Securities Registration: Business Combination (s-4)

Date : 06/27/2019 @ 2:56PM
Source : Edgar (US Regulatory)
Stock : Sino Agro Food, Inc. (QX) (SIAF)
Quote : 0.19  -0.06 (-24.00%) @ 4:49PM

Securities Registration: Business Combination (s-4)

 

 

 

As filed with the Securities and Exchange Commission on June 27, 2019

 

Registration No. 333-_______

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-4

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

SINO AGRO FOOD, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada   2020   33-1219070
         

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (IRS Employer
Identification Number)

 

Sino Agro Food, Inc.

Room 3801, Block A, China Shine Plaza

No. 9 Lin He Xi Road

Tianhe District, Guangzhou City, P.R.C. 510610

( 860) 20 22057860

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Solomon Lee

Chief Executive Officer

Sino Agro Food, Inc.

Room 3801, Block A, China Shine Plaza

No. 9 Lin He Xi Road

Tianhe District, Guangzhou City, P.R.C. 510610

(860) 20 22057860

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Marc Ross, Esq.

Avital Perlman, Esq.

Sichenzia Ross Ference LLP

1185 Avenue of the Americas, 37 th Floor

New York, New York 10036

Telephone: (212) 930-9700

 

 

Approximate date of commencement of proposed sale of the securities to the public: As promptly as practicable after the filing of this registration statement and other conditions to the commencement of the exchange offer described herein have been satisfied or, where permissible, waived.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.   ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Exchange Act.  ¨

 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ¨

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to be Registered
  Amount
to be
registered
  Proposed
Maximum
Aggregate
Offering Price
    Amount of
Registration Fee (1)
 
Shares of 7% Series G Non-Convertible Cumulative Redeemable Perpetual Preferred Stock   1,000,000 shares   $ 27,000,000     $ 3,636.00  

 

(1) Calculated in accordance with Rule 457(f) of the Securities Act of 1933, as amended. The Series G Shares may be exchanged for $27.00 of shares of common stock.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

The information in this prospectus may change. Sino Agro Food, Inc. may not complete the exchange offer and the securities being registered may not be exchanged or distributed until the registration statement filed with the Securities and Exchange Commission of which this prospectus forms a part is effective. This prospectus is not an offer to sell or exchange these securities and Sino Agro Food, Inc. is not soliciting offers to buy or exchange these securities in any jurisdiction where the exchange offer or sale is not permitted.

 

PRELIMINARY AND SUBJECT TO CHANGE, DATED JUNE 27, 2019

 

SINO AGRO FOOD, INC.

 

Offer to Exchange Up to

1,000,000 Shares of our 7% Series G Non-Convertible Cumulative Redeemable Perpetual Preferred Stock

(Liquidation Preference $40.00 per Share)

for

 

Shares of our Common Stock having an aggregate market value of $30.00 per share

(CUSIP No. 829355 205)

 

THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, AT THE END OF THE DAY ON __________ ___, 2019 UNLESS THE EXCHANGE OFFER IS EXTENDED OR TERMINATED.

 

Exchange Offer. We are offering to exchange one share of our 7% Series G Non-Convertible Cumulative Redeemable Perpetual Preferred Stock registered hereunder, which we refer to as the “ Series G Preferred Stock ,” for such number of shares of common stock of our company, which we refer to as the “ Common Stock ,” that are validly tendered (and not validly withdrawn) by such holder and accepted in the exchange offer, as shall have a market value of $27.00 as determined by the average trading price of the Common Stock three days before the Expiration Date.

 

Dividends. Dividends on the Series G Preferred Stock are cumulative from the date of original issue and will be payable on August 15 of each year (for calculating period January 1 to December 31 each year) commencing on August 15, 2020 (for dividend payable Fiscal year 2019), when, as and if declared by our board of directors. Dividends will be payable out of amounts legally available therefor at a rate equal to 7% per annum per $40.00 of stated liquidation preference per share, or $2.80 per share of Series G Preferred Stock per year.

 

Optional Redemption . On and after 5 years from the Dividend Record Date, we may, at our option, redeem the Series G Preferred Stock, in whole or in part, at any time or from time to time, at the rate of 15 shares of common stock for each share of Series G Preferred Stock, plus any accumulated and unpaid dividends thereon to, but not including, the date fixed for redemption. If we elect to redeem any shares of Series G Preferred Stock, we may use any available cash to pay accumulated dividends.

 

Terms of the Exchange Offer

 

The exchange offer will expire at 12:00 midnight, New York City time, at the end of the day on _______ __, 2019, unless we extend or terminate it (such date, as extended, the “ Expiration Date ”). The Expiration Date of this exchange offer will be at least 20 business days after the commencement of the exchange offer, in accordance with Rule 14e-1(a) under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”).

 

We will exchange shares of Series G Preferred Stock (and cash, as applicable) for all outstanding shares of Common Stock that are validly tendered (and not validly withdrawn) and accepted by us if all the conditions to this exchange offer are satisfied or waived, up to a maximum of 30,000,000 shares of Common Stock. There is no record date for participating in this exchange offer.

 

Shares of Common Stock validly tendered pursuant to the exchange offer may be withdrawn at any time before 12:00 midnight, New York City time, on the Expiration Date and, unless we have previously accepted such shares pursuant to the exchange offer, may also be validly withdrawn at any time after the expiration of 40 business days from the commencement of the exchange offer. Once we accept such shares of Common Stock validly tendered pursuant to the exchange offer, your tender is irrevocable.

 

You should read carefully the terms and conditions of the exchange offer described in this prospectus. None of Sino Agro Food, Inc., its directors or officers makes any recommendation as to whether you should tender all, some or none of your shares of Common Stock. You must make your own decision after reading this document and consulting with your advisors.

 

Before participating in this exchange offer, please refer to the section entitled “ Risk Factors ” in our Annual Report on Form 10-K for the year ended December 31, 2018 and all subsequent filings under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, as well as the additional risk factors contained in this prospectus beginning on page 12.

 

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is __________, __, 2019.

 

 

 

 

TABLE OF CONTENTS

 

  Page 
   
About this Prospectus 1
   
Where You Can Find More Information 1
   
Questions and Answers About the Exchange Offer 2
   
Company Overview 3
   
Summary of the Exchange Offer 7
   
Summary of Terms of Series G Preferred Stock 10
   
Selected Financial Data 11
   
Risk Factors 12
   
Disclosure Regarding Forward Looking Statements 14
   
Use of Proceeds 14
   
Description of Business 56
   
Description of Properties 14
   
The Exchange Offer 56
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 61
   
Market for Our Common Equity and Related Stockholder Matters 112
   
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 112
   
Description of Securities 114
   
Description of the 7% Series G Non-Convertible Cumulative Redeemable Perpetual Preferred Stock 115
   
Book-Entry Issuance 119
   
Material U.S. Federal Income Tax Consequences 121
   
Notices to Certain Non-U.S. Holders 126
   
Legal Matters 129
   
Experts 129
   
Consolidated Financial Statements F-1

  

 

 

 

ABOUT THIS PROSPECTUS

 

Unless otherwise indicated in this prospectus, “Sino Agro Food,” the “Company,” “we,” “us” and “our” refer to Sino Agro Food, Inc. and its subsidiaries.

 

We have filed with the SEC a registration statement on Form S-4 under the Securities Act of 1933, as amended, which we refer to as the “Securities Act,” to register the shares of Series G Preferred Stock offered by this prospectus. Copies of some of the documents referred to in this prospectus, which forms a part of the registration statement, have been filed as exhibits to the registration statement and you may obtain copies of those documents as described under the heading “Where You Can Find More Information” below.

 

Any statement made in this prospectus concerning the contents of any contract, agreement or other document is only a summary of the actual contract, agreement or other document. If we have filed any contract, agreement or other document as an exhibit to the registration statement, you should read such exhibit for a complete understanding of the document or matter involved. Each statement regarding a contract, agreement or other document is qualified in its entirety by reference to the actual document.

 

You should rely only on the information contained in this prospectus and any supplement hereto. We have not authorized anyone to provide you with information different from that which is contained in this prospectus or to make representations as to matters not stated in this prospectus or any supplement hereto. If anyone provides you with different or inconsistent language, you should not rely on it.

 

The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any purchase of our securities. Our business, financial condition, results of operations, and prospects may have changed since those dates. To understand this offering fully, you should read this entire document carefully.

 

The information set forth in this prospectus is not complete and may be changed. We may not sell the Series G Preferred Stock in the Exchange Offer until the registration statement filed with the SEC is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale thereof is not permitted.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We file annual, quarterly and current reports and other information with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Our Securities and Exchange Commission filings are available to the public over the Internet at the Securities and Exchange Commission’s website at http://www.sec.gov . You may also read and copy any document we file at the Securities and Exchange Commission’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. Access to those electronic filings is available as soon as practicable after filing with the Securities and Exchange Commission. You may also request a copy of those filings, excluding exhibits, from us at no cost. Any such request should be addressed to us at: Room 3801, Block A, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, P.R.C., Attn: Solomon Lee, CEO.

 

The Common Stock is quoted on the OTCQX Premier (“ OTCQX ”) and trades under the symbol “SIAF.”

 

You should read this entire prospectus (including the information incorporated by reference) and any amendments or supplements carefully before making your decision whether to participate in this exchange offer.

 

No person has been authorized to give any information or to make any representation other than those contained in this prospectus, and, if given or made, any information or representations must not be relied upon as having been authorized. This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or an offer to sell or the solicitation of an offer to buy these securities in any circumstances in which this offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made under this prospectus shall, under any circumstances, create any implication that there has been no change in the affairs of SIAF since the date of this prospectus.

 

Except as described in this registration statement, no information is incorporated by reference in this prospectus (including, without limitation, information on our website).

 

  - 1 -  

 

 

QUESTIONS AND ANSWERSABOUT THE EXCHANGE OFFER

 

The following are some questions that you, as a holder of Common Stock, may have about this exchange offer. We urge you to read carefully the remainder of this prospectus because the information in this section does not provide all the information that may be important to you with respect to the exchange offer and the issuance of the Series G Preferred Stock.

 

Q: Why are you conducting the exchange offer?

 

A: We have in the past issued a significant number of shares of Common Stock to lenders and others who have provided services to us. Based on investor feedback and advice received from trusted parties, we are conducting this exchange offer pursuant to which holders of the Common Stock will have the option (but not the obligation) to exchange some or all of their shares of Common Stock for shares of Series G Preferred Stock. We believe that many of these recipients of Common Stock, as well as other holders of Common Stock, would prefer to own a security that pays interest and could be redeemed in the future at a price that would deliver a significant return on their investment. We further believe that as the total number of authorized shares of Series G Preferred Stock is capped at 2 million (including the 1 million shares issuable in our concurrent public offering), the trading market of the Series G Preferred Stock will be less vulnerable to downward pressures of dilutive issuances than our common stock. In addition, we believe that, if common shareholders tender a significant number of shares of the Common Stock, we could see a pronounced increase in the market price in the Common Stock.

 

Q: What are the differences between the terms of the Series G Preferred Stock and the Common Stock?

 

A: The Series G Preferred Stock that we will issue you in exchange for your Common Stock will, as most shares of preferred stock do, carry certain rights and privileges not typically associated with common equity, such as the right to dividends and eventually a potential redemption. Further, each share of Series G Preferred Stock will carry the voting power of twenty (20 shares of Common Stock. The Series G Preferred Stock will only be convertible into Common Stock under very limited circumstances. See “Description of the Series G Preferred Stock.”

 

Q: How do I tender my shares of Common Stock if I am a registered holder of the Common Stock?

 

A: If you hold your shares of Common Stock in registered form, your shares of Common Stock will be held on the books of Broadridge Corporate Issuer Solutions, Inc., or Broadridge, as transfer agent, and not through The Depository Trust Company (“ DTC ”), as described below. Therefore, in order for your Common Stock to be tendered, you or your registered holder must submit a letter of transmittal to Broadridge, which is also acting as our exchange agent in connection with this exchange offer. Upon consummation of the exchange offer, your ownership of shares of Series G Preferred Stock received in exchange for your outstanding shares of Common Stock will be held through Broadridge, as transfer agent. In order to have your shares of Series G Preferred Stock held through DTC instead, you must contact the registered holder and instruct it to transfer your shares from Broadridge to DTC. See “The Exchange Offer—Procedures for Tendering Common Stock—Proper Execution and Delivery of Letters of Transmittal.”

 

Q: How do I tender my shares of Common Stock that are held through DTC?

 

A: If you hold your shares of Common Stock in “Street” name, i.e., through a financial institution (e.g., a broker, dealer, commercial bank, trust company or other nominee) and you wish to participate in this exchange offer, you should, to the extent you have not already received instructions from them, contact such financial institution and instruct them to tender your shares of Common Stock on your behalf. In this situation, do not complete the letter of transmittal because such financial institution will effect such tender through DTC by electronically transmitting your acceptance of the exchange offer through DTC’s Automated Tender Offer Program (“ ATOP ”). Then, upon consummation of the exchange offer, your ownership of shares of Series G Preferred Stock received in exchange for your outstanding shares of Common Stock will be held through DTC. See “Summary—Procedures for Tendering Common Stock.”

 

Q: How do I tender my shares of Common Stock that are quoted on the Merkur?

 

A: You will need to convert your shares of Common Stock into the shares of Common Stock that are quoted on the OTCQX, then tender those shares.

 

Q: What are the U.S. federal income tax consequences of participating in the exchange offer?

 

A: As described in detail under the heading “Material U.S. Federal Income Tax Consequences—U.S. Holders—The Exchange Offer,” you should generally recognize gain for U.S. federal income tax purposes in connection with the exchange offer.

 

The material U.S. federal income tax consequences of participating in the exchange offer are described in more detail under the heading “Material U.S. Federal Income Tax Consequences.” The tax consequences to you will depend upon your particular facts and circumstances. You should consult your tax advisor for a full understanding of the federal, state, local and non-U.S. income and other tax consequences of participating in the exchange offer.

 

  - 2 -  

 

 

COMPANY OVERVIEW

 

This summary highlights important information contained elsewhere in this prospectus. You should carefully read this prospectus and the documents incorporated by reference to understand fully our business and the terms of our Series G Preferred Stock as well as the tax and other considerations that are important to you in making your investment decision. You should consider carefully the “Risk Factors” section beginning on page 12 of this prospectus to determine whether an investment in the Series G Preferred Stock is appropriate for you. Unless the context otherwise requires, references in this prospectus to “SIAF,” the “Company,” “we,” “us” and “our” refer to Sino Agro Food, Inc. and its subsidiaries. For further information about us, see “Where You Can Find More Information.”

 

In this prospectus, 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.

 

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)   2018     2017  
Fisheries (CA) (Discontinued operation from October 5, 2016)   $     $ -  
Organic Fertilizer (HSA, SJAP & QZH)     28.9       84.4  
(QZH derecognized as variable interest entity from December 30, 2017)                
Cattle (MEIJI)     29.6       20.4  
Plantation (JHST)     3.6       4.6  
Corporate, Marketing & Trading (SIAF)             71.8  
Total Revenues derived on sales of goods   $ 68.5     $ 181.2  

 

Division (on consulting & services)   2018     2017  
CA (Fishery related developments)   $     $ 17.0  
Total Revenues derived on consulting & services   $ 11.1     $ 17.0  

 

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 August 24, 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. The Company now operates as an engineering, technology and consulting company specializing in building and operating agriculture and aquaculture farms in China.

 

Our principal executive office is located at Room 3801, 38 th Floor, Block A, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, Guangdong Province, PRC, 510610.

 

  - 3 -  

 

 

Through December 31, 2017, we were contracted as turnkey contractor to the owners and developers of the C&S Project Companies and acted as the master engineer, pioneering the construction and building of farms, from raw land into fully operational facilities. In each development the Company completes 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. 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.

 

In just a few years, we have matured into a company dedicated to the agriculture and aquaculture industry in China. The Company currently maintains operations of its HU Plantation as well as its services in engineering consulting and 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.

 

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, our management team introduced our business activities in China in 2006. We are an engineering and consulting company that specializes in building and operating agriculture and aquaculture farms.

 

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.

 

In all of our developments 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.

 

In just a few years, we have matured into a company dedicated to the agriculture and aquaculture industry in China. We currently maintain 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. 

 

Revenues are generated from activities that we divide into five stand-alone business divisions or units: (1) Fishery development, (2) Cattle & Beef, (3) Organic Fertilizer, (4) HU Plantation, and (5) Marketing and Trading. This fifth and newest division, “Marketing and Trading” represents our strongest push to vertically integrate the Company’s operations, furthering the Company’s overall “farm to plate” concept.

 

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.

 

  - 4 -  

 

 

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 5, 2016 we owned a 75% equity interest in JFD and controlled its board of directors. As of September 30, 2012, we had consolidated the assets and operations of JFD. From October 5, 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 TRW (inclusive of all original assets of its one farm, Fish Farm 1, which changed its name to Aqua Farm 1 and of other additional assets) for $33,538,480; and converted JFD into a Wholly Owned Foreign Entity (WOFE) such that TRW is holding 100% equity interest in JFD; and simultaneously (on October 5, 2016) JFD completed the acquisition of the assets and operation from owners and investors of four other aquaculture farms (namely Aqua Farms 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 in our acquisition of a 23.89% equity interest in TRW at October 5, 2016. The Company converted the amount due from unconsolidated equity investee into equity interest during the fourth quarter of 2017, which resulted in its equity interest in TRW increasing 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 ”), 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 ”) 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, referred to as VPS Shares, began to be traded on the Oslo Børs’ Merkur Market under the symbol “SIAF-ME.” The shares of Common Stock 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.

 

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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 .

 

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 have chosen 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.

 

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SUMMARY OF THE EXCHANGE OFFER

 

We are offering to exchange shares of our Series G Preferred Stock for outstanding shares of Common Stock. In order to exchange your outstanding shares of Common Stock, such shares must be validly tendered (and not validly withdrawn) and accepted by us.

 

Exchange Offer   The number of shares of Common Stock that will be required to be submitted in exchange for one share of Series G Preferred Stock will be determined by the market price of the Common Stock calculated by the average closing price of such shares for the three days before the date that shall be three business days before the Expiration Date (the “ Market Price ”). One share of Series G Preferred Stock will be exchanged for such number of shares of Common Stock having a Market Price equal to $27.00. The Expiration Date will not occur until after the SEC has declared both this registration statement on S-4 and the related registration statement on S-1 effective.   

 

    There is no record date for participating in this exchange offer.

 

Expiration Date   This exchange offer will expire at 12:00 midnight, New York City time, at the end of the day on ___________ ___, 2019, unless we decide to extend it.

 

Conditions to the Exchange Offer   We will complete this exchange offer only if:

 

  there has been no material change or development, which, in our reasonable judgment, would materially impair our ability to consummate the exchange offer,

 

  there is no change in the laws and regulations which would impair our ability to proceed with this exchange offer,

 

  the registration statement (of which this prospectus forms a part) is declared effective by the SEC and there is no stop order issued by the SEC suspending the effectiveness thereof,

 

  there is no litigation or threatened litigation which would impair our ability to proceed with this exchange offer, and

 

  we obtain any governmental approvals we deem necessary to complete this exchange offer.

 

    There is no minimum tender or acceptance condition for this exchange offer, except that we may not accept a number of shares of Common Stock that would, based on the Market Price, require us to issue more than 1,000,000 shares of Series G Preferred Stock. We will not accept more than sixty percent (60%) of the issued and outstanding shares of Common Stock.

 

    Please refer to the section in this prospectus entitled “The Exchange Offer—Conditions to the Exchange Offer.”

 

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Procedures for Tendering Common Stock   To participate in this exchange offer, you must tender your outstanding shares of Common Stock by following the procedures described in this prospectus. If you are a beneficial owner of Common Stock that is registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your Common Stock in the exchange offer, you should contact the registered holder promptly and instruct that person to tender on your behalf. In this situation, contact the institution through which you hold your shares if you have not yet received instructions.   
     
Shares held through DTC   If your shares of Common Stock are held in book-entry form through the facilities of DTC, they must be tendered through DTC by your relevant DTC participant, who must electronically transmit your acceptance of the exchange offer through DTC’s ATOP system, for which the exchange offer will be eligible. Then, upon consummation of the exchange offer, your ownership of shares of Series G Preferred Stock received in exchange for your outstanding shares of Common Stock will also be held in book-entry form through the facilities of DTC.   
     
Shares held through Broadridge   If you hold your shares of record, in order for your Common Stock to be tendered, you must submit a letter of transmittal to Broadridge, which is also acting as our exchange agent in connection with this exchange offer. Upon consummation of the exchange offer, your ownership of shares of Series G Preferred Stock received in exchange for your outstanding shares of Common Stock will be held through Broadridge, as transfer agent. In order to have your shares of Series G Preferred Stock held through DTC instead, you must contact Broadridge and instruct them to transfer your shares from Broadridge to DTC.  
     
    The completion, execution and delivery of the letter of transmittal or the electronic transmittal through ATOP will, in each case, constitute acknowledgement and agreement that you are bound by the terms of the letter of transmittal and we may enforce the terms and conditions contained in the letter of transmittal against you.   
     
    See “The Exchange Offer—Procedures for Tendering Common Stock—Proper Execution and Delivery of Letters of Transmittal.”   
     
Withdrawal Rights   Shares of Common Stock tendered pursuant to the exchange offer may be withdrawn at any time before 12:00 midnight, New York City time, at the end of the day on the Expiration Date. Once SIAF accepts shares of Common Stock tendered pursuant to the exchange offer, your tender is irrevocable. Unless SIAF has previously accepted such shares pursuant to the exchange offer, such shares may also be withdrawn at any time after the expiration of 40 business days from the commencement of the exchange offer. To withdraw, you must send a written or facsimile transmission notice of withdrawal to Broadridge, as exchange agent, at its address indicated under “The Exchange Offer—Exchange Agent” before 12:00 midnight, New York City time, at the end of the day on the Expiration Date.
     
Acceptance of Common Stock and Delivery of Series G Preferred Stock   We will accept any and all outstanding shares of Common Stock that are properly tendered in this exchange offer on or before 12:00 midnight, New York City time, at the end of the day on the Expiration Date, if all the conditions to the completion of this exchange offer are satisfied or waived. We will deliver Series G Preferred Stock to you promptly after the Expiration Date and acceptance of your Common Stock for Series G Preferred Stock. Please refer to the section in this prospectus entitled “The Exchange Offer—Acceptance of Common Stock for Exchange; Delivery of Series G Preferred Stock.” We will return any Common Stock that we do not accept for exchange to you, without expense, promptly after the Expiration Date.

 

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Tax Consequences   Except to the limited extent described in detail under the heading “Material U.S. Federal Income Tax Consequences—U.S. Holders—The Exchange Offer,” you should generally not recognize income, gain or loss for U.S. federal income tax purposes in connection with the exchange offer, other than the recognition of gain, but not loss, up to the amount of cash received in exchange for your Common Stock. For a discussion of the tax consequences relating to the exchange offer and to the ownership and disposition of the Series G Preferred Stock, see “Material U.S. Federal Income Tax Consequences” in this prospectus.
     
Exchange Agent   Broadridge is acting as the exchange agent in the exchange offer.
     
Information Agent   Broadridge is serving as the information agent for the exchange offer.
     
Fees and Expenses   We will pay all expenses related to this exchange offer. Please refer to the section of this prospectus entitled “The Exchange Offer—Fees and Expenses.”
     
Use of Proceeds   We will not receive any cash proceeds from the issuance of the Series G Preferred Stock.
     
Consequences to Holders Who Do Not Participate in the Exchange Offer   If you do not participate in this exchange offer, the trading market for your Common Stock will become more limited to the extent other holders of Common Stock participate in the exchange offer.

 

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SUMMARY OF TERMS OF SERIES G PREFERRED STOCK

 

The following summary of the terms of the Series G Preferred Stock is not intended to be complete. For a more detailed description of the terms of the Series G Preferred Stock, see “Description of the Series G Preferred Stock.”

 

Issuer   Sino Agro Food, Inc.
     
Series G Preferred Stock   In connection with this exchange offer, we are issuing up to 1,000,000 shares of our Series G Preferred Stock.
     
Exchange Ratio   The number of shares of Common Stock that will be required to be submitted in exchange for one share of Series G Preferred Stock will be determined by the market price of the Common Stock calculated by the average closing price of such shares for the three days before the date that shall be three business days before the Expiration Date (the “ Market Price ”). One share of Series G Preferred Stock will be exchanged for such number of shares of Common Stock having a Market Price equal to $27.00.  The Expiration Date will not occur until after the SEC has declared both this registration statement on S-4 and the related registration statement on S-1 effective.   
     
Comparison to Common Stock   The Series G Preferred Stock that we will issue you in exchange for your Common Stock will be identical to your Common Stock, except that the dividend rates on the Series G Preferred Stock will be higher than the dividend rates on the Common Stock, and the first available redemption date, which is also the date on which the Floating Rate Period commences, is earlier for the Series G Preferred Stock than for each series of the Common Stock.
     
Risk Factors   Please refer to “Risk Factors” and other information included or incorporated by reference in this prospectus for a discussion of factors you should consider carefully.
     
Transfer Agent, Registrar & Dividend Disbursing Agent   Broadridge

 

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SELECTED FINANCIAL DATA

 

    Year Ended December 31,  
    2018     2017     2016     2015     2014  
    $     $     $     $     $  
Income Data:                                        
Total revenues     141,670,563       198,166,939       342,945,752       343,649,468       298,558,486  
Income from continuing operations     6,056,775       (153,801 )     64,833,641       74,404,989       85,975,560  
Balance Sheet Data:                                        
Total investments     191,386,450       177,558,431       144,841,059       85,662,672       31,514,245  
Total assets     790,602,779       773,945,167       765,661,147       639,574,193       532,686,889  
Debt and junior subordinated     10,126,766       10,713,192       8,649,272       6,020,942       6,716,784  
debt unsecured     35,433,251       37,475,542       22,428,017       35,770,707       15,803,928  
Stockholders' equity     710,587,200       697,560,624       703,938,053       569,935,121       462,227,658  
Per Share Data:                                        
Cash dividends declared per common share     -       -       -       -       -  
Basic income (loss) per common share from continuing operations     0.46       (0.53 )     2.09       2.81       5.81  
Diluted income (loss) per common share from continuing operations     0.46       (0.53 )     1.93       2.72       5.56  
Book value per common share     19.03       28.23       33.46       31.68       29.17  
                                         
Weighted average diluted number of shares     37,336,164       24,711,015       21,040,065       17,988,619       15,847,496  

 

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RISK FACTORS

 

The Series G Preferred Stock is equity and is subordinate to our existing and future indebtedness and may be junior in rights and preferences to future preferred stock.

 

The shares of Series G Preferred Stock are equity interests in SIAF and do not constitute indebtedness. The shares of Series G Preferred Stock will rank junior to all indebtedness and other non-equity claims on SIAF with respect to assets available to satisfy claims on SIAF, including in a liquidation of SIAF. Our existing and future indebtedness may restrict payment of dividends on the Series G Preferred Stock.

 

Additionally, unlike indebtedness, where principal and interest customarily are payable on specified due dates, in the case of preferred stock like the Series G Preferred Stock, (1) dividends are payable only when, as and if declared by our Board (or a duly authorized committee of the board), (2) dividends do not cumulate if they are not declared and (3) as a corporation, we are subject to restrictions on payments of dividends and redemption price to the extent of lawfully available funds. Further, the Series G Preferred Stock places no restrictions on our business or operations or on our ability to incur indebtedness or engage in any transactions, subject only to the voting rights referred to below under “Description of the Series G Preferred Stock—Voting Rights.”

 

The terms of the Series G Preferred Stock provide that we may not, without the prior written consent of the holders of a majority of the then outstanding shares of Series G Preferred Stock, amend our Articles of Incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series G Preferred Stock. As a result, absent an amendment to our Articles of Incorporation, as amended, which, under the Nevada Revised Statutes, would require the consent of the holders of a majority of the common stock voting separately as a class and the holders of a majority of the Series G Preferred Stock voting together as a class with any other series of preferred stock entitled to vote thereon, we are not permitted to issue preferred stock or any other class or series of our capital stock ranking senior to the Series G Preferred Stock with respect to the payment of dividends or distributions of assets upon liquidation, dissolution or winding up of SIAF. If such an amendment is approved, we may issue preferred stock ranking senior to the Series G Preferred Stock with respect to the payment of dividends and distributions of assets upon liquidation, dissolution or winding up of SIAF. The Series G Preferred Stock would be junior to such senior preferred stock. The terms of any future preferred stock expressly senior to the Series G Preferred Stock may restrict dividend payments on the Series G Preferred Stock. In this case, unless full dividends for all outstanding preferred stock senior to the Series G Preferred Stock had been declared and paid or set aside for payment, no dividends could be declared or paid and no distribution could be made on any shares of the Series G Preferred Stock, and no shares of the Series G Preferred Stock would be permitted to be purchased, redeemed or otherwise acquired by SIAF, directly or indirectly, for consideration. This could result in dividends on the Series G Preferred Stock not being paid to you.

 

Investors should not expect SIAF to redeem the Series G Preferred Stock on the date it becomes redeemable or on any particular date after it becomes redeemable.

 

The Series G Preferred Stock is a perpetual equity security. This means that the Series G Preferred Stock has no maturity or mandatory redemption date and is not redeemable at the option of investors. The Series G Preferred Stock may be redeemed by us, at our option, either in whole or in part, on any dividend payment date on or after _________ __, 2024.

 

Holders of the Series G Preferred Stock may have limited voting rights compared to the voting power of the Common Stock.

 

Holders of the Series G Preferred Stock shall be entitled to vote with holders of outstanding shares of Common Stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration, except as provided by law. In any such vote, each share of the Series G Preferred Stock shall carry the voting power equal to thirty shares of Common Stock, subject to the provisions of the NRS. There can be no assurance that the number of shares of Common Stock required to be surrendered for one share of Series G Preferred Stock will be fewer than, or equal to, thirty. If the number of shares of Common Stock surrendered in exchange for one share of Series G Preferred Stock is greater than thirty, you will as a result of the exchange suffer diluted voting power.

 

  - 12 -  

 

 

General market conditions and unpredictable factors could adversely affect market prices for the Series G Preferred Stock.

 

There can be no assurance about the market prices for the Series G Preferred Stock. Several factors, many of which are beyond our control, will influence the market prices of the Series G Preferred Stock. Factors that might influence the market prices of the Series G Preferred Stock include:

 

whether we declare or fail to declare dividends on the Series G Preferred Stock from time to time;

 

our creditworthiness;

 

operating results that vary from the expectations of securities analysts and investors;

 

the financial performance of the major industries which we serve;

 

the operating and securities price performance of companies that investors consider to be comparable to us;

 

announcements of strategic developments, acquisitions and other material events by us or our competitors;

 

a downgrade, suspension or withdrawal of any rating assigned to us by a rating agency;

 

interest rates;

 

developments in the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing and developments with respect to financial institutions generally;

 

the market for similar securities; and

 

economic, financial, geopolitical, regulatory or judicial events that affect us or the financial markets generally.

 

We cannot assure you that a liquid trading market for the Series G Preferred Stock will develop or that a liquid trading market for the Common Stock will exist once the Series G Preferred Stock is issued.

 

The shares of the Series G Preferred Stock are a new issue of securities with no established trading market. As in the case of the Common Stock, we do not intend to list the shares of the Series G Preferred Stock on any stock exchange. While we do intend to have made available for trading on the OTC Marketplace, there can be no assurance that such shares will ever be eligible for quotation on the OTC Marketplace. Therefore, we cannot assure you that a liquid trading market for the Series G Preferred Stock will develop, that you will be able to sell the Series G Preferred Stock at a particular time or that the price you receive when you sell will be favorable. Because the Series G Preferred Stock does not have a stated maturity date, investors seeking liquidity in the Series G Preferred Stock will be limited to selling their shares in the secondary market. However, if you do not participate in this exchange offer, the trading market for your Common Stock will become more limited to the extent other holders of Common Stock participate in the exchange offer and receive shares of Series G Preferred Stock.

 

Your exchange of Common Stock for Series G Preferred Stock is expected to be a taxable transaction.

 

If you exchange Common Stock for Series G Preferred Stock, you should generally recognize gain for U.S. federal income tax purposes in connection with the exchange offer. The IRS could also take the position that the exchange of your common stock for Series G Preferred Stock is to be treated as a distribution of Series G Preferred Stock that is essentially equivalent to a dividend and therefore taxable as ordinary income (regardless of whether there is gain) to the extent of the Company's current or accumulated earnings and profits as determined for U.S. federal income tax purposes. For a more detailed discussion, see “Material U.S. Federal Income Tax Consequences.”

 

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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this prospectus.

 

This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

DESCRIPTION OF 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)   2018     2017  
Fisheries (CA) (Discontinued operation from October 5, 2016)   $     $ -  
Organic Fertilizer (HSA, SJAP & QZH)     28.9       84.4  
(QZH derecognized as variable interest entity from December 30, 2017)                
Cattle (MEIJI)     29.6       20.4  
Plantation (JHST)     3.6       4.6  
Corporate, Marketing & Trading (SIAF)             71.8  
Total Revenues derived on sales of goods   $ 68.5     $ 181.2  

 

Division (on consulting & services)   2018     2017  
CA (Fishery related developments)   $     $ 17.0  
Total Revenues derived on consulting & services   $ 11.1     $ 17.0  

 

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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. The Company now operates as an engineering, technology and consulting company specializing in building and operating agriculture and aquaculture farms in China.

 

Our principal executive office is located at Room 3801, 38 th 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.

 

  - 15 -  

 

  

    · 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. (Further details provided throughout report).
       
2018   · Mr. Dan Ritchey passed away on December 1, 2018. As of the date of this prospectus, 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 and the Audit Committee chairman on April 17, 2019.

 

Through December 31, 2018, the Company has been contracted as turnkey contractor to the owners and developers of the C&S Project Companies and acted as the master engineer, pioneering the construction and building of farms, from raw land into fully operational facilities. In each development the Company completes the construction and building of infrastructure including staff quarters, offices, processing facilities, storage, and all related production facilities. The Company’s management teams are responsible for developing all business activities into effective and efficient operations. 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.

 

  - 16 -  

 

  

Over the past ten years, the Company has matured into a company dedicated to the agriculture and aquaculture industry in China. The Company currently maintains operations of its HU Plantation as well as its services in engineering consulting and 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.

 

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. We are an engineering and consulting company that specializes in building and operating agriculture and aquaculture farms.

 

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.

 

In all of our developments 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. We currently maintain 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. 

 

Revenues are generated from activities that we divide into five stand-alone business divisions or units: (1) Fishery development, (2) Cattle & Beef, (3) Organic Fertilizer, (4) HU Plantation, and (5) Marketing and Trading. This fifth and newest division, “Marketing and Trading” represents our strongest push to vertically integrate the Company’s operations, furthering the Company’s overall “farm to plate” concept.

 

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 an 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.

  

  - 17 -  

 

 

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 5 th 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 5 th 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 5 th 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 5 th 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.

 

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.

 

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.

 

  - 18 -  

 

 

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 .

 

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.

 

  - 19 -  

 

 

The table below sets out information about the entities in which the Company, as of the date of this prospectus, 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   Engineering consulting (general types of developments),  business management, trading, sales and marketing    
             
Capital Award Inc. (CA)   Belize   Engineering consulting (mainly 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

 

  - 20 -  

 

  

Macau Eiji Company Limited (MEIJI)   Macau   Engineering consulting (mainly in 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
             
Sino Agro Food Sweden AB (Private) (SAFS)   Sweden   Various support and service to parent company, asset management, finance, consulting and provision of services in agriculture and aquaculture, marketing and sale of agricultural products, consultancy for business development in China, and related business   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
             
Qinghai Sanjiang A Power Agriculture Co. Ltd. (SJAP)   China   Existing activities: manufacturing of organic fertilizer bulk and concentrated livestock feed, and rearing of cattle and cooperative farming. Slaughter and deboning of cattle and value added processing of beef products.  

41.25% owned

by SIAF

  

  - 21 -  

 

 

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 prospectus).

 

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.

 

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. Our presence in retailing and wholesale markets generates market power and provides potential for both margin maintenance and expansion.

  

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.

 

  - 22 -  

 

  

 

 

The Company uses expertise and know-how in specific agriculture and aquaculture technologies. The Company’s “A Power Re-circulating Aquaculture System” (the “ APRAS ”) is a proven recirculating aquaculture system (“ RAS ”) technology 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 licenses for fertilizer formulas, enzyme patents, and for 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

 

  - 23 -  

 

 

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. Prior to acquisition, the Company prepays a deposit toward the acquisition consideration of the project company. 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.

  - 24 -  

 

  

 

Land ownership in China

 

In China, nearly all land is owned by the Central Government or local village collectives, which grant “usufructuary” rights (i.e., the right to use and enjoy the derived benefits for a period of time) in the form of land use rights. This is similar to “leasehold” land rights in the United States. Corporate entities and individuals may own the property (buildings) erected on Government land. Land use rights may be transferred, but they are based on agricultural contracts, and cannot be changed arbitrarily to non-agricultural purposes.

 

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 within aquaculture, beef cattle rearing and production of organic fertilizer.

 

  - 25 -  

 

 

The Company has enjoyed strong growth since the Company initiated its business activities in China in 2006. During the fiscal year of 2018, the Company’s consolidated revenues amounted to USD $141,670,563. 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 that are divided into five stand-alone business divisions:

 

(i) Aquaculture (CA: inclusive Technology engineering consulting & services (Project Development division) and sales of goods)

(ii) Integrated Cattle Farm (SJAP) and Organic Fertilizer (HSA)

(iii) Cattle Farm (MEIJI: sales of goods)

(iv) Plantation, and

(v) Seafood & Meat Trading (SIAF / CA GZ: inclusive Technology engineering consulting & services (Project Development division) and sales of goods and corporate affairs)

 

Aquaculture division

 

CA has entered into and completed several CSC’s (i.e., the Fish Farm 1 (or Aqua-Farm 1)) for JFD, the Prawn Farm 1 (Or Aqua-Farm 3) for EBAPCD and construction and development work still in progress for the Prawn Farm 2 (or Aqua-Farm 2) at Xin Hui District and the Prawn Farm 3 (or Aqua-Farm 4) and Prawn Farm 4 (or Aqua-Farm 5) at San Jiao Town Zhongshan for ZSAPP.

 

Prior to September 30, 2016, CA was the sole marketing, sales and distribution agent of the APRAS fishery and prawn farms. CA had purchased all marketable fish and prawn from the farms, and then sold them to wholesale markets. CA also supplied the farms with fingerlings, baby or adult fish or prawns, and stock feed. CA generated revenue from the sale of seafood bought from farms that either had been Company subsidiaries or C&S Project Companies.

 

However, since then, Tri-way has acquired all assets and operation of CA’s C&S related project farms (i.e. Aqua-Farm 1 to 5) and SIAF has carved-out its controlling interest in Tri-way to 23.89% + debt converted to equity of 12.71% totaling to 36.6%, such that Tri-way, the subsidiary, is categorized as an “investment in associate” holding of SIAF, as a result of SIAF’s deemed disposal of equity interest in the subsidiary.

 

Integrated Cattle Farm division (SJAP & QZH)

 

Operated by SJAP, the Integrated Cattle Farm division is the business unit of the Company active in beef cattle rearing and value added processing of domestic and imported beef meat. Revenue for fiscal year ended December 31, 2018 was USD 19.23 million or 13.6 percent of the Company’s total sales of goods revenue of USD 141.67 million in the same period. Gross profit for SJAP’s integrated cattle farm division in the fiscal year ended December 31, 2018 was USD 4.3 million, or 19.86 percent of the Company’s total gross profit in sales of goods of USD 21.65 million in the same period.

 

  - 26 -  

 

 

1. Beef cattle rearing and fattening

 

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. Revenue for fiscal year ended December 31, 2018 was USD 6.64 million or 4.7 percent of the Company’s total sales of goods revenue of USD 141.67 million in the same period. Gross profit for same division in the fiscal year ended December 31,2018 was at a loss of USD(0.98) million, or (4.5)% of the Company’s total gross profit in sales of goods of USD 21.65 million in the same period.

 

SJAP now has in its own property twelve cattle houses, with its smaller buildings housing a minimum of 200 head and larger cattle houses accommodating up to 350 head.

 

2. The Organic fertilizer Chain:

 

The SJAP’s fertilizer division’s revenue for fiscal year ended December 31, 2018 was USD 3.02 million or 2.1 percent of the Company’s total sales of goods revenue of USD 141.65 million in the same period. Gross profit for same division in the fiscal year ended December 31, 2018 was USD 0.89 million, or 4.1% of the Company’s total gross profit in sales of goods of USD 21.65 million in the same period.

 

The Company prepares its agricultural wastes into bioorganic fertilizer through the environmentally friendly “Bacterial and Bio-organic Fertilizer Manufacturing Technology.” Also, the livestock feed is prepared into bioorganic livestock feed. Livestock feed consists of raw material consisting of crop wastes as well as locally grown and available wild wheat plus wild wheat sterns, wild peas with sterns and leaves, and selective pastures grown in the wild. These raw materials will be finely cut and put through several aging and fermentation processes by adopting a technology and method called “Stock Feed Manufacturing Technology,” and catalyzed by the enzyme developed by SJAP. Thereafter, the end materials will be packed and sealed in airtight and weatherproof packaging ready for storage.

 

Bioorganic fertilizer and the bio-organic livestock feed is sold to farmers that work on the Company’s land-use rights, which is owned by the government and leased with a subsidy or rent free, due to the many benefits for the community. Fertilizer and livestock feed are prepared based on the Company’s patented enzyme. The use of the enzyme is synergistic, as the production of fertilizer and livestock feed is permissible all 12 months of the year, which is a competitive advantage.

  

The Bulk Livestock feed:

 

The farmers use the bioorganic fertilizer on the soil and feed the grain to the cattle and sheep together with the livestock feed. Government tests show:

 

· Additional average weight gain per head of fattening cattle;
· Additional fresh milk is produced;
· All feeds are much easier to digest resulting in much cleaner environment in the cattle yards and houses;
· No ill effects were recorded due to the Company’s feed;
· All cattle preferred to eat the Company’s feed and were reluctant to revert back to the consumption of their old feed after they had consumed the Company’s feed during the period.

 

Through an acquired patent, 1 the fat content of a 24 month-old cattle can be decreased from 18 kg to 5 kg, which improves the quality of the meat and its yield. The inventor of the patent is now an equity partner in SJAP.

 

3. Feed

 

SJAP’s feed division has two types of livestock feeds, namely “Bulk stock feed” mentioned above and “Concentrated stock feed” mentioned below and revenue for fiscal year ended December 31, 2018 was USD 1.52 million or 1.07 percent of the Company’s total sales of goods revenue of USD 141.65 million for the bulk stock feed and USD 8.04 million or 5.7 percent of the Company’s total sales of goods revenue of USD 141.65 million for the Concentrated stock feed in the same period. Gross profit for same division in the fiscal year ended December 31, 2018 was USD 0.82 million, or 3% of and USD 3.56 million, or 13.3% of the Company’s total gross profit in sales of goods of USD 21.65 million for the Bulk stock feed and Concentrated stock feed respectively in the same period.

 

 

1 T1 Enzyme Technology (T1), Patent number ZL2005 10063039.9.

 

  - 27 -  

 

  

The Concentrated livestock feed:

 

On February 28, 2013, SJAP completed its development of the Concentrated Livestock Feed (“ CLF ”) manufacturing factory, and started the production and sales of CLF. This CLF complements SJAP’s bulk livestock feed to provide the local cattle and sheep farming industry with a completed feed formula that can cater to the rearing of cattle and sheep at various growing cycles (e.g., specially formulated mixes with efficient nutrients for dairy cows and sheep, weaning, fattening and mature cattle and sheep). The advantage of the formulated feed combination is that the cattle and sheep growers will realize cost savings in production knowing precisely the amount of concentrated feed that will be needed by their livestock, thus avoiding wasted excess concentrated feed due to over feeding, which results in worthless excess fat in mature animals. In this respect, the Chinese central government has placed an order with SJAP to reserve up to 5,000 MT of CLF annually as part of the country’s annual reserve emergency livestock feed inventory. Thus, since March 2013 onward, SJAP has generated additional revenue generated from the sales of CLF. 

 

SJAP sells its fertilizer and bulk and concentrated livestock feed mainly to its regional farmers in addition to using it to rear its own grown cattle, but because its geographic location is so far away from other major provinces there are high costs associated with selling its fertilizer, bulk and concentrated livestock feed and live cattle other than to local purchasers. Conversely, equivalent imports from other provinces must be purchased at a higher cost, providing SJAP with a competitive edge. Furthermore, Qinghai Province is a region rearing millions of cattle and sheep per year, providing an ample market for SJAP’s fertilizer and livestock feed. 

 

4. Value Added Processing and distribution (VAP) (This division is now a discontinuing operation having disposed QZH in 2017).

 

The Company is constantly looking and analyzing various optional business plans to enhance SJAP’s operation with improved financial performances, yet at present there is no plan has been finalized.

  

l Recapping information of disposal of QZH that was reported in our 10K 2017 .

 

(i) The live cattle division

 

The average price paid to cooperatives for their fattened cattle is RMB50/Kg or RMB4/kg above average market prices, whichever is higher. A commitment by SJAP to the cooperative farmer to exercise its option to purchase cattle is made well in advance to lock-in the price before other buyers step in and also to obtain the producer’s commitment to raise its cattle based on SJAP’s quality standard for purchase. Again, if the quality of cattle raised by the cooperative does not meet SJAP standards, then there is no purchase obligation on SJAP’s part to carry out its commitment. Over the past few years until Q3 2015, when the Government relaxed its beef import policy, SJAP had generated good profit margins working under this arrangement. Since then, profit margins have steadily been depleted, such that by mid-2017 if SJAP had continued to commit buying additional heads of cattle from the cooperatives, it would have resulted in continuous operating losses for SJAP in 2017 and 2018 estimated to total $46.75 million (cumulative) based on an average market loss of RMB11.5/Kg (or $1.75/Kg), excluding other operating expenses. This alone had provided incentive for the Company to decide on what its alternatives were to sustain (and absorb) such losses, which for all intents and purposes was not an option considering current cash flow issues with the Company.

 

The local Government has been working with SJAP to develop a long-term plan to help ameliorate the problem faced by SJAP as well as other cattle houses throughout the region, yet the timeframe that appeared necessary to carry out a solution would also mean incurring more losses without the means to cover those losses in the meantime.

 

What has been decided between SJAP and its investors, including SIAF, and the local Government in the interest of its stakeholders was the following solution:

 

1) The local Government was able to work out an agreement with cooperatives to have them accept a portion of the loss they incurred in 2017 and the losses they have already incurred preparing for 2018 resulting from SJAP no longer being capable of making do on its commitment to purchase.

 

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2) SJAP agreed to pay the cooperatives a deeply discounted portion of its commitment/obligation to them at an average price of $800/head, about one-third of the out of pocket cost typically paid cooperatives in exchange for release from its commitment to purchase, which totals a one-time cost of $17.75 million. When compared to the estimated cumulative total loss to be incurred of $46.75 million in 2017/2018 due to SJAP’s lock-in commitment to buy, the estimated amount of out of pocket loss to SJAP is estimated to be reduced by about $30 million.

 

Also, consideration had to be given to the cost being incurred to meet the new regulations implemented by the Central Government on slaughterhouse operations, which license is currently held by QZH. Currently, it’s estimated that having both the funding and slaughterhouse operations underway meeting these new standards will take approximately 2 years to materialize; again, another source of income that would be completely curtailed until slaughterhouse operations were back online.

 

Taking into consideration and weighing its options, SJAP decided to eliminate any additional losses being incurred through QZH and has decided to discontinue QZH operations with the understanding that if favorable market conditions were to reoccur as well as the slaughterhouse license reinstituted in addition to Governmental assistance in developing a long-range plan being implemented that consideration will be given to resuming QZH operations in the future.

 

Thus, as of December 30, 2017 (the “deemed date of disposal”), QZH was derecognized as a variable interest entity and SIAF, based on its proportional ownership of QZH through its variable interest entity SJAP, had incurred a net loss on disposal totaling $9,365,543 as delineated in the following table:

 

NET LOSS FROM DISPOSAL OF A VARIABLE INTEREST ENTITY

 

(a) Net loss from disposal of a variable interest entity, QZH

 

Cash and cash equivalents   $ 17,060  
Inventories     4,567,530  
Prepayments     2,692,571  
Accounts receivables     16,403,731  
Other receivables     1,855,971  
Plant and equipment     3,888,987  
Intangible assets     2,870  
      29,428,720  
Less:  Accounts payable     (7,140,439 )
Other payables     (5,811,425 )
Short term borrowings     (1,530,456 )
Non-controlling interests     (5,082,410 )
Accumulated exchange difference     (498,347 )
Net assets and liabilities disposed as of December 30, 2017   $ 9,365,643  
         
Satisfied by:        
Cash consideration   $ -  

 

Under the arrangement of the disposal agreement between all parties, it was agreed to that:

 

•       SJAP is no longer liable and responsible for the liabilities of QZH.

 

•      If any profit will be derived from the sale of existing fixed assets of QZH, 50% of any gained profit will be paid to SJAP with SIAF receiving its proportional share of the proceeds.

 

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•      There will be an annual royalty fee paid by QZH to SJAP/SIAF calculated at 25% of QZH net income over the next 3 years beginning January 1, 2018, if operations were to be reinstituted within this period.

 

•      Also, if QZH operations were to resume under the Government’s plan to establish QZH as a regional hub for beef processing, value-added production, etc. within the next 3-years, an option to buy up to 25% equity of QZH at its fair book value (net of the loss incurred from disposal) would be made available to the Company or its nominee, on or before December 30, 2020.

  

Taking into consideration all issues related to the ongoing losses incurred by QZH, the Company believes that its support in favor of QZH’s disposal is the best option for its shareholders at this time foregoing incurring further and greater losses from QZH while leaving the door open to reinvest in QZH if, and when, the larger issues are resolved and the regional beef hub plan is able to be implemented.

 

Organic Fertilizer (HSA) division

 

The Organic fertilizer (HSA)’s revenue generated in fiscal year ended December 31, 2018 was USD 9.67 million, or 6.86%, of the Company’s total sales of goods revenue of USD 141.67 million in the same period. Gross profit for this division for the 12 months ended December 31, 2018 was USD 2.77 million, or 12.79% of the Company’s total gross profit on sales of goods of USD 21.65 million in the same period.

 

The operation in Linli District, Hunan Province, is run by HSA, a 76% owned Chinese subsidiary. HSA conducts the following business activities, both of which are in the development stage:

 

· manufacturing and sales of organic and mixed fertilizer, and

 

· cultivation of pastures and crops in preparation for the establishment of beef cattle farms to rear and grow a selective Chinese National Breed of cattle mainly for the domestic market of China.

 

By January 2013, the first organic fertilizer production plant was established and started its production of organic fertilizer (“ OF ”). On March 5, 2013, HSA secured the rights to use an enzyme developed by a Hong Kong company some twenty years ago that has been utilized by global manufacturers of organic fertilizer. The advantage of this particular enzyme is that when it is applied to the organic fertilizer it has the ability to convert part of the organic raw materials into potash and phosphate without having to add in chemically formulated potash and phosphate, such that the Company’s end fertilizer can be qualified as pure organic fertilizer made with 100% natural organic raw materials. With this pure organic fertilizer, HSA is in a position to fully explore the potential market for fish in farm lakes and thereby to attempt to align itself with the government’s policy of encouraging lake fish farmers to use pure organic fertilizer instead of chemical fertilizers. In addition, cost savings from avoiding the use of chemical potash and phosphate will, in management’s belief, result in a better profit margin for the Company. Sales of pure organic fertilizer commenced at the end of Q1 2013. By 2014 HSA successfully developed a different mixed organic fertilizer specially designed and composed for the application in lakes to provide nutrients to enhance growth of water plants and microorganisms in the lakes that the fish are fed on. We call this type of fertilizer “the Organic Mixed Fertilizer” (“ OMF ”). In the same year, HSA also developed a domestic pack of fertilizer called the “Retailed Pack Fertilizer” (“ RPF ”) supplying to the super market chain. As such there are three types of fertilizers being produced with:

 

(a). The OF is being used for the growing of crops, vegetables and plants,

 

(b). The OMF is being used for the growing of fish in the lakes, and

 

(c). The Retailed Pack fertilizer (“ RPF ”) are being used by domestic households.

 

By Q2 2016, HSA completed its construction work of and started production operation with its second fertilizer production plant.

 

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Construction work to develop HSA’s cattle station that began in March 2012 by cutting half of the hill at site next to the fertilizer production site that cost far more than the budget originally estimated (from the budgeted $8 million to almost $20 million) due mainly to extra-work required to satisfy compliance of the additional environmental impact conditions implied in the Government’s 2016 regulation and to additional work required to reconstruct the foundation of the land due to a number of land-slides occurred during the rainy season, however related main construction work were 95% completed by year end of 2017 containing a 2,000 head capacity cattle farm built and pending on the completion of the installation of associated plants and equipment, accessories and operational fittings and other necessities, it will be ready for stocking of cattle for rearing and fattening operation targeting to be within 2018. In this respect, the Company is recruiting and selecting the right management team specializing in the growing of the selected native breed cattle (namely the “ Asian Yellow Cattle, ” or “ AYC ”) in readiness to start-up the operation. The AYC are mainly found in Guangxi district and grown in free range conditions by small farms such that our initial stocking up to 2000 heads is rather significant in comparison that really needs a good management team to carry out its operation efficiently. The Company cultivated 75 acres of its land, situated below the fertilizer factory, and planted a high yielded pasture that have been developed in our Cattle Farm 1 in Enping District harvesting up to 200 MT/acre/year for the past year that has been proven as quality livestock feed suitable to the growing and fattening of AYC. The pasture will be harvested from the said 75 acres are the main bulk livestock feed fed to the AYC that will be sufficient for the growing of 2000 heads of AYC per year starting from 2018. In term, the plan is that; the cattle’s liquid waste will be used to fertilize the pasture field and the cattle’s solid waste will be used as raw materials by the fertilizer factory such that all wastes will be recycled, which we refer to as the AYC development project.

 

However this AYC development plan was disrupted and put on hold during mid-year of 2018 when the Government imposed an additional environmental regulation requiring the construction of a mash gas plant before the permit of the cattle farm could be issued. Although the Mash gas plant will be paid by the Government under subsidization program currently available to the project, it will take a further 12 months or more for construction, such that the Company decided to lease out the AYC development project’s property situated on land of 25 Mu to an unrelated third party whilst the Company evaluates other business opportunities and options that may allow better financial returns to the Company in the meantime.

 

HSA produced over 50,000 MT of organic fertilizer and organic mixed fertilizer in 2016, which was reduced to 24,448 Mt in 2018 (a decrease of 59.25%) primarily due to (i) the production of the fertilizer in HSA being affected in the second half of 2017 by the ongoing construction work of cattle station during the year and (ii) the retrofitting of the fertilizer plant to accommodate the application of cattle waste as the main source of raw material versus chicken waste as its main product source. By Q4 2017, HSA’s production lines were back to online. Organic Fertilizer generated sales of 15,105 MT in 2018 from 15,334 MT sold in 2017. Organic Mixed Fertilizer, generated sales of 14,638 MT in 2018 from 9,042 MT sold in 2017.

 

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, 2018 was $29.56 million, or 29.96%, of the Company’s total sales of goods revenue of USD 141.67 million in the same period. Gross profit for the Cattle Farm (MEIJI) division for the 12 months ended December 31, 2018 was $4.29 million, or 19.81% percent of the Company’s total gross profit on sales of goods of $21.65 million in the same period.

 

Currently there are two operations in this segment, Cattle Farm 1 and Cattle Farm 2.

 

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.

 

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.

 

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Similar to CA in its business model, 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.

  

AYC is traditionally a high-end market in China, as it is mainly sold in higher end markets (i.e. its 2016/2017 average of wholesale price was between RMB70 to RMB78/kg (live weight) while the average of other (western origin breed beef) cattle like Angus, etc. was between RMB36 to RMB 48/kg (live weight). We are anticipating that the AYC situation is rapidly changing, though, owing to urbanization and rising incomes, the rising demand for such quality beef, such that we foresee that eventually, locally grown and produced high quality beef from local breeds like the AYC will establish its “Brand” and market niche, returning premium prices in China similar to how many locally bred Japanese Cattle found their market niches in Japan that are not be affected by the supplies of imported beef.

 

Initially (as demonstration farms) these farms were going smoothly rearing and fattening mainly the western origin beef cattle (“ WOBC ”) breeds (i.e. Angus and/or Simmental) similar to cattle fattened at SJAP until the adverse impact caused by said relaxed importation of cattle from other countries that reduced the activity of the fattened WOBC and to grow more AYC. However, although the domestic prices of the AYC were not being affected by the imports, they do have much lower growth rates due to their small stature and in turn reduces these farms’ sales revenues based on volume yet make up the difference on their return on gross profit as evidenced in 2018 for gross profit of $4.29 million derived from sales of $29.56 million when compared to 2016 for gross profit of $1.54 million derived from sales of $29.84 million of WOBC.

 

Presently, these farms are carrying on with the growing and fattening mainly AYC.

 

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, 2018 was $3.61 million or 2.56% of the Company’s total sales of goods revenue of $141.67 million in the same period. Gross profit for the plantation division for the 12 months ended December 31, 2018 was $0.52 million, or 2.4% percent of the Company’s total gross profit for sales of goods of $21.65 million in the same period.

 

JHST is an SFJVC that is 75% owned by SIAF consolidated as a subsidiary, and is the owner and operator of a Plantation where mainly Hylocereus Undatus, or Dragon Fruit, and cash crop vegetables, are grown.

 

Hylocereus Undatus is a cactus commonly referred to as dragon fruit. JHST conducts two main operations: (i) growth and sales of flowers that are consumed as vegetables in China, and (ii) drying and value added processing and sales of HU flower products (used in health-related soups and teas). JHST cultivates 187 acres of Hylocereus Undatus in the Guangdong Province.

 

HU cacti take three years to reach maturity, though they will flower a little even in their first year, and can produce for as long as twenty years. JHST began planting in late 2007, and by 2015 all of the plants are mature (averaging over four years). HU blooms for a very short period, sometimes only one night, and flowers must be 20 to 25 cm long when picked before they turn from green to white. HU is a delicate crop and the harvest season runs from July through October.

 

Small amount of fresh flowers are sold to regional wholesale and retail markets due to their short shelf life and most of the flowers are dried and packed; these flowers are sold to a few major wholesalers, who distribute them to wholesale and retail markets and export traders through the winter and spring months (from October to June) in Guangdong Province. HU is a seasonal revenue product; more than half of JHST’s revenues are recognized in the third quarter. No sales are made in the first quarter.

  

The Company originally expected that by 2014, dried and pickled flowers would make up 96 percent of the division’s flower income as produce is diverted away from delicate fresh flowers. In 2013, the Company also planted a special selenium-rich Chinese herb (called XueYingZi, or “Immortal Vegetable” in China and Snowsakurako in Japan) and tried many treatment methods hoping to prolong the shelf life of the fresh flowers from 2-3 days up to 12-14 days aiming to increase the sales of fresh flowers. This experimentation had not produced the desired outcome; thus the Company instead has processed up to 80 percent of HU as dried flowers from 2013, onward.

 

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HU flowers are in greater demand than supply can meet for several reasons; (i) In Guangdong Province, HU plants can only be grown commercially along certain districts; there were over 40,000 acres of HU Plantation in 2005, but due to the growth of industrialization and modernization, acreage is now less than 4,000 acres, and (ii) farm laborers are getting harder to find. With the increase of cost of wages and salaries, the rapid rise of the land cost and the increase cost of farm developments, it is extremely difficult to start up a big acreage HU plantation. For these reasons the Company anticipates that prices of dried HU flowers will enjoy a steady rise at an average rate of 8 to 12 percent per year, which has been the trend since 2009. However, the biggest risk to yield is weather, as substantially wet rainy seasons can limit the yield of any harvest and damage their roots in term inducing diseases to the plants.

 

Our plantation experienced very heavy wet seasons for more than 4-5 years (2013 to 2017) requiring the Company to combat and treat diseases and related problems continuously during the period, but by 2017 had exhausted all various means to recover and to revitalize the HU plantation. With continued wet conditions experienced over the past years, damage to the soil and plant roots has increased disease problems to the HU plantation affecting its overall yield as well as quality of harvested flowers Even though new plants were being planted each year increasing the area of planting by over 900 Mu to a total of over 1700 Mu with the intent to increase productivity, proportionately, the outcome has fell well short of intended results. Furthermore, poor soil and weather conditions adversely affected the quality of the HU flowers products which caused a significant drop in selling prices (i.e., there was no sales of the fresh HU flowers decreased in 2018 while that of dried HU flowers decreased from $5.19/kg in 2017 to $4.93/kg in 2018). At the same time, the regional farmers suffered the same fate that we could not buy enough fresh flowers from them to dry to maintain the sales of dried flowers. Therefore, due to deteriorating conditions recurring in the HU sector, the Company is reviewing the following options with the hope to remedy the situation.

 

One of the plans of JHST was to plant other cash crops to provide an alternative source of income for the plantation. Immortal Vegetable (IV) plants have properties that some believe induce good health. The Company has processed these into small herbal tea bags - selling them as organic herbal health tea. Laboratory test results show that each kilo of fresh Immortal Vegetables contains 0.58 gram of selenium, which adds value to their sales. As of the 2015 season there were 70 Mu designated for growing immortal vegetables on the plantation, however sales of this products did not reach targeted levels such that in 2017 the Company maintained only a small plot of about 10 Mu for growing IV. We did not sell any dried IV tea in 2017, but we kept over 20,000 Kg dried IV tea in inventory planning to relaunch its sales by one of the country’s top e-commerce operators in 2018 that will involve (a) Repackaging the products by a well-known and reputable health food processor and promoter into three separate and different health products with each product reflecting its own health property instead of an all-in-one application like had been, previously, (b) To promote the product under one of China’s best brand names of health herbal products. Our herbal health tea products (“ HHTP ”) have been accepted by one of their franchisees during March 2018, and, as such, we are working on trials with the processor over the coming months to start launching the HHTP onto an e-commerce platform targeting Q3 2018 depending on the successful outcome of the trials to meet various marketing markers, satisfactorily. If HHTP is launched successfully, there is good potential for JHST’s plantation to generate sustainable high sales revenues and profit from 2018 onward because the IV are very durable plants with strong disease resistant characteristics having good growth rates producing 5 yields per year (average of 50 MT of fresh produce/acre/year) at a reasonable cost of production averaging at RMB1000/MT or the equivalent of RMB 50,000/acre. Practically speaking, the whole plant (that is, the flowers, leaves, sterns and roots) can be dried into the HHTP averaging 5 MT of HHTP/acre/year. We are targeting to plant about 15 acres in year 1 (starting from Q3 2018) to process into 75 MT of HHTP to generate direct farm sales (excluding marketing and other associated sales revenue and costs, etc.) up to RMB45 million/year 1 (or the equivalent of $7.2 million) at about a 70% gross profit margin. If successful, it will enhance revenue and profit by more than 200% of JHST’s annual sales revenue and gross profit generated in FY2018.

 

In March 2018, JHST signed two growing contracts that have stable pricing conditions: (1). With a herbal plant oil processor to grow 50 acres of plants called “Pogestemon Patchouli” (“ PP ”) for processing into a type of natural aromatic oil that has experienced a good market in China. 50 acres of trial will be run this year but can be expanded to 150 acres next year if proven successful. It is estimated that the 50 acres of PP will generate sales revenues over $1 million with 50% gross profit margins based on two harvests for the year 2018; and (2). To grow 200 acres of Passion Fruit for a Juice Manufacturer from 2018 to 2020 for 3 years initially estimated to produce around 2,400 MT of fruit/year contracted at RMB 8,000/MT (or $1,280/MT) to generate over $3 million in sales revenue. The combination of both fruits and PP will enhance revenue and gross profit to JHST that again will exceed its performance of FY2018, if their outcomes prove successful.

 

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Unfortunately the typhoon during Q3 2018 has destroyed much of the winter cash crops, which reduced JHST’s performances in Q4 2018 and in turn reduced 2018’s annual revenue and incomes by 22% and 62.5% respectively compared to 2017. At the same time the typhoon also destroyed the newly planted herbal PP plants and the passion fruit trees delaying their development. Currently as at the beginning of Q2 2019, management of JHST is still evaluating JHST’s overall prospects yet it has not yet come up with any conclusive plans needed for JHST.

 

Marketing & Trading Division

 

Revenue for 12 months ended December 31, 2018 was $68.45 million or 48.5% of the Company’s total sales of goods revenue of $141.67 million in the same period. Gross profit for the plantation division for the 12 months ended December 31, 2018 was $7.18 million, or 33.16% of the Company’s total gross profit for sales of goods $21.65 million in the same period.

 

The Company distributes imported meat and seafood through two completed and operational facilities from which it has acted as turnkey project developer to construct and to provide supervision to these operations:

 

1) Wholesale and distribution facilities ( “Wholesale Center 1 ”) for Guangzhou City NaWei Trading Co. Ltd (“ NWT ”), an unrelated Chinese third party owned company situated at the Guangzhou City, LiWan District, New Wholesale Market.

 

2) The Shanghai Distribution Center which was built to accommodate a capacity of 50 metric tons of meat per day and to distribute 5,000 metric tons of seafood per year.

 

In 2013, the Company also constructed a trading complex (the “Trading Center”) for the Import and Export at another building adjacent to Wholesale Centers 1 and 2. The Trading Center has imported frozen and fresh chilled and live seafood (i.e., cuttlefish, squid, prawns, salmon, crabs and eels) from Malaysia, Thailand, Russia and Madagascar and other local coastal fishing towns. The seafood was sold to Wholesale Center 1, which distributed and sold it into various reputable food chain outlets, wholesale market stores and supermarket chains in the Guangzhou City, Shanghai City as well as in the southern coastal towns of the Guangdong Province.

 

Primarily, the Company distributes meat imported from Australia and seafood from other countries through these operations under their import and export permits conditioned under the China Government’s regulations.

 

We believe this division has excellent growth potential due mainly to the needs of import foods in China, but the sales of this division is limited mainly by “insufficient working capital” to really drive up the sales’ turn over. For instance the company’s average of gross profit of import trade is at 10.5% (derived from average of 12.5% in mark-up) for selling the imported goods to its sales agencies to distribute in China when the total working capital(WC) needs for the 1 st month’s import and the subsequent 2 nd months import calculated to about 4 months’ “good-sold” when considering that it will require 2 months times to complete one cycle of the monthly import allowing time provided for “ordering, shipping, custom clearance, good inspection, discharging & local transportation, storing and selling time etc. and another 2 months for subsequent month’s import totaling to 4 months. As such, if the Company wants to generate $120 million in sales in one year it will require WC of about $40 million (or 33.3%) to be locked up month after month continuously during the year whilst the Company did not have $40 million in WC in the past or currently for that purpose, such that it could only build up sales of this division gradually pending on the availability of working capital from time to time.

 

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.

 

Overall in 2018 this division achieved average gross profit margins of 11% for the trading of seafood and 10% on the trading of beef from selling imported goods to its sales agencies to distribute in China based on an averaged mark-up of 12.5% on cost of goods sold excluding the cost of import duties, value added taxes and local associated charges etc. that were paid by respective agencies. This kind of gross profit margin will be increased when the Company will be in the financial position to afford to buy directly from the fishermen and to sub-contract the value added processors to process the seafood directly.

 

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Project Development Division

 

The project developments (or Technology engineering consulting and services) work are carried out by CA on aquaculture related projects and by SIAF on non-aquaculture projects:

 

Introduction

 

The Project Development division earns revenue by providing turnkey project management and engineering services today mainly within aquaculture. Project development revenue for 12 months ended December 31, 2017 was $16.99 million or 8.57% of the Company’s total revenue of $198.17 million (derived collectively from $181.12 million in Sales of goods and Project Development of $16.99 million) in the same period. Gross profit for project development for the 12 months ended December 31,2018 was $3.42 million or 17.42% of the Company’s total gross profit of $19.63 million (derived collectively from $16.21 million of Sales of goods and Project development of $3.42 million) in the same period. All project development activity for the year was carried out through Capital Award for its unconsolidated investee, Tri-way.

  

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;

 

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· 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).

 

  - 36 -  

 

 

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 1 st 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.  

 

  - 37 -  

 

 

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.

 

  - 38 -  

 

 

· 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
2. Grow-out fish or MWP.

 

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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 will be delayed until such time as the supporting facilities are completed and working efficiently. 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.

 

R&D work and development the 3 rd 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 3 rd 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 2 nd 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.

 

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· 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 2 nd “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 prospectus, 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.

 

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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). 2

  

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.

 

 

2 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.

 

  - 42 -  

 

 

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 prospectus, 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.

 

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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.

 

Carve-outs

The Company has announced that it has begun the first of three or four contemplated divestitures. The Company is currently exploring various opportunities for reorganizing or restructuring some of its current assets into new companies by means of mergers and/or acquisitions with the aim to establish higher independent fair market values for said companies (or respective related assets) by either listing each of said companies on a suitable stock exchange or selling them in a receptive market (or to a receptive buyer) The first carve-out (Tri-way) is comprised of aquaculture operations. The new company holds one single share class and shall conform to corporate governance standards assigned by the Hong Kong Securities and Futures Commission as well as the potential Stock Exchange targeted for its listing. The Company’s aquaculture operations, namely the C&S Project farms are, as follows:

 

· Jiang Men City A Power Fishery Development Co., Ltd. (Fish Farm 1);

 

· Enping City Bi Tao A Power Prawn Culture Development Co., Ltd. (Prawn Farm 1);

 

· Zhongshan A Power Prawn Culture Farms Development Co., Ltd. (Prawn Farm 2), and;

 

· Zhongshan New Prawn Project (ZSNPP) Phase 1 as well as an opportunity to acquire additional phases of the project as development continues. The ZSNPP is targeted to reach an annual production capacity of at least 200,000 metric tons over the long term.

 

Establishing the proposed new company would in management’s view expedite the attainment of several of the Company’s strategic objectives:

 

· Simplify the structure of the Company by creating a rapidly growing, profitable aquaculture company focused on the production of seafood with unique expansion potential;

 

· Create a company with an independent board of directors, a shareholder nomination committee, a single share class, a separate management team and auditors, dedicated reporting and investor relations functions;

 

· Expose the new company to institutional investors with in-depth knowledge and high appreciation of aquaculture businesses. Facilitate funding to increase ownership in existing aquaculture facilities, and;

 

· Create an independent company to secure funding for the future development of additional stages at the significant Zhongshan New Prawn.

 

As a result of the carve-out, Tri-way, as of October 1, 2016, is now categorized under SIAF as an investor in associate status from its original categorization as a SIAF subsidiary. Prior to the carve-out, Tri-way had assumed 100% holdings in JFD (previously, a 75% owned subsidiary) on August 16, 2016. Subsequently, Tri-way has merged/acquired in exchange for equity, all C&S farm projects and their respective assets.

 

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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 PSE 3 , 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.

 

 

3 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.

 

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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.

 

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. 4

 

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.

 

 

4 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 prospectus will use Chinese terminology to maintain consistency between Chinese statistics and product categories. Total aquatic trade statistics below do not include fishmeal.

 

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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 @2019 undercurrent news, China’s seafood imports increased by 44% to $12bn in 2018. In the twelve months to the end of December 2018, China imported CNY 787bn worth of seafood, according to Chinese customs data.

 

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Aquaculture

 

 

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 323 million tons in 2017. 5 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. 6 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. 7 China’s animal feed market is projected to grow at a CAGR of over 16% till 2019. 8

 

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.

 

 

5 Review of Recirculation Aquaculture System Technologies and their Commercial Application, Stirling Aquaculture, Institute of Aquaculture.

6 Food Outlook, FAO, November 2018

7 Research Report on Beef Import in China, 2019-2023

8 China Animal Feed Market Forecast and Opportunities, 2019

 

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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. 9

 

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. 10

 

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. 11 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.

 

 

9 Meat - OECD-FAO Agricultural Outlook 2018-2027

10 Frost & Sullivan: China’s beef market has great growth potential

11 Fertilizer Market Global Report 2017, Business Research Company

 

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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. 12

 

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.

 

Market for fruits and vegetables in China

The information in this section regarding the market for fruit in China is taken from the International Trade Center report “Overview of the markets for selected tropical fruits and vegetables in China” unless otherwise stated.

 

China is the biggest producer of fruit in the world, with a total of approximately 10,734,259 hectares of fruit planting area and a fruit output of approximately 192,202,000 tons as of 2008, according to the National Bureau of Statistics of the PRC. The per capita annual fruit consumption in China as of 2008 amounted 149 kilograms per capita, well above the global average of 69.09 kilograms per capita, according to FAO. In 2009, China exported 5,255,000 tons of fruit, an 8.5 percent year-on-year increase compared to the previous year, equivalent to a value USD 3.83 billion according to China Customs. The Chinese import of fruit in 2009 amounted to 2,309,000 tons, valued to USD 1.63 billion, a 37.0 percent increase year-on-year compared to 2008. This led to a fruit trade surplus of USD 2.2 billion, approximately a 27.6 percent decrease compared to 2008 according the Ministry of Agriculture of the PRC.

 

The global tropical fruit output, where the dragon fruit (Hylocereus Undatus) is included, reached roughly 82,700,000 tons in 2008 according to FAO. The output was led by mango, followed by pineapple, guava and avocado. According to the Ministry of Agriculture of the PRC, tropical fruit accounted for approximately 25 percent of the total fruit planting area in China in 2009, equivalent to roughly 2,500,000 hectares providing a total output of more than 20,000,000 tons. The research adds that an additional 17,500,000 hectares spread over China is suitable for planting tropical fruits.

 

The most commonly consumed tropical fruits in China are pineapple, mango, banana, litchi, coconut, longan and cashew. However demand for, e.g., mangosteen, star fruit, durian and dragon fruit is quickly growing among the population in the first and second tier cities. The China Fruit Marketing Association estimates that the consumption of tropical fruits accounts for roughly 10 percent of all the fruit in China, equivalent to approximately 19,000,000 tons. Analysts estimate that about 80 percent of the tropical fruit in China is consumed fresh, contrary to canned or processed fruit.

 

Consumer trends

Consumers in the northern and central parts of China generally prefer more sweet tasting fruit, preferably tropical fruits. In the southern regions of China however, the population consumes a broader range of fruits. Overall in China, consumers have started to consume more fruit with distinctive smells, for example durian and jackfruit. During recent years there has been a significant increase in consumption of more expensive fruit, such as durian, mangosteen and jackfruit thanks to the increasing standard of living of the population as well as the increased availability of such imported fruits.

 

The most commonly consumed imported fruits in China include kiwi, durian, mangosteen, grapes, cherries and dragon fruit. Generally, the Chinese population prefers to consume fresh fruit; so when domestic, fresh fruit is available during summer, consumption of the fresher and cheaper domestic fruit increases. In winter, when domestic products cannot be harvested or sold, the import of fruits, and especially tropical fruits, increases immensely.

 

Organic fruits are mostly sold domestically in China and have become increasingly popular in the market; however, the supply is still relatively small and the price is still more expensive (approximately RMB 1-2 more expensive per kg).

 

GOVERNMENT REGULATION

 

Regulation of M&A and Overseas Listings

 

 

12 Fertilizers in China, Industry Study with Forecasts for 2015 & 2020, Freedonia Group; June 2012

 

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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.

 

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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.

  

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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.

 

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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).

 

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DESCRIPTION OF PROPERTIES

 

We use the following properties:

 

Summary of Our Land Assets

 

Item   Owner   Location   Acres   Date
Acquired
  Tenure   Expiry dates   Nature of ownership   Nature of project
                                 
Hunan Lot 1   HSA   Ouchi Village, Fenghuo Town, Linli County    31.92   4/5/2011   43   3/31/2054   Lease   Fertilizer production
Hunan Lot 2   HSA   Ouchi Village, Fenghuo Town, Linli County    247.05   7/18/2011   60   7/17/2071   Management Right   Pasture growing
Hunan Lot 3   HSA   Ouchi Village, Fenghuo Town, Linli County    8.24   5/24/2011   40   5/23/2051   Land Use Rights   Fertilizer production
Hunan Lot 4   HSA   Ouchi Village, Fenghuo Town, Linli County   24.71   6/1/2018   50   5/31/2068   Lease   Cattle fattening
Guangdong Lot 1   JHST   Yane Village, Liangxi Town, Enping City    8.23   8/10/2007   60   9/8/2067   Management Right   HU Plantation
Guangdong Lot 2   JHST   Nandu Village of Yane Village, Liangxi Town, Enping City    27.78   3/14/2007   60   4/15/2067   Management Right   HU Plantation
Guangdong Lot 3   JHST   Nandu Village of Yane Village, Liangxi Town, Enping City    60.72   4/18/2007   60   4/17/2067   Management Right   HU Plantation
Guangdong Lot 4   JHST   Nandu Village of Yane Village, Liangxi Town, Enping City    54.68   9/12/2007   60   9/11/2067   Management Right   HU Plantation
Guangdong Lot 5   JHST   Jishilu Village of Dawan Village, Juntang Town, Enping City    28.82   9/12/2007   60   9/11/2067   Management Right   HU Plantation
Guangdong Lot 6   JHST   Liankai Village of Niujiang Town, Enping City    31.84   1/1/2008   60   1/1/2068   Management Right   HU Plantation
Guangdong Lot 7   JHST   Nandu Village of Yane Village, Liangxi Town, Enping City    41.18   1/1/2011   26   12/31/2037   Management Right   HU Plantation
Guangdong Lot 8   JHST   Shangchong Village of Yane Village, Liangxi Town, Enping City    11.28   1/1/2011   26   12/31/2037   Management Right   HU Plantation
Guangdong Lot 9   MEIJI   Xiaoban Village of Yane Village, Liangxi Town, Enping City    41.18   4/1/2011   20   3/31/2031   Management Right   Cattle Farm
Qinghai Lot 1   SJAP   No. 498, Bei Da Road, Chengguan Town of Huangyuan County, Xining City, Qinghai Province    21.07   11/1/2011   40   10/30/2051   Land Use Right & Building ownership   Cattle farm, fertilizer and livestock feed production
Guangdong Lot 10   JHST   Niu Jiang Town, Liangxi Town, Enping City    6.27   4/1/2013   10   3/31/2023   Management Right   Processing factory
Guangdong lot 11   CA   Da San Dui Wei ,You Nan Village, Conghua District of Guangzhou City    33.27   10/28/2014   30   10/27/2044   Management Right   Agriculture

 

We do not own any of the land mentioned in the table above

In general, the Government owns all land. In urban areas, the land is owned directly by the central Government. In rural and suburban areas, the local village collectives, usually through the villagers’ collective economic organization, or the village committees, own the agricultural land. Uncultivated land in mountain and other remote areas is also Government-owned. Corporate entities and individuals may own the enhancements (buildings, fences, and other structures) erected on Government land.

 

As such, any transferrable rights to the land are in the form of usufructuary rights (i.e., the right to use and enjoy the benefits derived therefrom for a period of time).

 

There are several types of usufructuary rights. These include the right to land contractual management (granted by local village collectives for agriculture land), the right to use of construction land (state land in urban areas), etc. The right to land contractual management allows a party the rights to possess, utilize, and obtain profits from agricultural land. This right is transferrable, but this land use right is based on agricultural household contracts and cannot be changed arbitrarily to non-agricultural purposes.

 

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A usufructuary right properly granted in accordance with the laws may be transferred, leased, or mortgaged in accordance with the laws and the terms of the land-grant contract.

 

1. A lease confers on the recipient the same right to use and enjoy the benefits, except for the right to own the building erected by the recipient and the right to transfer. In case of government acquisition of the land, the compensation paid by the government for the building will go to the lessor, unless the lease agreement states otherwise. The Agreement for the 109.79MU land of HSA is stated to be a lease agreement but the terms therein seem to suggest that HSA is being granted a Management Right.

 

2 & 3. Land Use Rights and Management Rights confer the same right to use and enjoy the benefits. “Land Use Right” is one granted by the State and usually used in the context of urban land, whereas local village collectives grant “Management Rights” and the term usually applies to rural land.

 

4. The term Land Use Right relates to the right to use the land and enjoy the benefits derived there from, whereas Building Ownership Right relates to the right to ownership of the building erected on the land concerned. SJAP was granted a Land Use Right by the State for the land (state-owned land), and a Building Ownership Right for the buildings erected thereon.

 

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 China 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.

 

SIAF’s Company of Companies - Rented Premises Profiles

 

Company   Location   Usage   Landlord   Tenure
                 
Sino Agro Food, Inc.  

Room 3801, Block A, China Shine Plaza,

No. 9, Linhexi Rd.,

Tianhe District,

Guangzhou City

  Head Office   Guangzhou Shine Real Property Development Limited Company  

July 9, 2016 to

July 8, 2018

 

                 
Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd.  

Unit 1-5, Jiangzhou Shuizha Building,

No. 19 Jiangjun Rd., Juntang Town,

Enping City

  Office   Enping City Jiangzhou Water Engineering Management Dept.  

April 1, 2014 to

March 31, 2019

 

USE OF PROCEEDS

 

We will not receive any cash proceeds from the issuance of the shares of Series G Preferred Stock in exchange for the outstanding shares of Common Stock. Such shares of Common Stock validly tendered (and not validly withdrawn) and accepted by us shall be cancelled and shall revert to authorized but unissued shares of Common Stock of the Company.

 

THE EXCHANGE OFFER

 

Terms of the Exchange Offer

 

We are offering to exchange 1,000,000 shares of our Series G Preferred Stock for shares of our Common Stock. The number of shares of Common Stock that will be required to be submitted in exchange for one share of Series G Preferred Stock will be determined by the market price of the Common Stock calculated by the average closing price of such shares for the three days before the date that shall be three business days before the Expiration Date (the “ Market Price ”). One share of Series G Preferred Stock will be exchanged for such number of shares of Common Stock having a Market Price equal to $27.00. The Expiration Date will not occur until after the SEC has declared both this registration statement on S-4 and the related registration statement on S-1 effective.

 

  - 56 -  

 

 

You should read the description of the Series G Preferred Stock in the section in this prospectus entitled “Description of the Series G Preferred Stock.”

 

Expiration Date; Extensions; Amendments; Termination

 

This exchange offer will expire at 12:00 midnight, New York City time, at the end of the day on the Expiration Date, unless we extend it in our reasonable discretion. The expiration date of this exchange offer will be at least 20 business days after the commencement of the exchange offer in accordance with Rule 14e-1(a) under the Exchange Act.

 

We expressly reserve the right to delay acceptance of any Common Stock, extend or terminate this exchange offer and not accept any Common Stock that we have not previously accepted if any of the conditions described below under “Conditions to the Exchange Offer” have not been satisfied or waived by us. We will notify the exchange agent of any extension by oral notice promptly confirmed in writing or by written notice. We will also notify the holders of the Common Stock by a press release or other public announcement communicated before 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date unless applicable laws require us to do otherwise.

 

We also expressly reserve the right to amend the terms of this exchange offer in any manner. If we make any material change to the exchange offer, we will promptly disclose this change in a manner reasonably calculated to inform the holders of our Common Stock of the change, including providing public announcement or giving oral or written notice to these holders. A material change in the terms of this exchange offer could include a change in the timing of the exchange offer, a change in the exchange agent and other similar changes in the terms of this exchange offer. If we make any material change to this exchange offer, we will disclose this change by means of a post-effective amendment to the registration statement which includes this prospectus. In addition, we will extend this exchange offer for an additional five to ten business days as required by the Exchange Act, depending on the significance of the amendment, if the exchange offer would otherwise expire during that period. We will promptly notify the exchange agent by oral notice, promptly confirmed in writing, or written notice of any delay in acceptance, extension, termination or amendment of this exchange offer.

 

Procedures for Tendering Common Stock

 

Proper Execution and Delivery of Letters of Transmittal

 

To tender your Common Stock in this exchange offer, you must use one of the procedures described below depending on how your Common Stock is currently held. If you are a beneficial owner of shares of Common Stock that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your shares of Common Stock in the exchange offer, you must contact the registered holder promptly and instruct that person to tender on your behalf. In this situation, do not complete the letter of transmittal. Instead, contact the institution through which you hold your shares directly if you have not yet received instructions. Some financial institutions may effect tenders by book-entry transfer through the facilities of DTC:

 

(1) Shares held through DTC . If your shares of Common Stock are held in book-entry form through the facilities of DTC, your relevant DTC participants must electronically transmit their acceptance of the exchange offer through DTC’s ATOP system, for which the exchange offers will be eligible. In accordance with ATOP procedures, DTC will then verify such acceptance by sending an agent’s message to the exchange agent for its acceptance. An “ agent’s message ” is a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, which states that DTC has received an express acknowledgement from you that you have received this prospectus and the related letter of transmittal and agree to be bound by the terms of the letter of transmittal, and that we may enforce such agreement against you. Such agent’s message must be received by the exchange agent on or prior to 12:00 midnight, New York City time, at the end of the day on the Expiration Date. Then, upon consummation of the exchange offer, your ownership of the shares of Series G Preferred Stock received in exchange for your outstanding shares of Common Stock will also be held in book-entry form through the facilities of DTC.

 

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(2) Shares held through Broadridge, as transfer agent . If you hold your shares of record, your shares of Common Stock are or will be recorded directly on the records of Broadridge, as transfer agent (and will not be held through DTC), and therefore you must deliver to Broadridge, acting as exchange agent, at the appropriate address listed in the letter of transmittal, a properly completed and duly executed letter of transmittal, together with any other documents that Broadridge, as the transfer agent, may otherwise require. You do not need to deliver any certificates representing such shares to Broadridge, as exchange agent. The letter of transmittal must be received by Broadridge, as exchange agent, on or prior to 12:00 midnight, New York City time, at the end of the day on the Expiration Date. Upon consummation of the exchange offer, your ownership of the shares of Series G Preferred Stock received in exchange for your outstanding shares of Common Stock will be recorded directly on the records of Broadridge, as transfer agent. In order to have your shares of Series G Preferred Stock held through DTC instead, you must contact Broadridge and instruct it to transfer your shares from Broadridge to DTC.

 

The method of delivery of the letter of transmittal and all other required documents is at your election and risk. Instead of delivery by regular mail, we recommend that you use an overnight delivery or facsimile. If you choose delivery by regular mail, we recommend that you use registered mail, properly insured, with return receipt requested. In all cases, you should allow sufficient time to assure timely delivery. You should not send any letters of transmittal or any other required documents to us. You must deliver all documents to Broadridge, as exchange agent, at its address or facsimile number, as applicable, provided below.

 

The completion, execution and delivery of the letter of transmittal or the electronic transmittal through ATOP will, in each case, constitute acknowledgment and agreement that you are bound by the terms of the letter of transmittal (which includes certain representations, warranties and agreements by you, including, but not limited to, those set forth below under “—Representations, Warranties and Agreements”) and we may enforce the terms and conditions contained in the letter of transmittal against you.

 

Representations, Warranties and Agreements

 

By participating in the exchange offer and validly tendering (and not validly withdrawing) your shares of Common Stock, you will have, among other things:

 

(1) represented and warranted to us that you are authorized to tender, sell, assign and transfer the Common Stock tendered and to acquire Series G Preferred Stock issuable upon the exchange of such tendered Common Stock, and that upon our acceptance of such tendered shares we will acquire good and marketable title thereto, including all rights relating thereto related to your Common Stock, free and clear of all liens, restrictions and other encumbrances and not subject to any adverse claim; and

 

(2) (a) represented and warranted to us that you have not assigned, sold or otherwise transferred to any person any right or claim in respect of, arising out of or relating to the Common Stock, and (b) agreed not to do any of the foregoing.

 

Acceptance of Common Stock for Exchange; Delivery of Series G Preferred Stock

 

Your tender of Common Stock will constitute an agreement between you and us governed by the terms and conditions provided in this prospectus and in the related letter of transmittal.

 

We will be deemed to have received your tender as of the date when Broadridge, as exchange agent, has received (i) your agent’s message for its acceptance or (ii) your duly signed letter of transmittal accompanied by your Common Stock tendered.

 

All questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of tenders will be determined by us in our sole discretion. Our determination will be final and binding.

 

We reserve the absolute right to reject any and all Common Stock not properly tendered or any Common Stock which, if accepted, would, in our opinion or our counsel’s opinion, be unlawful. We also reserve the absolute right to waive any conditions of this exchange offer or irregularities or defects in tender as to particular shares. If we waive a condition to this exchange offer, the waiver will be applied equally to all holders. Our interpretation of the terms and conditions of this exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Common Stock must be cured within such time as we shall determine. None of SIAF, the exchange agent, the information agent nor any other person will be under any duty to give notification of defects or irregularities with respect to tenders of Common Stock. None of SIAF, the exchange agent, the information agent or any other person will incur any liability for any failure to give notification of these defects or irregularities. Tenders of Common Stock will not be deemed to have been made until such irregularities have been cured or waived. The exchange agent will return without cost to their holders any shares of Common Stock that are not properly tendered and as to which the defects or irregularities have not been cured or waived promptly following the Expiration Date.

 

  - 58 -  

 

 

If all the conditions to the exchange offer are satisfied or waived on the Expiration Date, we will accept all or a portion of Common Stock properly tendered and will issue the Series G Preferred Stock promptly thereafter. Please refer to the section of this prospectus entitled “Conditions to the Exchange Offer” below. For purposes of this exchange offer, Common Stock will be deemed to have been accepted as validly tendered (and not validly withdrawn) for exchange when, as and if we give oral or written notice of acceptance to the exchange agent.

 

If any tendered Common Stock is not accepted for any reason provided by the terms and conditions of this exchange offer or if Common Stock is submitted for a greater amount than the holder desires to exchange, the unaccepted or non-exchanged Common Stock will be returned without expense to the tendering holder, or, in the case of Common Stock in book-entry form, will be credited to an account maintained with the book-entry facilities of Broadridge, as transfer agent, promptly after withdrawal, rejection of tender or the expiration or termination of the exchange offer.

 

By tendering into this exchange offer, you will irrevocably appoint our designees as your attorney-in-fact and proxy with full power of substitution and resubstitution to the full extent of your rights on the shares tendered. This proxy will be considered coupled with an interest in the tendered shares. This appointment will be effective only when, and to the extent that we accept your shares in this exchange offer. All prior proxies on these shares will then be revoked and you will not be entitled to give any subsequent proxy. Any proxy that you may give subsequently will not be deemed effective.

 

Withdrawal of Tenders

 

Except as otherwise provided in this prospectus, shares of Common Stock tendered pursuant to the exchange offer may be withdrawn at any time before 12:00 midnight, New York City time, at the end of the day on the Expiration Date and, unless SIAF has previously accepted such shares pursuant to the exchange offer, may also be withdrawn at any time after the expiration of 40 business days from the commencement of the exchange offer. Once SIAF accepts shares of Common Stock tendered pursuant to the exchange offer, your tender is irrevocable.

 

For a withdrawal to be effective, you must send a written or facsimile transmission notice of withdrawal to the exchange agent before 12:00 midnight, New York City time, at the end of the day on the Expiration Date at the address provided below under “—Exchange Agent” and before acceptance of your tendered shares for exchange by us.

 

Any notice of withdrawal must:

 

(1) specify the name of the person having tendered the Common Stock to be withdrawn;

 

(2) identify the shares to be withdrawn, including, if applicable, the registration number or numbers and total amount of these shares;

 

(3) be signed by the person having tendered the Common Stock to be withdrawn in the same manner as the original signature on the letter of transmittal by which these shares were tendered, including any required signature guarantees, or be accompanied by documents of transfer sufficient to permit the trustee for the Common Stock to register the transfer of these shares into the name of the person having made the original tender and withdrawing the tender; and

 

(4) specify the name in which any Common Stock is to be registered, if this name is different from that of the person having tendered the Common Stock to be withdrawn.

 

We will determine all questions as to the validity, form and eligibility, including time of receipt, of all notices of withdrawal and our determination will be final and binding on all parties. SIAF may delegate such power in whole or in part to the exchange agent. None of SIAF, the exchange agent, the information agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or will incur any liability for failure to give any notification. Any such determinations may be challenged in a court of competent jurisdiction. Common Stock that is validly withdrawn will be deemed not to have been validly tendered for exchange in this exchange offer.

 

The exchange agent will return without cost to their holders all Common Stock that have been tendered for exchange and are not exchanged for any reason, promptly after withdrawal, rejection of tender or expiration or termination of this exchange offer.

 

  - 59 -  

 

 

You may retender properly withdrawn Common Stock in this exchange offer by following one of the procedures described under “—Procedures for Tendering Common Stock” above at any time on or before the Expiration Date.

 

Conditions to the Exchange Offer

 

We will complete this exchange offer only if:

 

(1) there has been no material change, which, in our reasonable judgment, would materially impair our ability to consummate the exchange offer;

 

(2) there is no change in the laws and regulations which would reasonably be expected to impair our ability to proceed with this exchange offer;

 

(3) the registration statement (of which this prospectus forms a part) is declared effective by the SEC and there is no stop order issued by the SEC suspending the effectiveness thereof,;

 

(4) there is no action or proceeding instituted or threatened in any court or before any governmental agency or body that would reasonably be expected to prohibit, prevent or otherwise impair our ability to proceed with this exchange offer; and

 

(5) we obtain any governmental approvals that we deem in our sole discretion necessary to complete this exchange offer.

 

There is no minimum tender or acceptance condition for this exchange offer, except that we may not accept a number of shares of Common Stock that would, based on the Market Price, require us to issue more than 1,000,000 shares of Series G Preferred Stock. We will not accept more than sixty percent (60%) of the issued and outstanding shares of Common Stock.

 

The conditions to the exchange offer are for our sole benefit. We may assert any one of these conditions regardless of the circumstances giving rise to it and may also waive any one of them, in whole or in part, at any time and from time to time, if we determine in our reasonable discretion that it has not been satisfied, subject to applicable law. Notwithstanding the foregoing, all conditions to the exchange offer must be satisfied or waived before the expiration of this exchange offer. If we waive a condition to this exchange offer, the waiver will be applied equally to all holders. We will not be deemed to have waived our rights to assert or waive these conditions if we fail at any time to exercise any of them. Each of these rights will be deemed an ongoing right which we may assert at any time and from time to time.

 

If we determine that we may terminate this exchange offer because any of these conditions is not satisfied, we may:

 

(1) refuse to accept and return to their holders any Common Stock that have been tendered,

 

(2) extend the exchange offer and retain all shares tendered before the Expiration Date, subject to the rights of the holders of these shares to withdraw their tenders, or

 

(3) waive any condition that has not been satisfied and accept all properly tendered shares that have not been withdrawn or otherwise amend the terms of this exchange offer in any respect as provided under the section in this prospectus entitled “—Expiration Date; Extensions; Amendments; Termination.”

 

Exchange Agent

 

We have appointed Broadridge as exchange agent for this exchange offer. The letter of transmittal and any other required documents should be sent or delivered by each stockholder or broker, dealer, commercial bank, trust company or other nominee to Broadridge as listed below. Any letters of transmittal or notices of withdrawal may be sent to Broadridge by as set forth below.

 

If using UPS, FedEx or Courier:

Broadridge, Inc.

Attn: BCIS IWS

51 Mercedes Way

Edgewood, NY 11717

 

  - 60 -  

 

 

If using a USPS Service:

Broadridge, Inc.

Attn: BCIS Re-Organization Dept.

P.O. Box 1317

Brentwood, NY 11717-0718

 

Information Agent

 

We have appointed Broadridge as information agent for this exchange offer. Questions or requests for assistance should be directed to Broadridge toll-free at (___) _______________ (non U.S. stockholders may call toll at (____) _______). Additional copies of this prospectus and the letter of transmittal may be obtained from Broadridge.

 

Purpose of the Exchange Offer

 

We have in the past issued a significant number of shares of Common Stock to lenders and others who have provided services to us. Based on investor feedback and advice received from trusted parties, we are conducting this exchange offer pursuant to which holders of the Common Stock will have the option (but not the obligation) to exchange some or all of their shares of Common Stock for shares of Series G Preferred Stock. We believe that many of these recipients of Common Stock, as well as other holders of Common Stock, would prefer to own a security that pays interest and could be redeemed in the future at a price that would deliver a significant return on their investment. In addition, we believe that, if common shareholders tender a significant number of shares of the Common Stock, we could see a pronounced increase in the market price in the Common Stock.

 

The Information Agent

 

The information agent for the exchange offer is Broadridge.

 

Fees and Expenses

 

SIAF has retained Broadridge to act as the information agent and the exchange agent in connection with the exchange offer.

 

The information agent and the exchange agent each will receive reasonable compensation for their respective services, will be reimbursed for reasonable out-of-pocket expenses and will be indemnified against specified liabilities in connection with their services, including liabilities under the federal securities laws.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This prospectus contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”). The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Forward-looking statements can be identified by the use of forward-looking terminology, such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties These statements reflect management’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause the Company’s actual results, performance or achievements in 2018 and beyond to differ materially from those expressed in, or implied by, such statements. Such statements, include, but are not limited to, statements contained in this prospectus relating to the Company’s business, financial performance, business strategy, recently announced transactions and capital outlook. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: a continued decline in general economic conditions nationally and internationally; decreased demand for our products and services; market acceptance of our products; the impact of any litigation or infringement actions brought against us; competition from other providers and products; the inability to raise capital to fund continuing operations; changes in government regulation; the ability to complete customer transactions, and other factors relating to our industry, our operations and results of operations and any businesses that may be acquired by us. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Readers of this prospectus should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

 

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You should read the following discussion and analysis of the financial condition and results of operations of the Company together with the financial statements and the related notes presented herein.

 

Description and interpretation and clarification of business category on the consolidated results of the operations

 

The Company’s strategy is to manage and operate its businesses under five (5) business divisions or units on a standalone basis, namely:

 

Beef & Organic Fertilizer Division

(Marked 1.    (i) SJAP & QZH (Derecognized as variable interest entity on December 30, 2017) and (ii) HSA)

Plantation Division (Marked 2.    JHST)
Fishery Division

(Marked 3.    A. CA Engineer & Technology and 3.B. Seafood sales — (Discontinued operation from October 5, 2016)

Cattle Farm Division (Marked 4.    MEIJI and JHMC)
Corporate & Others Division (Marked 5.    SIAF)

 

A summary of each business division is described below:

 

· 1. Beef and Organic Fertilizer Division refers to:

 

(i) The operation of our partially owned subsidiary Qinghai Sanjiang A Power Agriculture Co., Ltd. (“ SJAP ”) in manufacturing and sales of organic fertilizer, bulk livestock feed, concentrated livestock feed, and the sales of live cattle inclusive of: (a) cattle that are not being slaughtered in our own slaughter house operated by Qinghai Zhong He Meat Products Co., Limited (“ QZH ”) are sold live to third party livestock wholesalers, and (b) cattle that are sold to QZH and slaughtered and deboned and packed by QZH; and the sales of meats deboned and packed by QZH that are sold to various meat distributors, wholesalers and super market chains and our own retail butcher stores. QZH is a fully owned subsidiary of SJAP; as such, the financial statements of these three companies (SJAP, QZH and HSA) are consolidated into our wholly owned subsidiary, A Power Agro Agriculture Development (Macau) Limited (“ APWAM ”), as one entity. SJAP and QZH are both variable interest entities over which we exercise significant control. As of December 30, 2017, QZH was derecognized as variable interest entity and its operating profit and/or loss no longer accretive to the Company’s 41.25% holding in SJAP, a variable interest entity. More details related to QZH’s discontinuance of operations is delineated throughout other sections of this prospectus.

 

(ii) The operation of Hunan Shenghua A Power Agriculture Co. Ltd. (“ HSA ”) in manufacturing and sales of organic fertilizer .

 

· 2. Plantation Division refers to the operations of Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd. (“ JHST ”) in the HU Plantation business where dragon fruit flowers (dried and fresh), crops of vegetables and immortal vegetables (dried) are sold to wholesale and retail markets. JHST’s financial statements are consolidated into the financial statements of Macau EIJI Company Ltd. (“ MEIJI ”) as one entity .

 

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· 3. Fishery Division refers to the operations of Capital Award Inc. (“ Capital Award ” or “ CA ”) covering its engineering, technology and consulting service management of fishery farms and seafood sales operations and marketing, where;

 

Capital Award generates revenues from providing engineering consulting services as turnkey contractors to owners and developers of fishery projects that are being designed and engineered into turnkey contracts by Capital Award in China using its A Power Module Technology Systems (“ APM ”) as follows:

 

(A). Engineering and Technology Services; via Consulting and Service Contracts (“ CSC’s ”) for the development, construction, and supply of plant and equipment, and management of fishery (and prawn or shrimp) farms and related business operations.

 

(B). Seafood Sales from CA’s projected farms; became a discontinued segment of operations from October 5, 2016 when Tri-way was disposed to other third parties in term Tri-way was reclassified as an unconsolidated equity investee on same date.

 

· 4. Cattle Farm Division refers to the operations of Cattle Farm 1 under Jiangmen City Hang Mei Cattle Farm Development Co. Ltd (“ JHMC ”) where cattle are sold live to third party livestock wholesalers who sell them mainly to Guangzhou and Beijing livestock wholesale markets. The financial statements of JHMC are consolidated into MEIJI as one entity along with MEIJI’s operation in the consulting and service for development of other cattle farms (e.g., Cattle Farm 2) or related projects .

 

· 5. Corporate & Others Division refers to the trading segment of business operations of the Group named internally under Corporate division of Sino Agro Food, Inc., including import/export business and consulting and service operations provided to projects that are not included in the above categories, and not limited to corporate affairs .

 

CONSOLIDATED RESULTS OF OPERATIONS

 

Part A. Audited Income Statements of Consolidated Results of Operations for the fiscal year ended December 31, 2018, compared to the fiscal year ended December 31, 2017.

 

A (1) Income Statements (audited)

 

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    2018     2017  
Continuing operations                
Revenue                
- Sale of goods   $ 130,543,170     $ 181,183,609  
- Consulting and service income from development contracts     11,127,393       16,983,330  
- Commission income     -       -  
      141,670,563       198,166,939  
Cost of goods sold     (110,967,348 )     (164,974,247 )
Cost of services     (9,051,408 )     (13,566,203 )
Gross profit     21,651,807       19,626,489  
                 
General and administrative expenses     (15,595,032 )     (19,780,290 )
Net -loss)/income from operations     6,056,775       (153,801 )
                 
Other income -expenses)                
Government grant     649,095       2,539,989  
                 
Other income     56,672       100,218  
                 
Change in fair value of derivative liability             209,219  
                 
Loss on restructuring             (6,225,204 )
                 
Bad debts written off             (14,394,402 )
                 
Impairment on interests in unconsolidated investees             (153,046 )
                 
Non-operating expenses     (4,609,253 )     (10,717,693 )
                 
Net loss from disposal of variable interest entity - QZH             (9,365,643 )
                 
Share of income from unconsolidated equity investee     14,251,264       12,010,051  
                 
Interest expense     (600,519 )     (3,952,631 )
                 
Net expenses     9,747,259       (29,949,142 )
                 
Net -loss)/income  before income taxes     15,804,034       (30,102,943 )
                 
Provision for income taxes     -       (1,684 )
                 
Net -loss)/income from continuing operation     15,804,034       (30,104,627 )
                 
Less: Net loss/-income) attributable to  non - controlling interest     1,519,303       17,000,482  
Net -loss)/income from continuing operations attributable to Sino Agro Food, Inc. and subsidiaries     17,323,337       (13,104,145 )
Other comprehensive  income/-loss) - Foreign currency translation income/-loss)     (14,555,377 )     12,781,924  
Comprehensive -loss)/income     2,767,960       (322,221 )
Less: other comprehensive -income)/loss attributable to non - controlling interest     1,793,417       (5,602,048 )
Comprehensive -loss)/income attributable to Sino Agro Food, Inc. and subsidiaries     4,561,377       (5,924,269 )
                 
Earnings per share attributable to Sino Agro Food, Inc. and subsidiaries common stockholders:                
Basic   $ 0.46     $ (0.53 )
Diluted   $ 0.46     $ (0.53 )
                 
Weighted average number of shares outstanding:                
Basic     37,335,654       24,711,015  
Diluted     37,335,654       24,711,015  

 

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Comparative overview of FY2018 and FY2017 based on results as illustrated in Table A(1), above:

 

Note (1) to (3) to Table A.1:

 

(A): Information of Note (1, 2 & 3) Sales, cost of sales and gross profit and analysis:

 

The Company’s revenues were generated from (A) Sale of Goods and (B) Consulting and Services provided in project and business developments covering technology transfers, engineering, construction, supervision, training, management and technology licensing fees etc.

 

Table (A.2). below reflects segmental break-down figures of Sales of Goods Sold, Cost of Goods Sold, and related Gross Profit for the twelve months ended December 31, 2018 and the twelve months ended December 31, 2017.

 

In US$       Sales of goods     Cost of Goods sold     Sales of Goods'  Gross profit  
        2018     2017     2018     2017     2018     2017  
                                         
SJAP   Sales of live  cattle     6,644,964       9,144,054       7,624,190       8,443,166       -979,225       700,888  
    Sales of feedstock                                     -          
    Bulk Livestock feed     1,521,303       4,474,578       697,997       2,030,708       823,306       2,443,870  
    Concentrate livestock feed     8,043,813       12,062,075       4,477,767       6,768,584       3,566,046       5,293,491  
    Sales of   fertilizer     3,028,357       2,230,973       2,137,582       1,719,162       890,775       511,811  
    SJAP Total     19,238,438       27,911,680       14,937,535       18,961,620       4,300,903       8,950,060  
    * QZH's (Slaughter & Deboning operation)             300,212               107,021       -       193,191  
    ** QZH's (Deboning operation)                                     -          
    on cattle & Lamb locally supplied             5,211,624               5,589,151       -       (377,527  
    on imported beef and mutton             43,765,625               51,618,555       -       -7,852,930  
    Sales of  live  cattle             -                       -          
    QZH Total     -       49,277,461       -       57,314,727       -       (8,037,266  
HSA   Sales of  Organic fertilizer     3,583,034       3,445,674       2,932,754       2,876,173       650,280       569,501  
    Sales of Organic Mixed Fertilizer     6,088,296       3,722,171       3,961,581       2,115,238       2,126,715       1,606,933  
    HSA Total     9,671,330       7,167,845       6,894,335       4,991,411       2,776,995       2,176,434  
    SJAP's & HS.A./Organic fertilizer total     28,909,768       84,356,986       21,831,870       81,267,758       7,077,898       3,089,228  
JHST   Sales of Fresh HU Flowers     -       42,956               38,443       -       4,513  
    Sales of Dried HU Flowers     236,850       1,163,115       214,793       1,114,222       22,057       48,893  
    Sales of Dried Immortal vegetables     423,152       -       314,720               108,433       -  
    Sales of Vegetable products     2,957,246       3,432,024       2,568,877       2,101,902       388,369       1,330,122  
    JHST/Plantation Total     3,617,249       4,638,095       3,098,390       3,254,567       518,859       1,383,528  
MEIJI                                         -          
    Sale   of  Live cattle (Aromatic)     29,558,983       20,401,361       24,761,345       16,629,579       4,797,638       3,771,782  
    MEIJI / Cattle farm Total     29,558,983       20,401,361       24,761,345       16,629,579       4,797,638       3,771,782  
SIAF                                         -          
    Sales of goods through trading/import/export activities                                     -          
    on seafood     35,468,172       30,402,652       31,553,391       27,038,775       3,914,781       3,363,877  
    on imported beef and mutton     32,988,998       41,384,515       29,722,352       36,783,568       3,266,646       4,600,947  
    SIAF/ Others & Corporate  total     68,457,170       71,787,167       61,275,743       63,822,343       7,181,427       7,964,824  
                                                     
Group Total         130,543,170       181,183,609       110,967,348       164,974,247       19,575,822       16,209,362  
                                                     
%  of increase (+) or decrease (-)     -28 %             -33 %             21 %        

 

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The Company’s revenues generated from sale of goods decreased by $50,640,439 or 28% from $181,183,609 for the year ended December 31, 2017 to $130,543,170 for the year ended December 31, 2018. The decrease was primarily due to the decrease of revenues from the SJAP's & HSA, the beef and organic fertilizer sector (from $84.3million in 2017 to $28.9 million in 2018) affected mainly by the discontinuing operation of QZH (from $49.2 million in 2017 to $0 in 2018) and the decrease of revenues of SJAP (from $27.9 million in 2017 to $19.2 million in 2018), the JHST/Plantation sector (from $4.6 million in 2017 to $3.6 million in 2018) and the SIAF/Other& Corporate sector (from $71.8 million to $68.5 million), while revenues of HSA increased (from $6.9 million in 2017 to $9.7 million in 2018 and MEIJI’s revenues increased (from $20.4 million in 2017 to $29.6 million in 2018) collectively.

 

 The Company’s cost of goods sold decreased by $54,006,899 or 33% from $164,974,247 for the year ended December 31, 2017 to $110,967,348 for the year ended December 31, 2018. The decrease was primarily due to the decrease in cost of goods sold from the SJAP's & HSA (from $81.3 million in 2017 to $21.8 million in 2018) and JHST/Plantation sector (from $3.2 million in 2017 to $3.1 million in 2018), and the SIAF/Other& Corporate sector (from $63.4 million to $61.3 million), collectively.

 

Gross profit of the Company generated from goods sold increased by $3,366,460 or 21% from $16,209,362 for the year ended December 31, 2017 to $19,575,822 for the year ended December 31, 2018. The overall increase was primarily due to the increase of the SJAP's & HS.A. (The beef & Organic fertilizer sector) gross profit of $4 million in gross profit (from 2017’s $3.1 million to 2018’s $7.1 million) mostly resulted from eliminating the losses from the discontinuing operation of QZH (from $8 million in 2017 to $0 in 2018), the MEIJI/Cattle farm sector increase of 1 million in gross profit (from 2017’s $3.8 million to 2018’s $4.8 million) and HSA’s improved performance (from $2.1 million in 2017 to $2.8 million in 2018),collectively.

 

· 1. (i) Beef and Organic Fertilizer Division (SJAP and (discontinued) QZH):

 

In US$       Sales of goods     Cost of Goods sold     Sales of Goods'  Gross profit  
        2018     2017     2018     2017     2018     2017  
SJAP   Sales of live  cattle     6,644,964       9,144,054       7,624,190       8,443,166       -979,225       700,888  
    Sales of feedstock                                     -          
    Bulk Livestock feed     1,521,303       4,474,578       697,997       2,030,708       823,306       2,443,870  
    Concentrate livestock feed     8,043,813       12,062,075       4,477,767       6,768,584       3,566,046       5,293,491  
    Sales of   fertilizer     3,028,357       2,230,973       2,137,582       1,719,162       890,775       511,811  
    SJAP Total     19,238,438       27,911,680       14,937,535       18,961,620       4,300,903       8,950,060  
    % of increase (+) or decrease (-)     -31 %             -21 %             -52 %        
    * QZH's (Slaughter & Deboning operation)             300,212               107,021       -       193,191  
    ** QZH's (Deboning operation)                                     -          
    on cattle & Lamb locally supplied             5,211,624               5,589,151       -       (377,527  
    on imported beef and mutton             43,765,625               51,618,555       -       -7,852,930  
    Sales of  live  cattle             -                       -          
    QZH Total     -       49,277,461       -       57,314,727       -       (8,037,266  
HSA   Sales of  Organic fertilizer     3,583,034       3,445,674       2,932,754       2,876,173       650,280       569,501  
    Sales of Organic Mixed Fertilizer     6,088,296       3,722,171       3,961,581       2,115,238       2,126,715       1,606,933  
    HSA Total     9,671,330       7,167,845       6,894,335       4,991,411       2,776,995       2,176,434  
    % of increase (+) or decrease (-)     35 %             38 %             28 %        
    SJAP's & HS.A./Organic fertilizer total     28,909,768       84,356,986       21,831,870       81,267,758       7,077,898       3,089,228  
    % of increase (+) or decrease (-)     -66 %             -73 %             129 %        

 

Revenue from the sector of beef and organic fertilizer decreased by $55,447,218 or 66% from $84,356,986 for the year ended December 31, 2017 to $28,909,768 for the year ended December 31, 2018. The decrease was mainly due to the decrease in sales of the discontinued operation of QZH from $49.3 million in 2017 to $0 in 2018.

 

Cost of goods sold from beef and organic fertilizer decreased by $59,435,888 or 73% from $81,267,758 for the year ended December 31, 2017 to $21,831,870 for the year ended December 31, 2018. The decrease was mainly due to the decrease in cost of goods sold in the discontinued operation of QZH from $57.3 million in 2017 to $0 in 2018. Gross profit from the beef and organic fertilizer sector increased by $3,988,670 or 129% from $3,089,228 for the year ended December 31, 2017 to $7,077,898 for the year ended December 31, 2018. The increase was primarily due to the result in eliminating the losses from the discontinuing operation of QZH (from $8 million in 2017 to $0 in 2018) and HSA’s improved performance (from $2.1 million in 2017 to $2.8 million in 2018), collectively.

 

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The table below shows information of the sales of live cattle mostly from SJAP’s own farm in 2018/ 2017

 

            2018     2017     Difference  
SJAP   Production and Sales of  live  cattle   Heads     3,886       3,775       111  
    Average Unit sales price   US$/head     1,710       2,417       -707  
    Unit cost prices   US$/head     1,962       2,237       -275  
    Production  and sales of   feedstock                         -  
    Bulk Livestock feed   MT     8,619       25,355       -16,736  
    Average Unit sales price   US$/MT     177       176       1  
    Unit cost prices   US$/MT     81       80       1  
    Concentrated livestock feed   MT     18,064       27,630       -9,566  
    Average Unit sales price   US$/MT     445       437       8  
    Unit cost prices   US$/MT     248       245       3  
    Production and sales of fertilizer   MT     23,204       15,705       7,499  
    Average Unit sales price   US$/MT     131       156       -25  
    Unit cost prices   US$/MT     92       123       -31  
QZH   Distinuing operation                            
    Slaughter operation                            
    Slaughter of cattle   Heads             643          
    Service fee   US$/Head             12          
    Sales of associated products   Pieces             643          
    Average Unit sales price   US$/Piece             374          
    Unit cost prices   US$/Piece             166          
    De-boning & Packaging activities                            
    From Cattle supplied locally                            
    De-boned Meats   MT             1,252          
    Average Unit sales price   US$/MT             4,149          
    Unit cost prices   US$/MT             3,785          
    From imported beef   MT             8,047          
    Average Unit sales price   US$/MT             5,439          
    Unit cost prices   US$/MT             6,415          

 

 Since the disposal of QZH in 2017, the cattle sold were mostly from SJAP’s own farm and at lighter weight (averaging at less than 300 Kg/head) to keep the losses of growing cattle as low as possible. The market price of live cattle has not improved during 2018 averaging lower than US$6/kg which is below our growing cost of about US$6.50/Kg. At the same time, SJAP’s bulk stock feed and concentrated stock feed sales reduced to 8,619 MT and 18,064 MT in 2018 compares to 2017’s 25,355 MT and 2763 MT respectively due primarily to SJAP is no longer requiring the corporative growers to do cattle fattening and in term reducing the production sales of the bulk stock feed and concentrated stock feed accordingly. However SJAP managed to market and sell its fertilizer to other local users during 2018 to increase its production sales from 15,705 MT in 2017 to 23,204 MT in 2018. Although the overall profits of SJAP in 2018 are still low at $4.3 million, they have improved compared to 2017.

 

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1. (ii). The operations of HSA in manufacturing and sales of organic fertilizer itemizing unit sales, costs and quantity of sales:

 

In US$   Sales of goods     Cost of Goods sold     Gross profit  
        2018     2017     2018     2017     2018     2017  
                                         
HSA   Sales of Organic fertilizer     3,583,034       3,445,674       2,932,754       2,876,174       650,280       569,500  
    Sales of Organic Mixed Fertilizer     6,088,296       3,722,171       3,961,581       2,115,238       2,126,715       1,606,933  
    HSA Total     9,671,330       7,167,845       6,894,335       4,991,412       2,776,995       2,176,433  
     % of increase (+) or decrease (-)     34 %             38 %             28 %        

 

    Description of items       2018     2017     Difference  
                        2018/2017  
HSA   Fertilizer operation                   -  
    Organic Fertilizer   MT     15,105       15,334       (229 )
    Average Unit sales price   $/MT     237       241       (4 )
    Unit cost price   $/MT     194       192       2  
    Organic Mixed Fertilizer   MT     14,638       9,042       5,596  
    Average Unit sales price   $/MT     416       412       4  
    Unit cost price   $/MT     271       234       37  
    Retailing packed fertilizer (for super market sales)   MT             71          
    Average Unit sales price   $/MT             687          
    Unit cost price   $/MT             353          

 

HSA sold 15,105 MT of organic fertilizer and organic mixed fertilizer in 2018, which is similar to 2017’s production sales of 15,334 MT dropping slightly in unit sale price by $4/MT primarily due to the translated exchange losses of lower RMB against US$ in 2018 as such in real term sales prices of organic fertilizer has not changed between 2017 and 2018. OMF, on the other-hand, a product specifically designed and designated for the growing environment of lake fish, had increased 2018’s production to 14,638 MT from 2017’s 9,042 MT, an increase by 61.8% or 5,596 MT evidencing the recovery of production of HSA is now in progress after the retrofitting work and other construction work that has been carried out during 2016 to early months of 2018 on its property.

 

(Note: Please see further details and information of the business plans and direction for SJAP and HSA in later chapter under “Subsequent events and future directions”.

 

2. Plantation Division refers to the operations of JHST. JHST is engaged in the HU Plantation business where dragon fruit flowers (dried and fresh), cash vegetable crops and immortal vegetables are sold to wholesale and retail markets. JHST’s financial statements are consolidated into the financial statements of MEIJI as one entity.

 

  - 68 -  

 

  

In US$   Sales of goods     Cost of Goods sold     Sales of Goods'  Gross profit  
        2018     2017     2018     2017     2018     2017  
                                         
JHST   Sales of Fresh HU Flowers     -       42,956             38,443       -       4,513  
    Sales of Dried HU Flowers     236,850       1,163,115       214,793       1,114,222       22,057       48,893  
    % of increases (+) or decreases (-)     -80 %             -81 %             -55 %        
    Sales of Dried Immortal vegetables     423,152       -       314,720               108,433       0  
    % of increases (+) or decreases (-)                                                
    Sales of Vegetable products     2,957,246       3,432,024       2,568,877       2,101,902       388,369       1,330,122  
    % of increases (+) or decreases (-)     -14 %             22 %             -71 %        
    JHST/Plantation Total     3,617,249       4,638,095       3,098,390       3,254,567       518,859       1,383,528  
    % of increases (+) or decreases (-)     -22 %             -5 %             -62 %        

 

Revenue from our plantation decreased by $1,020,846 or 22% from $4,638,095 for the year ended December 31, 2017 to $3,617,249 for the year ended December 31, 2018.

 

Cost of goods sold from the plantation decreased by $156,177 or 5% from $3,254,567 for the year ended December 31, 2017 to $3,098,390 for the year ended December 31, 2018. The decrease was primarily due to the cost in cultivating and maintaining large acreage with higher associated labor costs, etc.

 

Gross profit from our plantation decreased by $864,669 (or 62.5%) from $1,383,528 for the year 2017 to $518,859 for the year 2018.

 

The Table below shows the itemized unit sales and cost prices of the produces and products:

 

    2018     2017     Difference  
JHST                          
  Fresh HU Flowers    Pieces           480,813        
    Average Unit sales price   US$/Pieces             0.09          
    Unit cost prices   US$/Pieces             0.08          
    Dried HU Flowers   MT     48       224       -176  
    Average Unit sales price   US$/MT     4,934       5,190       -256  
    Unit cost prices   US$/MT     4,475       4,970       -495  
    Dried Immortal vegetables   MT     7       -          
    Average Unit sales price   US$/MT     60,450       -          
    Unit cost prices   US$/MT     44,960       -          
    Vegetable products   MT     2,846       3,223       -377  
    Average Unit sales price   US$/MT     1,039       1,065       -26  
    Unit cost prices   US$/MT     903       650       253  

 

As explained in 2017’s annual report and 2018’s quarterly reports, our plantation experienced very heavy wet seasons for more than 4-5 years (2013 to 2018, requiring the Company to combat and treat diseases and related problems continuously during the period, but by 2018 had exhausted all various means to recover and to revitalize the HU plantation. With continued wet conditions experienced over the past years, damage to the soil and plant roots has compounded disease-related problems to the HU plantation affecting its overall yield as well as the quality of harvested flowers. Even though new plants were being planted each year increasing the area of planting by over 900 Mu to a total of over 1700 Mu with the intent to increase productivity, proportionately, the outcome has fell well short of intended results.

 

Consequently JHST diversified it’s range of produces growing immortal vegetables and cash crops etc. to try to increase its revenues and profits, and in March 2018, JHST signed two growing contracts that have stable pricing conditions: (1). With a herbal plant oil processor to grow 50 acres of plants called “Pogestemon Patchouli” (“ PP ”) for processing into a type of natural aromatic oil that has experienced a good market in China. 50 acres of trial was implemented in Q2 2018 with the intension to expand to 150 acres in 2019 if proven successful. We estimate that the 50 acres of PP will generate sales revenues over $1 million with 50% gross profit margins based on two harvests for the year 2018; and (2). 200 acres of Passion Fruit trees were planted in Q3 2018 for a juice manufacturer from 2018 to 2020 for 3 years initially estimated to produce around 2,400 MT of fruit/year contracted at RMB 8,000/MT (or $1,280/MT) to generate over $3 million in sales revenue. The combination of both fruits and PP will enhance revenue and gross profit to JHST that again will exceed its performance of either FY2017 or FY2018, if their outcomes prove successful.

 

  - 69 -  

 

 

Unfortunately the typhoon that occurred during Q3 2018 destroyed much of the winter cash crops which reduced JHST’s performances in Q4 2018 and in turn reduced 2018’s annual revenue and income by 22% and 62.5% respectively, compared to 2017. At the same time the typhoon also destroyed the newly planted herbal PP plants and the passion fruit trees, delaying their development progresses. Currently, management of JHST is still evaluating JHST’s overall prospects but has yet to devise conclusive plans for JHST.

 

3. Cattle Farm Division refers to the operations of Cattle Farm 1 under Jiangmen City Hang Mei Cattle Farm Development Co. Ltd (“ JHMC ”) where locally bred cattle are grown and sold live to third party livestock wholesalers who sell them mainly in Guangzhou livestock wholesale markets. The financial statements of JHMC are consolidated into MEIJI as one entity along with MEIJI’s operation in the consulting and service for development of other cattle farms, such as Cattle Farm 2 or related projects .

 

In US$   Sales of goods     Cost of Goods sold     Sales of Goods' Gross profit  
        2018     2017     2018     2017     2018     2017  
MEIJI   Sale of Live cattle (Aromatic) from own farm & from trading     29,558,983       20,401,361       24,761,345       16,629,579       4,797,638       3,771,782  
                                                     
     MEIJI / Cattle farm Total     29,558,983       20,401,361       24,761,345       16,629,579       4,797,638       3,771,782  
    % of increases (+) & decreases (-)     45 %         49 %         27 %      

 

The locally bred so-called “Asian Yellow cattle” (“ AYC ”) currently has limited but steady local markets (in Guangdong Province) that can’t handle big production volumes (i.e., thousands of heads per day) with stable wholesale prices averaging over US$12/Kg (live weight) which is doubling SJAP’s cattle prices.

 

Revenue from the cattle farm increased by $9,157,622 or 45% from $20,401,361 for the year ended December 31, 2017 to $29,558,983 for the year ended December 31, 2018. The increase was primarily due to the steady demands of said local markets at stable sale prices generating reasonable returns for the farm.

 

Cost of goods sold from the cattle farm increased by $8,131,766 or 49% from $16,629,579 for the year ended December 31, 2017 to $24,761,345 for the year ended December 31, 2018.

 

Gross profit from cattle increased by $1,025,856 or 27% from $3,771,782 for the year 2017 to $4,797,638 for the year ended December 31, 2018, mainly due to lower stable production costs and higher sale prices.

 

            2018     2017     2018 to 2017  
MEIJI   Production and trading on sale of Live cattle   Head     7,945       9,772       (1,827 )
    Average Unit sales price   $/head     3,720       2,088       1,632  
    Unit cost prices   $/head     3,117       1,702       1,415  

 

Currently there are two operations in this segment, Cattle Farm 1 and Cattle Farm 2.

 

  - 70 -  

 

 

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 and adaptable to the “Asian Yellow 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 i s 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.

 

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.

 

Similar to CA in its business model, 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 Guangdong Province.

 

Presently, these farms are growing and fattening mainly AYC and that the Company’s earlier plan (mentioned earlier in our 10K 2017 and subsequent 10Qs 2018 reports) to merge Cattle Farms (1) & (2) with HSA such that CF (1) & CF (2) will become breeding stations supplying yearlings for HSA to grow into full grown cattle (up to 3 years old) that will be sold in the Chinese market, is now pending on further evaluation of other alternatives aiming to achieve faster and better return on capital investment.

 

· 4. Corporate & Others Division refers to the business operations of the Group called internally under the name of “Corporate & Other Division” of Sino Agro Food, Inc., including import/export business and consulting and service operations provided to projects not included in the above categories, and not limited to corporate affairs .

 

In US$   Sales of goods     Cost of Goods sold     Gross profit  
        2018     2017     2018     2017     2018     2017  
SIAF   Sales of goods through trading/import/export activities                                  
    on seafood (via imports)     35,468,172       30,402,652       31,553,391       27,038,775       3,914,781       3,363,877  
    % of increases (+) and decreases (-)     17 %             17 %             16 %        
    on imported beef mainly     32,988,998       41,384,515       29,722,352       36,783,569       3,266,646       4,600,946  
    % of increases (+) and decreases (-)     -20 %             -19 %             -29 %        
     SIAF/ Others & Corporate total     68,457,170       71,787,167       61,275,743       63,822,343       7,181,427       7,964,824  
    % of increases (+) and decreases (-)     -5 %           -4 %           -10 %      

 

Revenue from the corporate division decreased by $3,329,997 or 5% from $71,787,167 for the year ended December 31, 2017 to $68,457,170 for the year ended December 31, 2018. The decrease was marginal primarily due to a decrease in the sales of imported beef from $41.4 million in 2017 to $33.0 million in 2018 that was offset by the increase in sales of imported seafood from 2017’s $30.4 million to 2018’s $35.5 million.

 

Cost of goods sold from corporate decreased by $2,546,600 from $63,822,343 for the year ended December 31, 2017 to $61,275,743 for the year ended December 31, 2018 due primarily to the decreased sales of some imported goods.

 

Gross profit from the corporate decreased by $783,397 or 10% from $7,964,824 for the year ended December 31, 2017 to $7,181,427 for the year ended December 31, 2018. The decrease was primarily due to a corresponding decrease in sales.

 

  - 71 -  

 

  

Description of items   2018     2017     Difference  
SIAF   Seafood trading from imports                    
    Mixed seafood   MT     1,927       1,583       344  
    Average of sales price   $/MT     18,409       19,211       (802 )
    Average of cost prices   $/MT     16,377       17,085       (708 )
    Beef & Lamb trading from imports   MT     1,706       2,885       (1,179 )
    Average of sales price   $/MT     19,337       14,343       4,994  
    Average of cost price   $/MT     17,422       12,748       4,674  

 

This trading (of mainly imported foods) division has excellent growth potential due mainly to the demands for food in China, but the growth of sales of this division is mainly subject to the availability of working capital that helps drive sales’ turnover (as referred to in our earlier periodic reports). 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 we believe that this division will eventually become an effective and major revenue drive of the group once some of the financing plans will have materialized to allow more working capital being employed in the division.

 

Overall in 2018 this division achieved average gross profit margins of 11% for the trading of seafood and 10% on the trading of beef from selling imported goods to its sales agencies to distribute in China based on an average mark-up of 12.5% on cost of goods sold excluding the cost of import duties, value added taxes and local associated charges etc. that were paid by respective agencies. This kind of gross profit margin should increase when the Company will be in a financial position to afford to buy directly from the fishermen and to sub-contract the value added processors to process the seafood directly.

 

l 5.A. Engineering technology consulting and services:

 

Table (A.5) below shows the revenue, cost of services and gross profit generated from consulting, services, commission and management fees for years 2018 and 2017.

 

    2018     2017     Difference  
Revenue                        
CA     11,127,393       16,983,330       (5,855,937 )
Group Total Revenues     11,127,393       16,983,330       (5,855,937 )
Cost of service                        
CA     9,051,408       13,566,203       (4,514,795 )
Group Total Cost of sales     9,051,408       13,566,203       (4,514,795 )
Gross Profit                        
CA     2,075,985       3,417,127       (1,341,142 )
Group Total Gross Profit     2,075,985       3,417,127       (1,341,142 )

 

Revenues decreased by $5,855,937 or 34% from $16,983,330 for the year ended December 31, 2017 to $11,127,393 for the year ended December 31, 2018. The decrease was primarily due to the following reasons:

 

(i). Prior to the acquisition of farms by JFD/Tri-way, their respective development and construction costs and working capital requirements for all farms were mainly financed by their respective owners and investors and partly financed by CA’s deferred account receivables. Since the acquisition, this has become the sole responsibility of JFD/Tri-way.

 

(ii). Under said situation, most of the operational cash flow is being employed in working capital to generate continuing and constant sales revenues month after month. For example, with respect to a species of fish that takes 18 months to grow to marketable size from tiny fingerling (of 3 mm), if one wanted to sell 3 MT of the grown fish per day at gross profit margin of 35% and to generate annual sales of US$100 million, that would mean that the amount of working capital needed would be over US$65 million plus daily operational expenses for 18 months or more amounting to more than $80 million and for each $ of increased sales per year a similar ratio of working capital would be required.

 

In other words, under current situation, Tri-way does not have enough free cash-flow to be spent on capital expenditures required by farm developments, thus reducing CA’s C&S income in 2017 and 2018 accordingly.

 

Cost of services for consulting, service, commission and management fee decreased by $4,514,795 or 33% from $13,556,203 for the year ended December 31, 2017 to $9,051,408 for the year ended December 31, 2018. The decrease was primarily due to a decrease in sales.

 

  - 72 -  

 

 

Gross profit of consulting, service, commission and management fees decreased by $1,341,142 or 39%, from $3,417,127 for the year ended December 31, 2017 to $2,075,985 for the year ended December 31, 2018 The decrease was primarily due to a decrease in sales.

 

Note to Table A 1 ( Net Expense):

 

Other income/(expense) increased by $36,696,401 from $(29,949,142) in 2017 to $9,747,259 in 2018 was mainly due to i) an decrease in government grant of 1,890,894 from $2,539,989 to $649,095; ii) change in fair value of derivative liability of $209,219 from a new convertible bond of $4 million issued during the year 2017; and iii) share of profit from a unconsolidated equity investee from $12,010,051 in 2017 to $14,251,264 in 2018; offset by iv) a decrease in other income of $43,546 from $100,218 in 2017 to $56,672 in 2018; v) a loss on restructuring of 6,225,204 which represents the non-amortized part of the discount upon the issuing of the convertible bond in 2017; vi) a bad debt written off of $14,394,402 contributed by QZH in 2017;

 

Note to Table A 1 General and Administrative and interest Expenses:

 

General and administrative (including depreciation and amortization) and interest expenses (including in Note Other income/(expenses) decreased by $7,537,370 or 32% from $23,732,921 for the year ended December 31, 2017 to $16,195,551 for the year ended December 31, 2018. The decrease was mainly due to (i) a decrease in Wages and salaries of 3,658,259 from $5,520,494 for the year ended December 31, 2017 to $1,862,232 for the year ended December 31, 2018; and (ii) a decrease in Others and miscellaneous (including research and development) $ 934,225 from $ 5,006,321 for the year ended December 31, 2017 to $ 4,072,096 for the year ended December 31, 2018; as shown in the table below:

 

Table (i)

 

Category   2018     2017     Difference  
                   
Office and corporate expenses     3,354,114       3,946,885       (592,771 )
Wages and salaries     1,862,232       5,520,491       (3,658,259 )
Traveling and related lodging     45,430       54,028       (8,598 )
Motor vehicles expenses and local transportation     56,198       67,210       (11,012 )
Entertainments and meals     49,504       143,735       (94,231 )
Others and miscellaneous     4,072,096       5,006,321       (934,225 )
Depreciation and amortization     6,155,458       5,041,620       1,113,838  
Sub-total     15,595,032       19,780,290       (4,185,258 )
Interest expense     600,519       3,952,631       (3,352,112 )
Total     16,195,551       23,732,921       (7,537,370 )

 

Note to Table (i):

 

In this respect, total depreciation and amortization amounted to $15,351,003 for the year ended December 31, 2018, out of which amount $6,155,548 was reported under general and administration expenses and $9,195,455 was reported under cost of goods sold; whereas total depreciation and amortization was $10,548,891 for the year ended December 31, 2017 and out of which amount $5,041,620 was reported under General and Administration expenses and $5,507,271 was reported under cost of goods sold.

 

  - 73 -  

 

 

Note to Table A 1 Non-controlling interest:

 

Table (F) below shows the derivation of non-controlling interest

 

          Jiangmen City                    
    Jiangmen City Heng     Hang Mei Cattle     Hunan Shenghua     Qinghai Sanjiang        
    Sheng Tai Agriculture     Farm     A Power     A Power        
    Development Co.     Development Co.     Agriculture Co.,     Agriculture Co