USD 2.5 million and shall be paid in
full no later than 18 July 2013. As of the date of this Annual Report, MEIJI, a subsidiary of the Company, has contributed USD
865,000 of the subscribed capital, whereas USD 234,500 of the subscribed capital has not been paid by the Chinese owner.
The aforementioned deadlines can be re-arranged by all the promoters. If no new deadline is agreed upon, failure by MEIJI to make
full payment may lead to the other promoters making full payment of the capital contribution on MEIJI’s behalf and requesting
MEIJI to compensate for their payment and losses.
The Company acts as the project manager
providing turnkey services to the Chinese developer of the project, meaning that the Company builds the project using its technology,
systems, know-how, and management expertise and systems. As such, the Company’s expenditure in the project includes the Company’s
own administration and operational expenses provided for and incurred in the project (charged and recorded under the Company’s
general and administrative operation expenses), which are billed to the Chinese developer. All other development expenditures (inclusive
of the Company’s subcontractors’ and sub-suppliers’ costs and the Company’s marked up profits) are billed
to the Chinese developer who will pay accordingly.
When the C&S Project Company initiates
production the Company acts as the sole marketer of food products and as the supplier for the C&S Project Company under the
terms and conditions of the C&S agreement. The Company acts as the selling supplier and buying wholesaler to the company supplying
items such as feed, young cattle, and RAS technological components and buys mature prawns, sleepy cod, eels and live cattle. The
Company earns a gross profit of between 10-15% based on the C&S Project Company’s revenue on this exclusivity.
The C&S Project Company will remain
wholly-owned by the Chinese developer until the Company exercises the acquisition option and subsequently converts the company
into an SFJVC where the Chinese investor remains as a minority shareholder. The acquisition price is normally determined in accordance
with the book value of the Chinese company as of the acquisition date. Consideration will normally consist partly of cash and partly
of project loans owed by the Chinese investor, which offset and decrease the purchase proceeds in the corresponding amount. Generally,
the agreements that the Company has entered into governing the formation of the unincorporated companies into SFJVCs do not regulate
the maturity date for the formation of SFJVC. The date for the formation of the SFJVC is generally left to the discretion of the
Company, based on the development and profitability of the relevant project.
As of the date of this Annual Report, the
Company has entered into ten C&S agreements. A portion of the C&S agreements contain an acquisition premium clause, in
which the accumulated C&S project development fees billed by the Company will be paid in addition to the equity book value
at the time of acquisition. In the event that either of the investors decides to sell all or part of its equity in the SFJVC to
any third party, a portion of the agreements require the selling investor to obtain prior consent of the other investor before
such sale and to grant the right of first refusal to the other investor on the like terms for the intended sale.
As of October 1, 2016, when Tri-way
became the developer and operator of all fishery C&S Projects formerly under SIAF, CA’s new role is one of turnkey operator
appointed by and working on behalf of Tri-way.
Land leases
Private ownership of land is not permitted
in China. Therefore, the Company leases land that is either collectively owned land or state owned land, through land use rights.
Corporate entities and individuals may own the property (buildings) erected on the land.
Land use rights may be transferred, but
they are based on agricultural contracts and cannot be changed arbitrarily to non-agricultural purposes. The lease term varies
from 27 to 60 years. There are certain uncertainties (e.g., lease term may not exceed 30 years and all transfers have not yet been
registered correctly) in respect of certain leased land due to the fact that not all requirements have been fulfilled or not yet
registered. However, the Company believes it is protected against these uncertainties through its agreements with the relevant
local Chinese partners and relevant registration processes have been initiated. The Company’s subsidiary HSA has acquired
land use rights for state owned land located in OuChi Village, FengHuo Town, LinLi County, Hunan Province. However, HSA has not
obtained a land use right certificate for such land, which therefore, for the time being, cannot be lawfully mortgaged or transferred.
Moreover, the Company’s subsidiary CA has entered into a Rural Land Management Rights Sub-Sales Agreement for the acquisition
of the contractual operating and use rights of 202 mu of collective owned land located in Da San Dui Wei You Nan Village, Shenwan
Town, Zhongshan City for a period of 30 years. However, the transfer procedures for the land in question have not been completed.
CA is not an enterprise registered in mainland China and therefore, according to Chinese law, cannot acquire the contractual operating
and use rights of collective owned land. The Company is currently negotiating with Beijing Hengxintianyi Investment Guarantee Co.
Ltd. to designate a subsidiary of the Company in China for the purpose of entering into a new Rural Land Management Rights Sub-Sales
Agreement.
License Rights
Through the past 10 years (from 2007 to
present) the Company has improved and modified the Recirculating Aquaculture System (“RAS”) originally pioneered
in Germany into a unique system designed for indoor systems referred to as A Power Module (“APM indoor”) and
an outdoor module called open dam RAS (“ODRAS”). We provide two types of licenses under this technology namely,
a Developer License permitting a fishery project license to utilize the technology in its design of the APM indoor or ODRAS farms,
and an Operator license permitting the use of APM-indoor or ODRAS technology at their respective farms. Each license is granted
a 50-year term per assigned module unit for a one-time fee of $50,000 per license, that is a $50,000 fee for rights to the Developer
license and a $50,000 fee for rights to the Operator license for 50 years per developed module.
On November 12, 2008, the Company’s
subsidiary TRW entered into an agreement with the inventor of a patent, Mr. Shan Dezhang, concerning the sale and purchase
of the master license rights of a patent registered in China with patent number ZL200510063039.9.
On May 15, 2009, Tri-way (as licensor)
entered into a sub-license agreement with SJAP (as licensee) concerning the sub-licensing of the above-mentioned patent (ZL200510063039.9).
For further information on the aforementioned agreements, please refer to the section entitled “Intellectual Property Rights”
above.
Industry Overview
This section discusses the industry in
which the Company operates. Certain of the information in this section relating to market environment, market developments, growth
rates, market trends, industry trends, competition and similar information are estimates based on data compiled by professional
organizations, consultants and analysts, in addition to market data from other external and publicly available sources.
Economic outlook in China
China’s economy is at present second
only to that of the United States. China's economy is expected to expand 6.2 percent in 2019 from 6.6 percent in 2018. Growth
has slowed somewhat following government efforts to try and rein in high levels of debt. China has started feeling the effects
of the trade war with the United States, which has resulted in new tariffs on more than $250 billion of Chinese exports. Based
on the World Bank’s classification, China has had a remarkable period of rapid growth shifting from a centrally planned
to a market based economy. Today, China is an upper middle-income country that has complex development needs.
Agriculture in China
Agriculture is a vital industry in China,
employing over 300 million farmers. China ranks first in worldwide farm output, primarily producing rice, wheat, potatoes, tomato,
sorghum, peanuts, tea, millet, barley, cotton, oilseed and soybeans and also the largest consumer of many agricultural products,
such as pork, rice and soybeans. Although accounting for only 10 percent of arable land worldwide, it produces food for 20 percent
of the world's population. While China generally has been successful in meeting its rapidly rising demand for food and grains by
increasing domestic production, it has emerged as a leading global importer of several agricultural commodities, including cotton,
soybeans, vegetable oils, and animal hides. As its domestic agricultural production has grown, China has also become the largest
exporter in global markets for several horticultural products, including mandarin oranges, apples, apple juice, garlic and other
vegetables.
China’s increasingly important position
in global agricultural markets followed decades of gradual growth in domestic food production and consumption. After the introduction
of market-based reforms in 1978 that included the elimination of the collective production system and relaxation of government
direction over certain farmer production and marketing decisions, Chinese agricultural output grew significantly. Between 1978
and 2008, China almost doubled its production of grains (rice, wheat and corn) and quadrupled its production of meats; the production
of fruit and milk was about 30 times greater in 2008 than in 1978. During these three decades, population growth of about 1 percent
annually, coupled with annual per capita income growth of eight percent, fueled a large increase in demand for more and higher-value
agricultural products, especially by China’s large and growing middle class. China’s rapid growth in food consumption
was largely met by domestic production growth, enabling it to remain self-sufficient in most major commodities.
China’s support for agriculture
China’s government support for agriculture
is low compared to that of developed countries, such as the United States and European Union, but in line with that of other rapidly
growing economies, according to USITC. As measured by the OECD’s PSE2,
the amount of support provided to Chinese farmers was low (and sometimes negative) during the 1990’s, but gradually rose
during the period 2008-2010. Compared with other countries at a similar level of development, including Brazil, Mexico, Russia,
and South Africa, China’s support for farmers falls in the middle of the range. China’s PSE reflects changes in the
central government’s policy priorities from grain self-sufficiency and low consumer prices toward a stronger focus on raising
farm household incomes, according to USITC. Government support to China’s agricultural sector indicates that Chinese policymakers
are placing a renewed emphasis on the rural economy. Indirect support, in the form of general services, is very high relative to
similar support programs in other countries, due largely to investments in agricultural infrastructure. General services include
modern research and extension services, food safety agencies, and agricultural price information services, most of which provide
benefits to producers and consumers throughout the economy. Compared with direct payments to farmers, general services support
is less production-distorting to the sector.
Agricultural consumption
China is a major global consumer of agricultural
products. It consumes one-third of the world’s rice, one-fourth of all corn, and half of all pork and cotton, and it is the
largest consumer of oilseeds and most edible oils. The traditional Chinese diet centers around staple foods (mainly grains and
starches), which account for nearly half of the daily caloric intake. Average Chinese per capita consumption recently stabilized
at approximately 3,000 calories per day, one of the highest levels among Asian countries.
2 OECD: PSE is defined as
the estimated monetary value of transfers from consumers and taxpayers to farmers, expressed as a percentage of gross farm
receipts (defined as the value of total farm production at farmgate prices), plus budgetary support.
Chinese food consumption is influenced
by factors such as population size and demographics, income, food prices, and general preferences. Per capita income growth and
urbanization are the two factors most responsible for altering recent consumption patterns in China. Rising income translates into
higher per capita food consumption, while increasing urbanization is driving diversification of food choices because of greater
availability and choice offered through increasingly diverse sales outlets.
Chinese consumers generally fall into one
of three categories: rural consumers; urban low-income consumers; or urban high-income consumers. Although urban high-income consumers
can afford to buy more and better-quality food, the ubiquity of food outlets in cities means that nearly every urban resident,
regardless of income, has available an increasingly diverse food selection. Compared to rural diets, urban diets contain less grain
and more non-staple items, including processed and convenience foods. Rural migrants to cities tend to adopt the urban diet.
Expenditure on food
Food is the largest class of household
expenditure for all Chinese income groups; even housing takes a smaller share of average household income, according to USITC.
As income rises, the absolute amount of food expenditure increases, although the share of income spent on food falls. Urban residents
spend substantially more on food than their rural counterparts, according to USITC. Higher incomes lead to an increase in both
the quantity and quality of food demanded. However, while demand for higher quantities of food appears to level off in the top
income households, demand for higher-quality foods continues to rise with income.
The market for aquatic products and
aquaculture in China
The information in this section regarding
aquatic and aquaculture, including graphs, is taken from the USDA’s GAIN Report Number: CH12073 per 12/28/2012 unless otherwise
stated.3
Total Aquatic Products Production
China has the world’s largest aquatic
production and its market share of the world’s fish production has risen from 7 percent in 1961 to 37 percent by 2012. China
alone accounted for 62.5 percent of the aquaculture production in the world by volume in 2015. Aquaculture represents more than
71.9 percent of the total fish production in China. Total 2015 aquatic production in China increased 4.38 percent to reach 47.9
million tons, compared to the 45.8 million tons in 2014, per the FAO.
Fish production accounts for 59 percent
of the total aquatic production, followed by shellfish and crustaceans at 22.6 percent and 10 percent, respectively. Fish production
is, according to the USDA, expected to continue its upward growth trend to reach 34.5 million tons in 2012, up from 33 million
tons in 2011 and 31.3 million tons in 2010.
In 2011, Shandong, Guangdong, Fujian and
Zhejiang provinces profited from favorable coastal locations and abundant freshwater resources/facilities to rank as the top four
aquatic production areas. In terms of freshwater cultured production, Hubei, Guangdong, and Jiangsu provinces are the largest producers.
According to @2020 undercurrent news, China’s
seafood imports increased by 39% to $15bn in 2018.
The market for meat in China
China is by far the world’s largest
producer and consumer of meat which includes pork, poultry and beef. Historically, this situation did not have a large impact on
the rest of the world, as China, for the most part, maintained self-sufficiency in meat. However, since 2007 the situation has
changed dramatically. China has gradually turned into a net importer of meats.
World meat production was 340 million tons
in 2017.4 Global trade in meat is
projected to be 20% higher in 2027, representing a slowing down of meat trade growth to an annual average of 1.5% compared to 2.9%
during the previous decade.5 Meat
imports into Asia account for 56% of global trade, and poultry will constitute more than half of this additional import demand.
China’s meat production reached 86.60 million tons in 2018, where total meat production in the United States amounted to
47.06 million tons in 2018.
With strong economic growth and the improvement
of living standards, the demand for beef in China is rising.6
China’s animal feed market is projected to grow at a CAGR of over 16% till 2019.7
3
Definition of terms: China’s definition of aquatic products includes both cultured (farm-raised) and wild caught
products; aquatic products include fish, shrimp/prawn/crab, shellfish, algae, and other. Aquatic catch production is total volume
of both fresh and seawater wild caught aquatic products; Aquaculture production is the total volume of both fresh and seawater
cultured (farmed) aquatic products. This report will use Chinese terminology to maintain consistency between Chinese statistics
and product categories. Total aquatic trade statistics below do not include fishmeal.
4
Review of Recirculation Aquaculture System Technologies and their Commercial Application, Stirling Aquaculture, Institute
of Aquaculture.
5
Food Outlook, FAO, November 2018
6
Research Report on Beef Import in China, 2019-2023
7
China Animal Feed Market Forecast and Opportunities, 2019
There are several other specific market
drivers which underpin the increase in demand for red meat. One driver is the improved living standard in China which stimulates
the growth of beef markets since beef often sells at a much higher price and traditionally has been more expensive than what most
people can afford. Another is the fact that Chinese people’s dietary structure is becoming more diversified and reasonable,
bringing larger amount of beef consumption since beef has nutritional benefits. Lastly, a gradual lowering of import taxes is likely
to support sufficient supply of cattle.
Feed grain prices are projected to remain
low during 2018-2027. The year 2017 was affected by numerous outbreaks of Avian Influenza (AI) around the world which resulted
in a slower increase in world output. China, the second largest producer after the United States, was particularly affected by
several outbreaks over the last years. Thus, China can expect a return to historical trend growth in poultry production from 2018
onwards. Globally, the share of meat output traded is expected to remain constant at around 10%, with most of the increase in volume
coming from poultry meat. The projected production growth in developing countries remains insufficient to satisfy demand grown,
particularly in Asia and Africa. As a result, import demand is expected to remain strong.8
Market drivers
The improvement of living standard stimulates
the growth of beef markets:
Traditionally, Chinese people eat pork
and chicken to satisfy their desire for meat. This is largely due to the much higher price of beef which goes beyond normal people’s
affordable level. With the improvement of living standards, Chinese people have begun the upgrade of their consumption of meat,
and began to eat more beef.
Chinese people’s dietary structure
becomes more diversified and reasonable, bringing larger amount of beef consumption:
At present, Chinese people are changing
their diet patterns to higher and richer nutrition. From a nutritional perspective, beef not only contains high unsaturated fatty
acids and high protein, it also has low fat and lots of nutrition, which makes it perfect for the healthy diet. Thus, in the future,
beef is expected to replace some parts of the market shares in pork, chicken and other meats.9
The market for fertilizer in China
Sales of fertilizers are expected to be
supported by healthy expansion of agricultural activities as the amount of sown areas continues to grow and rural income levels
rise. Farmers will continue to register steadily increasing incomes, the result of growing crop prices and government subsidies
designed to supplement their revenues and reduce their material costs. Subsidies aimed directly at cutting the cost of fertilizers
is expected to encourage additional use. In addition, rising crop prices have encouraged farmers to invest in fertilizers to further
boost crop yields. Advances will also be driven by increases in the acreage of sown land dedicated to growing cash crops. However,
increasing demand for organic food and improved understanding of the correct application of fertilizers is expected to prevent
demand from rising at a faster pace.
In value terms, fertilizer demand is expected
to grow from over $195 billion in 2016 to over $245 billion in 2020.10
Faster value growth will be driven by strong demand for higher value multi-nutrient fertilizers. In addition, advances will be
supported by continued growth in fertilizer prices as the cost of natural gas, oil, coal, and other raw materials continues to
increase.
Demand for fertilizer nutrients in China
is projected to grow 4.4 percent annually through 2015 to 98.1 million metric tons. Nutrient demand will be stimulated by increasing
use of higher nutrient level products as income levels grow in rural areas in China. In addition, government efforts to promote
multi-nutrient fertilizers will also support gains in fertilizer nutrient demand. Accounting for more than three-fourths of total
fertilizer demand in 2010, single-nutrient fertilizers will remain the larger product type through 2015, despite a relatively low
growth rate of 2.1 percent per year. Sales of single nutrient fertilizers will continue to be supported by their relatively low
prices.
The size, growth and composition of fertilizer
demand in the six regions that make up China vary considerably. The Central-South and Central-East will remain the two largest
regional fertilizer markets. Due to the comparatively high income levels in the Central-South and Central-East -
which enable residents to afford more expensive food items - demand for cash crops
such as fruits and vegetables will rise in these regions, which in turn will fuel demand for fertilizer. Sales in the Northeast
and Northwest regions will outpace the average through 2015, benefiting from the Great Western Development Strategy, the Northeast
Revitalization Policy, and increasing income levels for farmers.11
8
Meat - OECD-FAO Agricultural Outlook 2018-2027
9
Frost & Sullivan: China’s beef market has great growth potential
10
Fertilizer Market Global Report 2017, Business Research Company
11
Fertilizers in China, Industry Study with Forecasts for 2015 & 2020, Freedonia Group; June 2012
In 2006, the central government started
a program intended to partially compensate farmers for price increases in fuel, fertilizer and other agricultural inputs. In the
case of fertilizers, government support is part of several separate programs targeting fertilizer producers, with cost reductions
being passed along to farmers purchasing the input.
GOVERNMENT REGULATION
Regulation
of M&A and Overseas Listings
On August 8,
2006, six PRC regulatory agencies, including the Ministry of Commerce (the “MOFCOM”), the State Assets Supervision
and Administration Commission, the State Administration of Taxation (“SAT”), the State Administration of Industry
and Commerce (the “SAIC”), the China Securities Regulatory Commission (“CSRC”), and the State
Administration of Foreign Exchange (the “SAFE”), jointly issued the Regulations on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8,
2006 and was amended on June 22, 2009. The M&A Rules include provisions that purport to require that an offshore
special purpose vehicle formed for purposes of the overseas listing of equity interests in PRC companies and controlled directly
or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special
purpose vehicle’s securities on an overseas stock exchange.
On September 21,
2006, the CSRC published on its official Website procedures regarding its approval of overseas listings by special purpose vehicles.
The CSRC approval procedures require the filing of a number of documents with the CSRC. The application of this new PRC regulation
remains unclear, with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the
CSRC approval requirement.
The M&A Rules also
establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming
and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a Chinese domestic enterprise.
In February 2011,
the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors (“Circular 6”), which established a security review system for
mergers and acquisitions of domestic enterprises by foreign investors. Under Circular 6, a security review is required for mergers
and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions
by which foreign investors may acquire “de facto control” of domestic enterprises with “national security”
concerns. In August 2011, the MOFCOM promulgated the Rules on Implementation of Security Review System (the “MOFCOM
Security Review Rules”), to replace the Interim Provisions of the Ministry of Commerce on Matters Relating to the Implementation
of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the MOFCOM
in March 2011. The MOFCOM Security Review Rules, which came into effect on September 1, 2011, provide that the MOFCOM
will look into the substance and actual impact of a transaction and prohibit foreign investors from bypassing the security review
requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual
arrangements or offshore transactions.
Regulation
of Foreign Currency Exchange and Dividend Distribution
The principal
regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (the “FX
Regulations”), which were last amended in August 2008. Under the FX Regulations, the RMB is freely convertible for
current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions,
but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities
outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. On August 29,
2008, the SAFE issued a notice, Circular 142, regulating the conversion by a foreign-invested company of foreign currency into
RMB by restricting how the converted RMB may be used. Circular 142 requires that the registered capital of a foreign-invested company
settled in RMB converted from foreign currencies 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. In addition, the SAFE increased its oversight
of the flow and use of the registered capital of a foreign-invested company settled in RMB converted from foreign currencies. The
use of such RMB capital may not be changed without the SAFE’s approval, and may not in any case be used to repay RMB loans
if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines.
As a result, Circular 142 may significantly limit our ability to transfer cash or other assets from The Company and/or our other
non-PRC subsidiaries into our subsidiaries in the PRC, which may adversely affect our business expansion and we may not be able
to convert the net proceeds into RMB to invest in or acquire any other PRC companies, or establish other variable interest entities
(“VIEs”) in the PRC.
Dividends paid
by a PRC subsidiary to its overseas shareholder are deemed income of the shareholder and are taxable in the PRC. Pursuant to the
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in the PRC
may purchase or remit foreign currency, subject to a cap approved by the SAFE, for settlement of current account transactions without
the approval of the SAFE. Foreign currency transactions under the capital account are still subject to limitations and require
approvals from, or registration with, the SAFE and other relevant PRC governmental authorities.
In October 2005,
the SAFE promulgated the Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and
Roundtrip Investment through Offshore Special Purpose Vehicles (“Circular 75”). Under Circular 75, which was
issued by SAFE effective November 1, 2005, prior registration with the local SAFE branch is required for PRC residents to
establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests
in an onshore enterprise located in the PRC. An amendment to the registration or filing with the local SAFE branch by such PRC
resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas
funds raised by such offshore company, or any other material change involving a change in the capital of the offshore company.
Moreover, Circular 75 applies retroactively. As a result, PRC residents who, prior to November 1, 2005, had established or
acquired control of offshore companies that had made onshore investments in the PRC prior to were required to complete the relevant
registration procedures with the local SAFE branch by March 31, 2006.
Since May 2007,
the SAFE has issued a series of guidance to its local branches with respect to the operational process for the SAFE registration
under Circular 75. The guidance provides more specific and stringent supervision of the registration required by Circular 75. For
example, the guidance imposes obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to
the local SAFE authorities regarding any shareholder or beneficial owner of the offshore entity who is a PRC citizen or resident.
Untrue statements by the onshore subsidiaries will lead to potential liability for the subsidiaries and, in some instances, for
their legal representatives and other related individuals.
Under the relevant
rules, failure to comply with the registration procedures set forth in Circular 75 may result in restrictions being imposed on
the foreign exchange activities of the relevant onshore company, including increases in its registered capital, payment of dividends
and other distributions to its offshore parent or affiliate and capital inflows from the offshore entity, and may also subject
relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC residents who control our company
from time to time are required to register with the SAFE in connection with their investments in us.
On December 25,
2006, the People’s Bank of China (the “PBOC”) issued the Administration Measures on Individual Foreign
Exchange Control and related Implementation Rules were issued by the SAFE on January 5, 2007. Both became effective on
February 1, 2007. Under these regulations, all foreign exchange transactions involving an employee share incentive plan, share
option plan, or similar plan participated in by onshore individuals may be conducted only with approval from the SAFE or its authorized
branch. Under the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock
Incentive Plan of Overseas Listed Company (“Offshore Share Incentives Rules”), which was issued by the SAFE
on February 15, 2012, PRC citizens who are granted share options, restricted share units or restricted shares by an overseas
publicly listed company are required to register with the SAFE or its authorized branch and to comply with a series of other requirements.
If we, or the PRC employees of ours who hold options, restricted share units or restricted shares fail to comply with these registration
or other procedural requirements, we, and/or such employees may be subject to fines and other legal sanctions.
The principal
regulations governing distribution of dividends of foreign holding companies include the Foreign Investment Enterprise Law (1986),
which was amended in October 2000, and the Administrative Rules under the Foreign Investment Enterprise Law (2001). Under
these regulations, foreign investment enterprises in China may pay dividends only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in China are required
to allocate at least 10% of their accumulated profits each year, if any, to fund certain reserve funds unless these reserves have
reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.
Laws and Regulations
Related to Employment and Labor Protection
On June 29,
2007, the National People’s Congress promulgated the Employment Contract Law of PRC (“Employment Contract Law”),
which became effective as of January 1, 2008, and was amended on December 28, 2012. The Employment Contract Law requires
employers to provide written contracts to their employees, restricts the use of temporary workers and aims to give employees long-term
job security.
Pursuant to the
Employment Contract Law, employment contracts lawfully concluded prior to the implementation of the Employment Contract Law and
continuing as of the date of its implementation shall continue to be performed. Where an employment relationship was established
prior to the implementation of the Employment Contract Law but no written employment contract was concluded, a contract must be
concluded within one month after its implementation.
On September 18,
2008, the State Council promulgated the Implementing Regulations for the PRC Employment Contract Law which came into effect immediately.
These regulations interpret and supplement the provisions of the Employment Contract Law.
As of December 31,
2015, we had entered written employment contracts with three of our employees.
Income Tax
On March 16,
2007, the National People’s Congress approved and promulgated the Enterprise Income Tax Law (the “EIT Law”).
On December 6, 2007, the State Council approved the Implementing Rules. Both the EIT Law and its Implementing Rules became
effective on January 1, 2008. Under the EIT Law and the Implementing Rules, which superseded the previous Income Tax Law,
the enterprise income tax rate for both domestic companies and foreign invested enterprises is unified at 25%. On December 26,
2007, the State Council promulgated the Circular on Implementation of Enterprise Tax Transition Preferential Policy, or the Preferential
Policy Circular. The EIT Law, its Implementing Rules and the Preferential Policy Circular provide a five-year transitional
period for certain entities that had enjoyed a favorable income tax rate of less than 25% under the previous Income Tax Law and
were established before March 16, 2007, during which period the applicable enterprises income tax rate shall gradually increase
to 25%.
On April 14,
2008, the Administration Measures for Recognition of High and New Technology Enterprises, or the Recognition Measures, were jointly
promulgated by the Ministry of Science and Technology, the Ministry of Finance, and the SAT, which sets out the standards and process
for granting the high and new technology enterprises status. According to the EIT Law and its Implementing Rules as well as
the Recognition Measures, enterprises which have been granted the high and new technology enterprises status shall enjoy a favorable
income tax rate of 15%. The new EIT Law and its Implementation Rules also provide that “software enterprises”
enjoy a two-year income tax exemption starting from the first profit making year, followed by a reduced tax rate of 12.5% for the
subsequent three years.
The EIT Law also
provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body”
is in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the
rate of 25% for its global income. The Implementing Rules merely defines the location of the “de facto management body”
as “the place where the exercising, in substance, of the overall management and control of the production and business operation,
personnel, accounting, properties, etc., of a non-PRC company is located.” The SAT issued the Circular regarding the
Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto
Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether
the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. The SAT
issued the Bulletin regarding the Administrative Measures on the Income Tax of Chinese-Controlled Offshore Incorporated Resident
Enterprises (Interim) on July 27, 2011, which became effective on September 1, 2011, providing more guidance on the implementation
of Circular 82. This bulletin clarifies matters including resident status determination, post-determination administration and
competent tax authorities. Although both Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises,
not companies like us, the determining criteria set forth in Circular 82 and the bulletin may reflect the SAT’s general position
on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises,
regardless of whether they are controlled by PRC enterprises or individuals. Based on a review of surrounding facts and circumstances,
the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise
for PRC tax purposes. However, due to limited guidance and implementation history of the EIT Law, should the Company be treated
as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate
of 25% retroactive to January 1, 2008.
The EIT Law also
imposes a withholding income tax of 10% on dividends distributed by a Foreign Invested Enterprise (an “FIE”)
to its immediate holding company outside of China if such immediate holding company is considered a non-resident enterprise without
any establishment or place within China or if the received dividends have no connection with the establishment or place of such
immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty
with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous law.
The State of Nevada, where the Company is incorporated, does not have such tax treaty with China. The SAT further promulgated a
circular, or Circular 601, on October 27, 2009, which provides that the tax treaty benefits will be denied to “conduit”
or shell companies without business substance and that a beneficial ownership analysis will be used based on a “substance-over-form”
principle to determine whether to grant the tax treaty benefits. Most our subsidiaries in China are directly held by our non-Chinese
subsidiaries. If we are regarded as a non-resident enterprise and our non-Chinese subsidiaries are regarded as resident enterprises,
then our non-Chinese subsidiaries may be required to pay a 10% withholding tax on any dividends payable to us. If our non-Chinese
subsidiaries are regarded as non-resident enterprises, then our PRC subsidiaries may be required to pay a 5% withholding tax for
any dividends payable to our non-Chinese subsidiaries, however, it is still unclear at this stage whether Circular 601 applies
to dividends from our PRC subsidiaries paid to our non-Chinese subsidiaries, and if our non-Chinese subsidiaries were not considered
as “beneficial owners” of any dividends from their PRC subsidiaries, whether the dividends payable to our non-Chinese
subsidiaries would be subject to withholding tax at a rate of 10%.
The EIT Law and
its Implementation Rules have tried to scrutinize transactions between related parties. Pursuant to the EIT Law and its Implementation
Rules, the tax authorities may impose mandatory adjustment on tax due to the extent a related party transaction is not in line
with arm’s-length principle or was entered with a purpose to reduce, avoid or delay the payment of tax. On January 8,
2009, the SAT issued the Implementation Measures for Special Tax Adjustments (Trial), which clarifies the definition of “related
party” and sets forth the tax-filing disclosure and documentation requirements, the selection and application of transfer
pricing methods, and transfer pricing investigation and assessment procedures.
On December 10,
2009, the SAT issued a circular on Strengthening the Administration of Enterprise Income Tax Collection on Income Derived from
Equity Transfer by Non-resident Enterprise, or Circular 698. Pursuant to Circular 698, non-resident enterprises should declare
any direct transfer of equity interest of PRC resident enterprises and pay taxes in accordance with the EIT Law and relevant laws
and regulations. For an indirect transfer, if the effective tax rate for the transferor (a non-PRC-resident enterprise) is lower
than 12.5% under the law of the jurisdiction of the direct transferred target, the transferor is required to submit relevant transaction
materials to PRC tax authorities for review. If such indirect transfer is determined by PRC tax authorities to be a transaction
without any reasonable business purpose other than for tax avoidance, the gains derived from such transfer will be subject to PRC
income tax.
In addition to
the above, after the EIT Law and its Implementing Rules were promulgated, the SAT released several regulations to stipulate
more details for carrying out the EIT Law and its Implementing Rules. These regulations include:
· Notice
of the State Administration of Taxation on the Issues Concerning the Administration of Enterprise Income Tax Deduction and Exemption
(2008);
· Notice
of the State Administration of Taxation on Strengthening the Withholding of Enterprise Income Tax on Non-resident Enterprises’
Interest Income Sourcing from China (2008);
· Notice
of the State Administration of Taxation on Several Issues Concerning the Recognition of Incomes Subject to the Enterprise Income
Tax (2008);
· Opinion
of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax (2008);
· Notice
of the Ministry of Finance and State Administration of Taxation on Several Preferential Policies in Respect of Enterprise Income
Tax (2008);
· Interim
Measures for the Administration of Collection of Enterprise Income Tax on the Basis of Consolidation of Trans-regional Business
Operations (2008);
· Several
Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (2009);
· Circular
of the State Council on Printing and Distributing Policies for Further Encouraging the Development of the Software Industry and
the Integrated Circuit Industry (2011); and
· Circular
on Income Tax Policies for Further Encouraging the Development of Software Industry and Integrated Circuit Industry (2012).
ITEM 1A. RISK FACTORS.
Investing in our common stock involves
a high degree of risk. You should carefully consider each of the following risks and all other information in this Annual Report
before deciding to invest in our common stock. If any of these risks actually occur, our business, financial condition, results
of operations, and our future growth prospects would suffer. Under these circumstances, the share price and value of our common
stock could decline and you could lose all or part of your investment. The risks and uncertainties described in this Annual Report
are the only material risks and uncertainties that we presently know to be facing our company.
This Annual Report contains forward-looking
statements. Forward-looking statements anticipate future events or future financial performance. This Annual Report also contains
market data related to our business and industry. This market data includes projections that are based on a number of assumptions. If
these assumptions turn out to be incorrect, actual results may differ from projections based on them. As a result, our markets
may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates
may have a material adverse effect on our business, results of operations, financial condition and the market price of our common
stock.
Currently, we conduct our business operations
in the People’s Republic of China. As China’s economy and its laws, regulations and policies may and do differ from
those found in the West, and change continually, we face certain risks that are summarized in this section.
Risks Related to Our Company
Subsequent to the Tri-way carve-out,
the number of direct major customers associated with SIAF subsidiaries has been reduced.
Subsequent to the Tri-way carve-out, the
number of direct major customers associated with SIAF subsidiaries has been reduced, with the concentration of major customers
now handled through the SJAP and SIAF/CA’s import/export trading division (the “Corporate Division”) via
its main distribution agent, Shanghai Virgo Trading Co. Ltd. (“Virgo”) such that a loss of business with Virgo
will have an adverse effect on SIAF’s Corporate Division operational performance. The Corporate Division accounted for 8.2%
of consolidated revenues during the fiscal year ended December 31, 2018.
We may be unable to maintain an effective
system of internal control over financial reporting, and as a result we may be unable to accurately report our financial results.
Our reporting obligations as a public company
place a significant strain on our management, operational and financial resources and systems. If we fail to maintain an effective
system of internal control over financial reporting, we could experience delays or inaccuracies in reporting our financial information,
or non-compliance with SEC reporting and other regulatory requirements. This could subject us to regulatory scrutiny and result
in a loss of public confidence in our management, which could, among other things, cause our stock price to drop.
Because we will require additional
financing to expand our vertically integrated operations according to our business plan and growth strategy, our failure to obtain
necessary financing will impair our growth strategy; in addition, the risks of vertical integration are significant.
As of December 31, 2018, we had net
working capital of $175,208,848, including cash and cash equivalents of $4,950,799. Our capital requirements to accomplish our
planned vertically integrated development and growth plan of our business are significant.
In most developed countries, risks of agriculture
operations are shared to a certain degree by different sectors in the industry. For example:
·
|
Research and development are often initiated and supported by government departments;
|
·
|
Primary producers are mainly concerned with the growing risks of the produce;
|
·
|
Marketing companies assume the risks of marketing the produce;
|
·
|
Trading houses sell the produce and assume the credit risks of the sales; and
|
·
|
Logistics companies assume the risks of transporting the produce.
|
However, as a vertically integrated operator,
we must assume all the above-mentioned risks. China is a developing country; compared to other developed nations, its agriculture
industry is not modern. Thus, management believes that it is essential for us to develop our business operation in a vertically
integrated manner so that we can achieve reasonable profit margins for our products. We believe that the multiple layers of profits
generated through vertical integration may compensate to some degree for the variety of risks that we face through the multiple
operations; however, the overall risks are much greater. At the same time, our five year plan for vertically integrated developments
is not fully completed, and the remaining developments may require significant capital expenditures and management resources. Failure
to implement these vertically integrated developments could hurt our ability to manage our growth and our financial position.
To accomplish the objectives discussed
above and to execute our business strategy, we need access to capital on appropriate terms. We currently have no commitments with
any third party to obtain such additional financing and we cannot assure you that we will be able to obtain the requisite additional
financing on any terms and, if we are able to raise additional funds, it may be necessary for us to sell our securities at a price
which is at a significant discount from the market price and on other terms which may be disadvantageous to us. In connection with
any such financing, we may be required to provide registration rights to the investors and pay damages to the investors in the
event that the registration statement is not filed or declared effective by specified dates. The price and terms of any financing
which would be available to us could result in both the issuance of a significant number of shares and significant downward pressure
on our stock price. We cannot assure you that our business objectives, particularly over the longer term, will be met on a timely
basis, if at all. Consequently, we may be unable to meet fixed obligations and expenses that will be generated in the operation
of our business, whether as presently in existence or as proposed. Any failure to obtain requisite financing on acceptable terms
could have material and adverse effect on our business, financial condition and future prospects.
No assurance of successful expansion
of operations.
Our significant increase in the scope and
the scale of our operations, including the hiring of additional personnel, has resulted in significantly higher operating expenses.
We anticipate that our operating expenses will continue to increase. Expansion of our operations may also make significant demands
on our management, finances and other resources. Our ability to manage the anticipated future growth, should it occur, will depend
upon a significant expansion of our accounting and other internal management systems and the implementation and subsequent improvement
of a variety of systems, procedures and controls. We cannot assure that significant problems in these areas will not occur. Failure
to expand these areas and implement and improve such systems, procedures and controls in an efficient manner at a pace consistent
with our business could have a material adverse effect on our business, financial condition and results of operations. We cannot
assure that attempts to expand our marketing, sales, manufacturing and customer support efforts will succeed or generate additional
sales or profits in any future period. As a result of the expansion of our operations and the anticipated increase in our operating
expenses, along with the difficulty in forecasting revenue levels, we expect to continue to experience significant fluctuations
in its results of operations.
We may be unable to successfully
expand our production capacity, which could result in material delays, quality issues, increased costs and loss of business opportunities,
which may negatively impact our product margins and profitability.
Part of our future growth strategy
is to increase our production capacity to meet increasing demand for our goods. Assuming we obtain sufficient funding to increase
our production capacity, any projects to increase such capacity may not be constructed on the anticipated timetable or within budget.
We may also experience quality control issues as we implement any production upgrades. Any material delay in completing these projects,
or any substantial cost increases or quality issues in connection with these projects could materially delay our ability to bring
our products to market and adversely affect our business, reduce our revenue, income and available cash, all of which could harm
our financial condition.
Our business and operations are growing
rapidly. If we fail to effectively manage our growth, our business and operating results could be harmed.
We have experienced, and may continue to
experience, rapid growth in our operations. This has placed, and may continue to place, significant demands on our management,
operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products and services
could suffer, which could negatively affect our operating results. To effectively manage our growth, we must continue to improve
our operational, financial and management controls and reporting systems and procedures. These systems improvements may require
significant capital expenditures and management resources. Failure to implement these improvements could hurt our ability to manage
our growth and our financial position.
If the Chinese government were to
change its presently favorable policy toward the agriculture industry, we would no longer enjoy our present tax-related privileges,
which would materially and adversely impact our sales performance, margins, and net profit and our costs structure.
As producers active in the agriculture
industry, our subsidiaries are presently exempt from income tax and enjoy various incentive grants and subsidies given by the Chinese
government. If the Chinese government were to change its presently favorable policy toward the agriculture industry, we would no
longer enjoy our present tax-related privileges, which would materially and adversely impact our sales performance, margins, and
net profit and our costs structure. We have experienced, and may continue to experience, quick changes of policies by the Chinese
government. If we do not effectively and efficiently manage our growth on time due to lack of capital, we could suffer adversely
from the consequences of any such policy changes.
Our intellectual property rights
are valuable, and any inability to adequately protect, or uncertainty regarding validity, enforceability or scope of them could
undermine our competitive position and reduce the value of our products, services and brand, and litigation to protect our intellectual
property rights may be costly.
We attempt to strengthen and differentiate
our product portfolio by developing new and innovative products and product improvements. As a result, our patents, trademarks,
trade secrets, copyrights and other intellectual property rights are important assets to us. Various events outside of our control
pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual
property protection may not be available in China and other countries in which our products are sold. Also, although we have registered
our trademark in China, our efforts to protect our proprietary rights may not be sufficient or effective. Any significant impairment
of our intellectual property rights could harm our business or our ability to compete and hurt our results of operation. Also,
protecting our intellectual property rights is costly and time consuming. Policing unauthorized use of our proprietary technology
can be difficult and expensive. Litigation might be necessary to protect our intellectual property rights. But due to the relative
unpredictability of the Chinese legal system and potential difficulties to enforce a court’s judgment in China, there is
no guarantee that litigation would result in a favorable outcome. Furthermore, any such litigation may be costly and may divert
our management’s attention from our core business. An adverse determination in any lawsuit involving our intellectual property
is likely to jeopardize our business prospects and reputation. Although we are not aware of any of such litigation, we have no
insurance coverage against the litigation costs so we would be forced to bear all litigation costs if we cannot recover them from
other parties. All foregoing factors could harm our business, financial condition, and results of operations. Any unauthorized
use of our intellectual property could make it more expensive for us to do business and harm our operating results.
We may be exposed to infringement
or misappropriation claims by third parties, which, if determined against us, could adversely affect our business and subject us
to significant liability to third parties.
Our success mainly depends on our ability
to use and develop our technology and product designs without infringing upon the intellectual property rights of third parties.
We may be subject to litigation involving claims of patent infringement or violations of other intellectual property rights of
third parties. Holders of patents and other intellectual property rights potentially relevant to our product offerings may be unknown
to us, which may make it difficult for us to acquire a license on commercially acceptable terms. There may also be technologies
licensed to us and that we rely upon that are subject to infringement or other corresponding allegations or claims by third parties
which may damage our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work
with us possess appropriate intellectual property rights or licenses, we cannot fully avoid the risks of intellectual property
rights infringement created by suppliers of components used in our products or by companies we work with in cooperative research
and development activities. Our current or potential competitors may have obtained or may obtain patents that will prevent, limit
or interfere with our ability to make, use or sell our products. The defense of intellectual property claims, including patent
infringement suits, and related legal and administrative proceedings can be both costly and time consuming, and may significantly
divert the efforts and resources of our technical personnel and management. These factors could effectively prevent us from
pursuing some or all of our business operations and result in our customers or potential customers deferring, canceling or limiting
their purchase or use of our products, which may have a material adverse effect on our business, financial condition and results
of operations.
We rely on highly skilled personnel
and the continuing efforts of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our
business may be severely disrupted.
Our performance largely depends on the
talents, knowledge, skills, know-how and efforts of highly skilled individuals and in particular, the expertise held by our chief
executive officer, Solomon Lee. His absence, were it to occur, could impact development and implementation of our projects and
businesses. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled
personnel for all areas of our organization. Our continued ability to compete effectively depends on our ability to attract new
technology developers and to retain and motivate our existing contractors. If one or more of our executive officers are unable
or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business
may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our
executives joins a competitor or forms a competing company, we may lose some customers.
Our financial and operating performance
may be adversely affected by adverse weather conditions, natural disasters and other catastrophes.
Our financial and operating performance
may be affected adversely by epidemics, bad weather conditions, natural disasters and other catastrophes. Our HU plantation and
Mega Farm is situated in Enping district and Zhongshan district which are subject to flooding, especially during the typhoon season
(from July through September); for examples we lost many live fish and prawns grown in our open dam area of 450 Mu at the
Zhongshan Mage Farm due to flooding in 2017 and again the same farm lost most of its fish breed stocks due to power stoppage caused
by the typhoon; meanwhile, at Enping’s HU Plantation we lost all the winter cash crops planted during August 2018 and
50 Mu of nursery herbal tea plants and 200 Mu of passion fruit tree planted during Q2 2018.
We do not expect to encounter any epidemics
in our aquaculture fishery farms in districts of the Guangdong Province or cattle farms in Huangyuan District of the Qinghai Province.
However in the event of epidemics, we expect that our marine animals and our cattle will be quarantined until such time as a sanitary
certificate for clean bill of health is obtained, before any of our products will be sold. In an extreme situation where our products
would fail to obtain the sanitary certificate, they will be destroyed subject to the direction of the Inspection Authorities of
the Agriculture Department of China. There is compensation granted by the Chinese government for the destruction of our products
but only for a fraction of our cost of production; as such the Company will bear virtually all losses under such circumstances.
If we make any acquisitions, they
may disrupt or have a negative impact on our business.
Although we have no present plans for any
specific acquisitions, in the event that we make acquisitions, we could have difficulty integrating the acquired companies’
personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us.
We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition,
the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition
to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
·
|
difficulty of integrating acquired products, services or operations;
|
·
|
potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
|
·
|
difficulty of incorporating acquired rights or products into our existing business;
|
·
|
difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities;
|
·
|
difficulties in maintaining uniform standards, controls, procedures and policies;
|
·
|
potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
|
·
|
potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;
|
·
|
effect of any government regulations which relate to the business acquired;
|
·
|
potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition.
|
Our business could be severely impaired
if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection
with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely affect our results of operations.
We face significant competition,
including changes in pricing.
The markets for our products are both competitive
and price sensitive. Many competitors have significant financial, operations, sales and marketing resources, plus experience in
research and development, and compete with us by offering lower prices. Competitors could develop new technologies that compete
with our products to achieve a lower unit price. If a competitor develops lower cost superior technology or cost-effective alternatives
to our products and services, our business could be seriously harmed.
The markets for some of our products are
also subject to specific competitive risks because these markets are highly price competitive. Our competitors have competed in
the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This
would reduce sales revenues and increase losses. Failure to anticipate and respond to price competition may also impact sales and
aggravate losses.
Many of our competitors are larger
and have greater financial and other resources than we do.
Our products compete and will compete with
similar if not identical products produced by our competitors. These competitive products could be marketed by well-established,
successful companies that possess greater financial, marketing, distribution personnel, and other resources than we do. Using said
resources, these companies can implement extensive advertising and promotional campaigns, both generally and in response to specific
marketing efforts by competitors. They can introduce new products to new markets more rapidly. In certain instances, competitors
with greater financial resources may be able to enter a market in direct competition with us, offering attractive marketing tools
to encourage the sale of products that compete with our products or present cost features that consumers may find attractive.
Risks Related to our Industry
Our agricultural assets are situated
in three provinces in China and crop disease, severe weather, natural disasters and other conditions affecting the environment,
including the effects of climate change, could result in substantial losses and weaken our financial condition.
Our agricultural operations are situated
in Qinghai Province, Hunan and Guangdong Province. Qinghai Province in particular is subject to occasional periods of drought.
Crops require water in different quantities at different times during the growth cycle. The limited water resource at any given
point can adversely impact production. In Qinghai our cropping and pasture land presently comprises over 5,000 acres, an area too
big and too costly to afford drip irrigation systems for our crops. In Hunan, the district of Linli where we have over 300 acres
of crop and pasture land may from time to time be subject to flooding that could affect our agriculture production. In Enping,
Guangdong, our HU Plants are very susceptible to dry and wet seasonal variation that could also affect our agriculture production.
Crop disease, severe weather conditions,
such as floods, droughts, windstorms and hurricanes, and natural disasters, may adversely affect our supply of one or more products,
reduce our sales volumes, increase our unit production costs or prevent or impair our ability to ship products as planned. Since
a significant portion of our costs are fixed and contracted in advance of each operating year, volume declines due to production
interruptions or other factors could result in increases in unit production costs, which could result in substantial losses and
weaken our financial condition. We may experience crop disease, insect infestation, severe weather and other adverse environmental
conditions from time to time.
Severe weather conditions may occur with
higher frequency or may be less predictable in the future due to the effects of climate change.
An occurrence of such an event might result
in material disruptions to our operations, to the operations of our customers or suppliers, resulting in a decline in the agriculture
industry. There can be no assurance that our facilities or products will not be affected by any such occurrence in the future,
which occurrence may lead to adverse conditions to our operations and financial results.
Prices of agricultural products are
subject to supply and demand, a market condition which is not predictable.
Because our agricultural products are commodities,
we are not able to predict with certainty what price we will receive for our products. Additionally, the growth cycle of such products
in many instances dictates when such products must be marketed to achieve the maximum profitability. Excessive supplies tend to
cause severe price competition and lower prices throughout the industry affected. Conversely, shortages may drive the prices higher.
Shortages often result from adverse growing conditions which can reduce the availability of the agricultural products affected.
Since multiple variables can affect supply and demand, we cannot accurately predict or control from year to year what prices, either
favorable or unfavorable, it will receive from the market.
In addition, general public perceptions
regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some
of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons,
and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased
demand for our products. However, even if market prices are unfavorable, some of our agricultural products which are ready to be,
or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the
factors described above could have a material adverse effect on our business, results of operations and financial condition.
We could realize losses and suffer
liquidity problems due to declines in sales prices for our agriculture products.
Sales prices for agricultural products
are difficult to predict. It is possible that sales prices for our products will decline in the future, and sales prices for other
agricultural products may also decline. In recent years, there has been increasing consolidation among food retailers, wholesalers
and distributors. A significant portion of our costs is fixed, so that fluctuations in the sales prices have an immediate impact
on our profitability. Our profitability is also affected by our production costs, which may increase due to factors beyond our
control.
We are subject to the risk of product
contamination and product liability claims.
The sales of our products may involve the
risk of injury to consumers. Such injuries may result from tampering by unauthorized personnel, product contamination or spoilage,
including the presence of foreign objects, substances, chemicals, or residues introduced during the growing, packing, storage,
handling or transportation phases. While we are subject to governmental inspection and regulations and believe our facilities comply
in all material respects with all applicable laws and regulations, including internal product safety policies, we cannot be sure
that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims
or lawsuits relating to such matters. Even if a product liability claim is unsuccessful, the negative publicity surrounding any
assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers
and our brand image. We do not maintain product liability insurance.
We may not be successful in the implementation
of our new technologies and new products, and our new products may not be widely accepted.
Our new technologies such as our drip irrigation
system for precision agriculture or the introduction, testing and promotion of new agricultural varieties, must be able to adapt
to local conditions. The term “drip irrigation” refers to a system whereby the exact amount of water is supplied to
the plants’ roots at the correct moment. On the one hand, there exists the failure risk due to not being suitable for the
local environment and market conditions; on the other hand, there are risks of loss of competitive advantages due to the rising
of producing similar products enterprises and other enterprises that follow to produce the similar products.
We are a holding company whose subsidiaries
are given certain degree of independence and our failure to integrate our subsidiaries may adversely affect our financial condition.
According to the specific characteristics
of agricultural production in China, we have given our subsidiary companies and their farms a certain degree of independency in
decision-making. On one hand, this independency increases the sense of ownership at all levels, on the other hand it has also increased
the difficulty of the integration of operation and management, which has resulted in increased difficulty of management integration.
In the event we are not able to successfully manage our subsidiaries this will result in operating difficulties and have a negative
impact on our business.
One or more distributors could engage
in activities that harm our brand and our business.
Our products are sold primarily through
distributors, who are responsible for ensuring that our products have the appropriate licenses to be sold to farmers in their provinces,
and are stored at the correct temperature to ensure freshness and meet shelf life terms. If distributors do not obtain 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 their provinces,
which could further adversely impact our sales. In addition, distributors may sell our products under another brand 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 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. Furthermore, if any of
our distributors sell inferior seeds produced by other companies under our brand name, our brand and reputation could be harmed,
which could make marketing of our branded seeds more difficult. As of the date of this Annual Report, we are not aware of the occurrence
of any of the potential violations by our distributors described above.
The PRC 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 highly competitive, and we expect competition to increase and intensify within the sector. We
face significant competition in our lines of business. Many of our competitors have greater financial, research and development
and other resources than we have. Competition may also develop from consolidation within our industry in China or the privatization
of producers that are currently operated by local governments in China. Our competitors may be better positioned to take advantage
of industry consolidation and acquisition opportunities than we are. The reform and restructuring of state-owned equity in enterprises
involved primarily in producing sectors will likely lead to the reallocation of market share in the agriculture industry, and our
competitors may increase their market share by participating in the restructuring of state-owned agriculture companies. Such privatization
would likely result in increased numbers of market participants with more efficient and commercially viable business models. As
competition intensifies, our margins may be compressed by more competitive pricing and we may lose our market share and experience
a reduction in our revenues and profit.
We may not possess all of the licenses
required to operate our business, or we may fail to maintain the licenses we currently hold. This could subject us to fines and
other penalties, which could materially adversely affect our results of operations.
We are required to hold a variety of permits
and licenses to conduct business in China. We may not possess all of the permits and licenses required for each of our business
segments. In addition, the approvals, permits or licenses required by governmental agencies may change without substantial advance
notice, and we could fail to obtain the approvals, permits or licenses required to expand our business. If we fail to obtain or
to maintain such permits or licenses, or if renewals are granted with onerous conditions, we could be subject to fines and other
penalties and be limited in the number or the quality of the products that we could offer. As a result, our business, results of
operations and financial condition could be materially and adversely affected.
Risks Related to Doing Business in China
Under PRC law, we are required to
obtain and retain permits and business licenses, and our failure to do so would adversely impact our ability to conduct business
in China.
We hold various permits, business licenses,
and approvals authorizing our operations and activities, which are subject to periodic review and reassessment by the Chinese authorities.
Standards of compliance necessary to pass such reviews change from time to time and differ from jurisdiction to jurisdiction, leading
to a degree of uncertainty. If renewals, or new permits, business licenses or approvals required in connection with existing or
new facilities or activities, are not granted or are delayed, or if existing permits, business licenses or approvals are revoked
or substantially modified, we may not be able to continue to operate our facilities which would have a material adverse effect
on our operations. If new standards are applied to renewals or new applications, it could prove costly for us to meet these new
standards.
The PRC economic cycle may negatively
impact our operating results.
We believe that the rapid growth of the
PRC economy before 2008 generally led to higher levels of inflation. We believe that the PRC economy has more recently experienced
a decrease in its growth rate. We believe that a number of factors have contributed to this deceleration, including appreciation
of the RMB, the currency of China, which has adversely affected China’s exports. In addition, we believe the deceleration
has been exacerbated by the recent global crisis in the financial services and credit markets, which has resulted in significant
volatility and dislocation in the global capital markets. It is uncertain how long the global crisis in the financial services
and credit markets will continue and the significance of the adverse impact it may have on the global economy in general or the
Chinese economy in particular. Slowing economic growth in China could result in weakening growth and demand for our products, which
could reduce our revenues and income. In the event of a recovery in the PRC, renewed high growth levels may again lead to inflation.
The government’s attempts to control inflation may adversely affect the business climate and growth of private enterprise.
In addition, our profitability may be adversely affected if prices for our products rise at a rate that is insufficient to compensate
for the rise in inflation.
Currency fluctuations and restrictions
on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi (RMB) into foreign
currencies and, if the RMB were to decline in value, reducing our revenue in U.S. dollar terms.
The exchange rate of the RMB is currently
managed by the Chinese government. On July 21, 2005, the People’s Bank of China, with the authorization of the State
Council of the PRC, announced that the RMB exchange rate would no longer be pegged to the U.S. Dollar and would float based on
market supply and demand with reference to a basket of currencies. According to public reports, the governor of the People’s
Bank has stated that the basket is composed mainly of the U.S. Dollar, the European Union Euro, the Japanese Yen and the South
Korean Won. Also considered, but playing smaller roles, are the currencies of Singapore, the United Kingdom, Malaysia, Russia,
Australia, Canada and Thailand. The weight of each currency within the basket has not been announced.
The initial adjustment of the RMB exchange
rate was an approximate 2% revaluation from an exchange rate of 8.28 RMB per U.S. Dollar to 8.11 RMB per U.S. Dollar. The People’s
Bank announced that the daily trading price of the U.S. Dollar against the RMB in the inter-bank foreign exchange market would
float within a band of 0.3% around the central parity published by the People’s Bank, while trading prices of non-U.S. Dollar
currencies against the RMB would be allowed to move within a certain band announced by the People’s Bank. The People’s
Bank has stated that it will make adjustments of the RMB exchange rate band when necessary according to market developments as
well as the economic and financial situation. In a later announcement published on May 18, 2007, the band was extended to
0.5%. Since July 2008, the RMB has traded at 6.83 RMB per U.S. Dollar. Recent reports indicate an upward revaluation in the
value of the RMB against the U.S. Dollar may be allowed. The People’s Bank announced on June 19, 2010 its intention
to allow the RMB to move more freely against the basket of currencies, which increases the possibility of sharp fluctuations in
the value of the RMB in the near future and thus the unpredictability associated with the RMB exchange rate.
However the RMB in 2018 is very sensitive
to and influenced by its political situation with USA illustrated by its multiple changes in depreciation and appreciation against
the US$ during the past year.
Despite this change in its exchange rate
regime, the Chinese government continues to manage the valuation of the RMB. The value of our common stock will be indirectly affected
by the foreign exchange rate between the U.S. dollar and the RMB. Appreciation or depreciation in the value of the RMB relative
to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change
in our business or results of operations.
The income statements of our operations
are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens
against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies,
the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income
for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements
of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion
of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded
as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies
other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities
create fluctuations that will lead to a transaction gain or loss.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While
we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure. In addition, our foreign currency exchange losses may be magnified by
PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Uncertainties with respect to the
PRC legal system could adversely affect us and we may have limited legal recourse under PRC law if disputes arise under our contracts
with third parties.
Since 1979, we believe PRC legislation
and regulations have significantly enhanced protections afforded to various forms of foreign investments in China. However, China
has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects
of economic activities in China. In particular, because these laws and regulations are relatively new, the interpretation and enforcement
of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies
and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a
result, sometimes we may not be aware of our violation of these policies and rules until sometime after violation.
The Chinese government has enacted laws
and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and
trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability
to enforce commercial claims or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject
to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a
particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction
under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal
system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse
effect on our business, financial condition and results of operations.
Under the PRC EIT Law, we may be
classified as a “resident enterprise” of the PRC. Such classification could result in tax consequences to the Company
or our non-PRC resident shareholders.
On March 16, 2007, the National People’s
Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which
took effect on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises.
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 bodies” as a managing body that in practice
exercises “substantial and overall management and control over the production and operations, personnel, accounting, and
properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as
being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities
determine the PRC tax resident treatment of a foreign company on a case-by-case basis.
If the PRC tax authorities determine that
we are a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow.
First, we could be subject to the enterprise income tax at a rate of 25 percent 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 between “qualified
resident enterprises” are exempt from enterprise income tax. As a result, if we are treated as a PRC “qualified
resident enterprise,” all dividends paid from our Chinese subsidiaries to us would be exempt from PRC tax.
Finally, the new “resident enterprise”
classification could result in a situation in which a 10% PRC tax is imposed on dividends we pay to our non-PRC stockholders that
are not PRC tax “resident enterprises” and gains derived by hem from transferring our common stock, if such income
is considered PRC-sourced income by the relevant PRC authorities. In such event, we may be required to withhold a 10% PRC tax on
any dividends paid to non-PRC resident stockholders. Our non-PRC resident stockholders also may be responsible for paying PRC tax
at a rate of 10% on any gain realized from the sale or transfer of our common stock in certain circumstances. We would not, however,
have an obligation to withhold PRC tax with respect to such gain.
Moreover, the SAT released Circular Guoshuihan
No. 698 (“Circular 698”) on December 15, 2009 that reinforces the taxation of non-listed equity transfers
by non-resident enterprises through overseas holding vehicles. Circular 698 addresses indirect share transfers as well as other
issues. Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a foreigner (non-PRC
resident) who indirectly holds shares in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers
equity interests in a PRC resident enterprise by selling the shares of the offshore holding company, and the latter is located
in a country or jurisdiction where the effective tax burden is less than 12.5 percent or where the offshore income of his, her,
or its residents is not taxable, the foreign investor is required to provide the PRC tax authority in charge of that PRC resident
enterprise with certain relevant information within 30 days of the transfer. The tax authorities in charge will evaluate the offshore
transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization
and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking,
the PRC tax authorities will be able to re-assess the nature of the equity transfer under the doctrine of substance over form.
A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up
to comply with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s
challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning
purposes and subject the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a relatively short history,
there is uncertainty as to its application. We (or a foreign investor) may become at risk of being taxed under Circular 698 and
may be required to expend valuable resources to comply with Circular 698 or to establish that we (or such foreign investor) should
not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations
(or such foreign investor’s investment in us).
If any such PRC taxes apply, a non-PRC
resident stockholder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a foreign tax
credit against such stockholder’s domestic income tax liability (subject to applicable conditions and limitations). Prospective
investors are encouraged to consult with their own tax advisors regarding the applicability of any such taxes, the effects of any
applicable income tax treaties, and any available foreign tax credits.
Failure to comply with PRC regulations
relating to the establishment of offshore special purpose companies by PRC residents may materially adversely affect us.
In October 2005, the SAFE issued the
Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies
by Residents inside China, generally referred to as Circular 75. The policy announced in this notice required PRC residents to
register with the relevant SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV,
for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those
residents. Failure to comply with the requirements of Circular 75 and any of its internal implementing guidelines as applied
by SAFE in accordance with Notice 106 may result in fines and other penalties under PRC laws for evasion of applicable foreign
exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing
their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other
transfers of funds into or out of China.
We requested our shareholders who are PRC
residents to make the necessary applications, filings and amendments as required under Circular 75 and other related rules. We
attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements.
However, we cannot provide any assurances that our shareholders who are PRC residents will comply with our request to make any
applicable registrations, and nor can we provide any assurances that our shareholders who are PRC residents will be able to obtain
such applicable registration or comply with other requirements required by Circular 75 or other related rules or that,
if challenged by government agencies, the structure of our organization fully complies with all applicable registrations or approvals
required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or
whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. Failure by
such PRC resident shareholders or future PRC resident shareholders to comply with Circular 75 or other related rules, if SAFE requires
it, could subject these PRC resident shareholders to fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our subsidiaries’ ability to make distributions or pay dividends, or affect our ownership structure, which
could adversely affect our business and prospects.
Adverse changes in political and
economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which
could reduce the demand for our products and materially and adversely affect our competitive position.
Our business, financial condition, results
of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy
differs from the economies of most developed countries in many respects, including:
·
|
the amount of government involvement;
|
·
|
the level of development;
|
·
|
the control of foreign exchange; and
|
·
|
the allocation of resources.
|
While the Chinese economy has grown significantly
in the past 20 years, we believe the growth has been uneven, both geographically and among various sectors of the economy. The
Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. We believe
some measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition
and results of operations may be adversely affected by government control over capital investments or changes in tax regulations
that are applicable to us.
The Chinese economy has been transitioning
from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures
emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is
still owned by the Chinese government. The Chinese government also exercises significant control over Chinese economic growth through
the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies.
Contract drafting, interpretation
and enforcement in China involve significant uncertainty.
We have entered into numerous contracts
governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed
by PRC law tend to contain less detail and to not be as comprehensive in defining contracting parties’ rights and obligations.
As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and
enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such
disputes arise, we cannot assure you that we will prevail.
The application of PRC regulations
relating to the overseas listing of PRC domestic companies is uncertain, and we may be subject to penalties for failing to request
approval of the PRC authorities prior to listing our shares in the U.S.
As mentioned above, on August 8, 2006,
six PRC government agencies, i.e., MOFCOM, the SAIC, the CSRC, SAFE, the State-Owned Assets Supervision and Administration Commission
(“SASAC”) and SAT, jointly issued the New M&A Rules, which became effective on September 8, 2006. The
New M&A Rules purport, among other things, to require offshore “special purpose vehicles” that are (1) formed
for the purpose of overseas listing of the equity interests of PRC companies via acquisition and (2) are controlled directly
or indirectly by PRC companies and/or PRC individuals, to obtain the approval of the CSRC prior to the listing and trading of their
securities on overseas stock exchanges. On September 21, 2006, pursuant to the New M&A Rules and other PRC Laws,
the CSRC published on its official website relevant guidance with respect to the listing and trading of PRC domestic enterprises’
securities on overseas stock exchanges (the “Related Clarifications”), including a list of application materials
regarding the listing on overseas stock exchanges by special purpose vehicles. We were and are not required to obtain the approval
of CSRC under the new M&A Rules in connection with this transaction because we were and are not a special purpose vehicle
formed or controlled by PRC individuals.
However, there are substantial uncertainties
regarding the interpretation, application and enforcement of these rules, and CSRC has yet to promulgate any written provisions
or formally to declare or state whether the overseas listing of a PRC-related company structured similar to ours is subject
to the approval of CSRC. Any violation of these rules could result in fines and other penalties on our operations in China,
restrictions or limitations on remitting dividends outside of China, and other forms of sanctions that may cause a material and
adverse effect to our business, operations and financial conditions.
The New M&A Rules also established
additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming
and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks or China’s traditional
brands. We may grow our business in part by acquiring other businesses. Complying with the requirements of the New M&A Rules in
completing this type of transaction could be time-consuming, and any required approval processes, including CSRC approval, may
delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our
market share.
We may face regulatory uncertainties
that could restrict our ability to issue equity compensation to our directors and employees and other parties who are PRC citizens
or residents under PRC law. The grant of stock options under any incentive plan that we adopt in the future would require registration
with SAFE.
On April 6, 2007, SAFE issued the
“Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock
Option Plan of An Overseas Listed Company,” also known as “Circular 78”. It is not clear whether Circular 78
covers all forms of equity compensation plans or only those that provide for the grant of stock options. For any equity compensation
plan which is so covered and is adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants
who are PRC citizens to register with, and obtain the approval of, SAFE prior to their participation in any such plan. In addition,
Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participate
in an overseas listed company’s covered equity compensation plan prior to April 6, 2007. As of the date of this filing,
we have not adopted any incentive plans, but may do so in the future. Any such plan may grant equity compensation, including, but
not limited to, stock options, to our PRC employees and/or directors. The grant of any equity compensation under such a plan to
a PRC citizen, however, may under Circular 78 require the PRC citizen to register with and obtain approval of SAFE. We believe
that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it is determined
that our such a plan, or any equity compensation grant under such a plan, is subject to Circular 78, failure to comply with such
provisions of Circular 78 may subject us and any recipients thereof to fines and legal sanctions and prevent us from being able
to grant equity compensation to our PRC employees and/or directors. In that case, our ability to compensate our employees
and directors through equity compensation would be hindered and/or prevented.
Capital outflow policies in the PRC
may hamper our ability to remit income to the United States.
The PRC has adopted currency and capital
transfer regulations. These regulations may require that we comply with complex regulations for the movement of capital and as
a result we may not be able to remit all income earned and proceeds received in connection with our operations or from the sale
of our operating subsidiary to the U.S. or to our stockholders.
Our operations and assets in the
PRC are subject to significant political and economic uncertainties.
Government policies are subject to rapid
change and the government of the PRC may adopt policies that have the effect of hindering private economic activity and greater
economic decentralization. There is no assurance that the government of China will not significantly alter its policies from
time to time without notice in a manner with reduces or eliminates any benefits from its present policies of economic reform. In
addition, a substantial portion of productive assets in China remains government-owned. For instance, all lands are state or rural
collective economic organizations owned and leased to business entities or individuals through governmental grants of the land
use rights. The grant process is typically based on government policies at the time of the grant, which could be lengthy and complex.
This process may adversely affect our business. The government of China also exercises significant control over China’s economic
growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular
industries or companies. Uncertainties may arise as a result of changing governmental policies and measures. In addition, changes
in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion,
imports and sources of supply, devaluations of currency, the nationalization or other expropriation of private enterprises, as
well as adverse changes in the political, economic or social conditions in China, could have a material adverse effect on
our business, results of operations and financial condition.
Our use of the allocated land may
be subject to challenges in the future.
All land use rights that we own are land
use rights relating to allocated land. The local governmental authorities have granted such land use rights to us for free use
or at a discounted levy rate given our contribution to the development of the local economy. However, pursuant to the Catalogue
on Allocated Land issued by the Ministry of Land Resources of the PRC (the “Catalogue”), the land use rights
for allocated land may only be granted to those specific projects which are in compliance with the Catalogue, subject to the approval
of the competent governmental authorities. We, as a privately owned agricultural producer, may not be qualified to be granted such
land use rights for allocated land according to the Catalogue. Consequently, our use of such land may be subject to challenge in
the future, and the legal consequences could include the confiscation of such land by the governmental authorities or a demand
that we pay a market price for purchasing the land use rights for such land and converting the allocated land use right to a granted
land use right.
Because Chinese law governs almost
all of our material agreements, we may not be able to enforce our legal rights within China or elsewhere, which could result in
a significant loss of business, business opportunities, or capital.
Chinese law governs almost all of our material
agreements. We cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available
outside of China. The system of laws and the enforcement of existing laws in China may not be as certain in implementation and
interpretation as in the United States. Our inability to enforce or obtain a remedy under any of our current or future agreements
could result in a significant loss of business, business opportunities or capital. It will be extremely difficult to acquire jurisdiction
and enforce liabilities against our officers, directors and assets based in China.
Substantially all of our assets will be
located in the PRC and all of our officers and our present directors reside outside of the United States. As a result, it may not
be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers
or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers
under federal securities laws. Moreover, we have been advised that China does not have treaties providing for the reciprocal recognition
and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between
the United States and China would permit effective enforcement of criminal penalties of the federal securities laws.
We do not have insurance coverage.
We currently do not purchase property insurance
for our properties, including raw materials, semi-manufactured goods, manufactured goods, buildings and machinery equipment, livestock,
and we currently do not carry any product liability or other similar insurance, nor do we have business liability or business disruption
insurance coverage for our operations in the PR. There is no insurance covering risks incurred through seasonal variation consequences.
In this respect, we as an engineering based company have qualified personnel and staffs to manage and to limited the happenings
of these relevant risk factors; however there is no guarantee that accidents will not happen, and if they happen, the consequences
may have a material adverse effect on our business, financial condition and results of operations.
Because our cash and cash equivalent
are held in banks that do not provide capital guarantee insurance, the failure of any bank in which we deposit our funds could
affect our ability to continue in business.
Banks and other financial institutions
in the PRC do not provide insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited
with banks in the PRC, and in the event of bank failure, we may not have access to, or may lose entirely, our funds on deposit.
Depending upon the amount of cash we maintain in a bank that fails, our inability to have access to such cash deposits could impair
our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to
continue in business.
Failure to comply with the United
States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign
Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with
us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur
from time to time in the PRC. We cannot assure you that our employees or other agents will not engage in such conduct for which
we might be held responsible. If our employees or agents are found to have engaged in such practices, we could suffer severe penalties
and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
Labor laws in the PRC may adversely
affect our results of operations.
On June 29, 2007, the PRC government
promulgated a new labor law, namely, the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on
January 1, 2008. The New Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of
an employer’s decision to reduce its workforce. Further, it requires that certain terminations be based upon seniority and
not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely
affect our ability to effect such changes in a manner that is most advantageous to our business or in a timely and cost-effective
manner, thus materially and adversely affecting our financial condition and results of operations.
Your ability to bring an action against
us or against our directors and officers, or to enforce a judgment against us or them, will be limited because we conduct substantially
all of our operations in the PRC and because the majority of our directors and officers reside outside of the United States.
We are a Nevada holding company and substantially
all of our assets are located outside of the United States. Substantially all current operations are conducted in the PRC. In addition,
all but one of our directors and officers are nationals and residents of countries other than the United States. Substantial portions
of the assets of these persons are located outside the United States. Thus, it may be difficult to effect service of process
within the United States upon these persons. It may also be difficult to enforce in U.S. courts judgments on the civil liability
provisions of the U.S. federal securities laws against us and our officers and directors, none of whom are residents in the United
States and the substantial majority of whose assets are located outside of the United States. It is also uncertain whether the
courts of the PRC would recognize or enforce judgments of U.S. courts. Our PRC legal counsel has advised us that the recognition
and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in the PRC may recognize and enforce
foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between the PRC and the
country where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other arrangements
that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according
to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers
if they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest.
It is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
Risks Related to Ownership of our Common
Stock
Volatility in our common stock price
may subject us to securities litigation.
Stock markets, in general, have experienced
in recent months, and continue to experience, significant price and volume volatility, and the market price of our common stock
may continue to be subject to similar market fluctuations unrelated to our operating performance or prospects. This increased volatility,
coupled with depressed economic conditions, could continue to have a depressing effect on the market price of our common stock.
The following factors, many of which are beyond our control, may influence our stock price:
|
·
|
the status of our growth strategy including the building of our new production line with any proceeds we may be able to raise in the future;
|
|
·
|
announcements of technological or competitive developments;
|
|
·
|
regulatory developments in the PRC affecting us, our customers or our competitors;
|
|
·
|
announcements regarding patent or other intellectual property litigation or the issuance of patents to us or our competitors or updates with respect to the enforceability of patents or other intellectual property rights generally in the PRC or internationally;
|
|
·
|
actual or anticipated fluctuations in our quarterly operating results;
|
|
·
|
changes in financial estimates by securities research analysts;
|
|
·
|
changes in the economic performance or market valuations of our competitors;
|
|
·
|
additions or departures of our executive officers;
|
|
·
|
release or expiration of lock-up or other transfer restrictions on our outstanding common stock; and
|
|
·
|
sales or perceived sales of additional shares of our common stock.
|
In addition, the securities markets have,
from time to time, experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. Any of these factors could result in large and sudden changes in the volume and trading price of our common stock and
could cause our stockholders to incur substantial losses. In the past, following periods of volatility in the market price of a
company’s securities, stockholders have often instituted securities class action litigation against that company. If we were
involved in a class action suit or other securities litigation, it would divert the attention of our senior management, require
us to incur significant expense and, whether or not adversely determined, have a material adverse effect on our business, financial
condition, results of operations and prospects.
One of our directors and officers
controls a majority of our common stock and his interests may not align with the interests of our other stockholders.
Solomon Lee, our chairman, chief executive
officer and president, controls our company and beneficially owns in excess of 50.1% of our issued and outstanding common stock.
This significant concentration of share ownership may adversely affect the trading price of our common stock because investors
often perceive a disadvantage in owning shares in a company with one or several controlling stockholders. Furthermore, our directors
and officers, as a Company, have the ability to significantly influence or control the outcome of all matters requiring stockholder
approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations
or the sale of substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a
change in control of our company that could deprive our stockholders of an opportunity to receive a premium for their shares as
part of a sale of our company and might reduce the price of our common stock. In addition, without the consent of Mr. Lee,
we could be prevented from entering into transactions that could be beneficial to us. Mr. Lee may cause us to take actions
that are opposed by other stockholders as his interests may differ from those of other stockholders.
Future issuances of capital stock
may depress the trading price of our common stock.
Any issuance of shares of our common stock
(or common stock equivalents) after the date hereof could dilute the interests of our existing stockholders and could substantially
decrease the trading price of our common stock. We may issue additional shares of our common stock in the future for a number of
reasons, including financing our operations and business strategy (including in connection with acquisitions, strategic collaborations
or other transactions).
Sales of a substantial number of
shares of our common stock in the public market could depress the market price of our common stock, and impair our ability to raise
capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or
other equity-related securities would have on the market price of our common stock.
We believe that the price of our shares
in the OTC QX markets is adversely affected by the current stigma associated with Chinese companies quoted or listed publicly in
the United States.
Although we managed to maintain our liquidity
to a certain degree, our share price has suffered. Many Chinese companies suffer from this stigma, which tends to affect both market
prices and liquidity, and our company is no exception. Reasons with varying degrees of legitimacy explain this stigma, including
but not limited to: (i) investors’ experience of losses suffered in the course of investing in other Chinese companies,
(ii) the difficulty some Chinese companies have had in preparing auditable financial statements, and (iii) the difficulty
in enforcing US judgments in foreign courts generally. All of these have contributed to a negative perception by some US investors
regarding all Chinese companies publicly traded on US markets. Regardless of the reasons for this perception, if it continues over
a sustained period of time our market prices may continue to trade below net tangible asset value per share. This would increase
risk that our shareholders could lose the funds they invested in our company. It could also impact our ability to maintain our
growth plan on schedule, which would adversely affect our business and financial condition.
The issuance of any of our equity
securities pursuant any equity compensation plan we may adopt may dilute the value of existing stockholders and may affect the
market price of our stock.
In the future, we may issue to our officers,
directors, employees and/or other persons equity based compensation under any equity compensation plan we may adopt to provide
motivation and compensation to our officers, employees and key independent consultants. The award of any such incentives could
result in an immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the value
of our stock price. The exercise of these options and the sale of the underlying shares of common stock and the sale of stock issued
pursuant to stock grants may have an adverse effect upon the price of our stock. In addition, if the holders of outstanding convertible
securities convert such securities into common stock, you will suffer further dilution.
The requirements of being a public
company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board
members.
We are a public company and subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley Act of 2002. The Exchange
Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial
condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal controls for financial reporting. For example, Section 404 of the Sarbanes-Oxley Act requires that our management
report on the effectiveness of our internal controls structure and procedures for financial reporting. Section 404 compliance
may divert internal resources and will take a significant amount of time and effort to complete. If we fail to maintain compliance
under Section 404, or if in the future management determines that our internal control over financial reporting are not
effective as defined under Section 404, we could be subject to sanctions or investigations by the NASDAQ Stock Market should
we in the future be listed on this market, the SEC, or other regulatory authorities. Furthermore, investor perceptions of our company
may suffer, and this could cause a decline in the market price of our common stock. Any failure of our internal controls could
have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these
changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in
an adverse opinion on internal controls from our independent auditors. We may need to hire a number of additional employees with
public accounting and disclosure experience in order to meet our ongoing obligations as a public company, particularly if we become
fully subject to Section 404 and its auditor attestation requirements, which will increase costs. Our management team and
other personnel will need to devote a substantial amount of time to new compliance initiatives and to meeting the obligations that
are associated with being a public company, which may divert attention from other business concerns, which could have a material
adverse effect on our business, financial condition and results of operations.
Our shares of common stock may be
thinly traded, so you may be unable to sell at or near ask prices or at all.
We cannot predict the extent to which an
active public market for our common stock will develop or be sustained. Our common stock is currently traded on the OTC QX where
the shares have historically been thinly traded, meaning that the number of persons interested in purchasing our common stock at
or near bid prices at any given time may be relatively small or non-existent.
This situation may be attributable to a
number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community who generate or influence sales volume, and that even if we came
to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours
or purchase or recommend the purchase of our shares until such time as we have become more seasoned and viable. As a consequence,
there may be periods of several days, weeks or months when trading activity in our shares is minimal or non-existent, as compared
to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without
an adverse effect on share price. We cannot assure you that a broader or more active public trading market for our common stock
will develop or be sustained, or that current trading levels will be sustained or not diminish.
We may become involved in securities
class action litigation that could divert management’s attention and harm our business.
The stock market in general, and the shares
of early stage companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been
unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in the future,
the market price of our shares could fall regardless of our operating performance. In the past, following periods of volatility
in the market price of a particular company’s securities, securities class action litigation has often been brought against
that company. If the market price or volume of our shares suffers extreme fluctuations, then we may become involved in this type
of litigation, which would be expensive and divert management’s attention and resources from managing our business.
As a public company, we may also from time
to time make forward-looking statements about future operating results and provide some financial guidance to the public markets.
Our management has limited experience as a management team in a public company and as a result projections may not be made timely
or set at expected performance levels and could materially affect the price of our shares. Any failure to meet published forward-looking
statements that adversely affect the stock price could result in losses to investors, stockholder lawsuits or other litigation,
sanctions or restrictions issued by the SEC.
Securities analysts may elect not
to report on our common stock or may issue negative reports that adversely affect the stock price.
At this time, to our knowledge no securities
analysts provide research coverage of our common stock, and securities analysts may not elect not to provide such coverage in the
future. It may remain difficult for our company, with its small market capitalization, to attract independent financial analysts
that will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely
affect the stock’s actual and potential market price. The trading market for our common stock may be affected in part by
the research and reports that industry or financial analysts publish about our business. If one or more analysts elect to cover
our company and then downgrade the stock, the stock price would likely decline rapidly. If one or more of these analysts cease
coverage of our company, we could lose visibility in the market, which, in turn, could cause our stock price to decline. This could
have a negative effect on the market price of our common stock.