UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Commission File Number: 000-54191
SINO AGRO FOOD, INC.
(Exact Name of Registrant as Specified in its Charter)
| Nevada | | 33-1219070 |
| (State or Other Jurisdiction of Incorporation) | | (IRS Employer Identification Number) |
Room 3520, Block A, China Shine Plaza
No. 9 Lin He Xi Road
Tianhe District, Guangzhou City, P.R.C. 510610
(Address of principal executive offices, including zip code)
Registrant’s Telephone Number, including area code: (860) 20 22057860
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ¨ | Accelerated Filer ¨ |
| Non-Accelerated Filer x | Smaller Reporting Company x |
| | Emerging growth company x |
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 13(a) of the Exchange Act. ¨
The aggregate market value of the voting stock held by non-affiliates of the issuer on December 3th, 2019, based upon the $0.07 per share closing price of such stock on that date, was in round figure of $3,497,453.00
There were 59,963,607 shares of our common stock issued and outstanding as at December 31, 2020.
Documents incorporated by reference: None
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Annual Report is filed, and we do not intend to update any of the forward-looking statements after the date this Annual Report is filed to confirm these statements to actual results, unless required by law.
This Annual Report 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 Annual Report and, accordingly, we cannot guarantee their accuracy or completeness, though we do generally believe the data to be reliable. 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 Annual Report. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
In this Annual Report, unless the context requires otherwise, references to the “Company,” “Sino Agro,” “SIAF,” “we,” “our company” and “us” refer to Sino Agro Food, Inc., a Nevada corporation together with its subsidiaries.
BUSINESS
Sino Agro Food, Inc.
SIAF is an agriculture technology and natural food holding company with principal operations in the People’s Republic of China. The Company acquires and maintains equity stakes in a cohesive portfolio of companies that SIAF forms according to its core mission to produce, distribute, market and sell natural, sustainable protein food and produce, primarily seafood and cattle, to the rapidly growing middle class in China. SIAF provides financial oversight and strategic direction for each company, and for the interoperation between companies, stressing vertical integration between the levels of the Company’s subsidiary food chain. The Company owns or licenses patents, proprietary methods, and other intellectual properties in its areas of expertise. SIAF provides technology consulting and services to joint venture partners to construct and operate food businesses, primarily producing wholesale fish and cattle. Further joint ventures market and distribute the wholesale products as part of an overall “farm to plate” concept and business strategy.
Revenues by division were as follows (in millions of U.S. dollars):
| Division (on Sales of Goods) | | 2019 | | | 2018 | |
| Fisheries (CA) (Discontinued operation from October 5, 2016) | | $ | | | | $ | - | |
| Organic Fertilizer (HSA, SJAP & QZH) | | | 26.9 | | | | 28.9 | |
| (QZH derecognized as variable interest entity from December 30, 2017) | | | | | | | | |
| Cattle (MEIJI) | | | 36.2 | | | | 29.6 | |
| Plantation (JHST) | | | 4.6 | | | | 3.6 | |
| Corporate, Marketing & Trading (SIAF) | | | | | | | | |
| Total Revenues derived on sales of goods | | | 66.2 | | | $ | 68.5 | |
| Division (on consulting & services) | | 2019 | | | 2018 | |
| CA (Fishery related developments) | | $ | | | | $ | | |
| Total Revenues derived on consulting & services | | $ | 1.7 | | | $ | 11.1 | |
History
The Company, which was formerly known as Volcanic Gold, Inc. and A Power Agro Agriculture Development, Inc., was incorporated on October 1, 1974 in the State of Nevada. The Company was formerly engaged in the mining and exploration business but ceased the mining and exploring business in 2005. On 24 August 2007, the Company entered into a merger and acquisition agreement with CA, a Belize corporation and its subsidiaries CS and CH. Effective of the same date, CA completed a reverse merger transaction with the Company.
For two years after its introduction in China, the Company operated in the dairy segment, but sold the dairy business in December of 2009 and began to implement its five-year plan to develop its vertically integrated business operations consisting of (i) cattle fattening and production of beef products and (ii) cultivation of fish and prawn and related products.
Our principal executive office is located at Room 3520, 35th Floor, Block A, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, Guangdong Province, PRC, 510610.
The table below provides an overview of key events in the development of the business of the Company.
| Year | | Event |
| 2006 | | • | Initiates agriculture and aquaculture consulting activities in China. |
| 2007 | | • | Changes name from A Power Agro Agriculture Development, Inc. to Sino Agro Food, Inc. |
| | | • | Acquires the Belize holding company Capital Award. Today, Capital Award is the Company’s subsidiary operating many of the Company’s aquaculture activities. |
| | | • | Acquires the dairy operations through a 78 percent ownership stake in ZhongXing Agriculture and Husbandry. |
| | | • | Acquires the HU Plantation through a 75 percent ownership stake in Jiang Men City Heng Sheng Tai Agriculture Development. |
| 2009 | | • | Conducts a strategic review and divests the dairy business in December due to poor industry fundamentals with control of the industry concentrated in a few very large value-added manufacturers. |
| | | • | Founded Qinghai Sanjiang A Power Agriculture (“SJAP”). SJAP manufactures bioorganic fertilizer, livestock feed and develops other agriculture projects in the County of Huangyuan, in the vicinity of Xining City, Qinghai Province. |
| 2010 | | • | Creates a five-year plan to develop vertically integrated businesses in primary production, distribution and marketing of beef cattle, beef products and seafood through proprietary recirculating aquaculture systems. |
| | | • | Begins construction of the Company’s first fish farm, Fish Farm 1, with targeted capacity of 1,000 metric tons per year. |
| 2011 | | • | Begins construction of Prawn Farm 1 & 2, Cattle Farm 1 and Fish Farm 2. |
| | | • | Becomes a fully reporting SEC company on the OTCQB (as defined below). |
| 2012 | | • | Acquires a 75 percent ownership in Fish Farm 1 and Cattle Farm 1. Advances construction of Cattle Farm 2 and Wholesale Center 1 in Guangzhou. |
| | | • | Produces 1,800 MT of seafood and raises 6,000 head of cattle. |
| 2013 | | • | Closes the Zhongshan Prawn Farm agreement, targeting production of 10,000 MT of prawn p.a. in 2016/2017 and 100,000 MT in 2024. |
| | | • | SJAP awarded Dragon Head Enterprise status by the Qinghai provincial government. |
| | | • | Mr. George Yap and Mr. Nils-Erik Sandberg join SIAF’s Board of Directors, as independent directors. |
| | | • | Produces 4,700 MT of seafood and raises 15,000 head of cattle. |
| 2014 | | • | SJAP’s abattoir and meat processing facilities commence operations. SJAP signs supplier and concession agreements with Tesco, PLC China for packaged meat products. |
| | | • | Advances construction of a wholesale and distribution center in Shanghai, targeting ultimate capacity of 12,000 MT of meat and 6,000 MT of seafood per annum. |
| | | • | Mr. Anthony Soh and Mr. Dan Ritchey join SIAF’s Board of Directors as independent directors. |
| | | • | Ms. Olivia Lai is hired as Chief Financial Officer. |
| | | • | Produces 5,600 MT of Seafood and raises 26,000 head of cattle during 2014. |
| 2015 | | • | The Company announces a long-term vision to become a leading sustainable aquaculture company focused on organically farmed fish and prawns. |
| | | • | Wholesale Center 2 in Shanghai initiates operations |
| | | • | Mr. Bertil Tiusanen is hired as Chief Financial Officer. Ms. Lai becomes the Company’s Chief Corporate Affairs Officer. |
| | | • | The Company announces contemplated plan to divest its aquaculture operations and seek a separate listing on the Oslo Stock Exchange. |
| 2016 | | • | The Company was admitted to the Merkur market in Oslo. |
| | | • | The Company upgraded to OTCQX Premier from the OTCQB® Venture Market. |
| | | • | Mr. Bertil Tiusanen resigned as Chief Financial Officer and appointed as SVP Business Development, New Ventures Europe |
| | | • | Officer and Mr. Dan Ritchey appointed as Chief Financial Officer. |
| | | • | The Company’s carve-out of Tri-way resulting in categorization of Tri-way as an Investor in Associate from a subsidiary status. As such, the Company’s fully owned subsidiary namely, Capital Award Inc (CA), retains its main business activity in the sector of technology and engineering consulting and related services, and Tri-way has assumed all activity regarding aquaculture operations and the sale of all products produced by them. |
| | | • | Tri-way has purchased Master Developer and Operating licensing rights from CA for purposes of future development of aquaculture projects in China utilizing CA’s APM-indoor and ODRAS technology, and has contracted with CA to provide its turnkey contractor services for those projects in China. |
| 2017 | | • | Mr. George Yap resigned as independent director and Audit Committee chairman and member of Nomination Committee. |
| | | • | The Company increased its equity interest in Tri-way from 23.89% to 36.6% in the fourth quarter by converting the amount due from Tri-way into equity interest. |
| | | • | On December 30, 2017 the Company sold its (35.36%) equity in QZH to a third party. |
| 2018 | | • | Mr. Dan Ritchey passed away on December 1, 2018. As of the date of this Annual Report, the Company has yet to appoint a CFO; consequently, Mr. Solomon Lee currently serves as the Company’s interim CFO. |
| | | • | Mr. Nils Erik Sandberg resigned as independent director and Audit Committee chairman |
| 2019 | | • | Mr. Colanukuduru Ravindran was appointed as an independent director and the Audit Committee chairman on March 29, 2019. |
| • | Mr. Muson Cheung was appointed as an independent director on April 11th 29, 2019. |
| • | The company’s common stocks were delisted from the Merkur Market (OSLO) from September 10th 2019. |
| • | Mr. Anthony Soh resigned as independent director on September 30th 2019. |
| • | On September 30th 2019, the Company contracted out the following businesses’ operations to the existing management of the corresponding operations: (i). SJAP’s integrated cattle activity to Mr. Zhao Y L, the legal representative and MD of SJAP, (ii). HSA’s manufacturing of fertilizer to Mr. Lee Ping the existing manager of HSA and (iii). JHST’s plantation operation and MEIJI’s cattle operations to Mr. Fang ZhiJun, the existing manager of both operations. |
| • | On September 30th 2019, Mr. Solomon Lee resigned as the Chairman of SJAP resulting in categorization of SJAP as an Investor in Associate from a subsidiary status. |
| • | On September 30th 2019, Tri-way terminated the farms’ management contracts and ceased the operation of Aqua-farm 4 and 5 due to the unsatisfactory performances of the said farms of the past 3 years (from 2017 to 2019) |
Background
After successfully developing many aquaculture fishery farms, cattle farms and related business operations (along with sales and marketing of produce and products) in Australia and Malaysia since 1998, SIAF’s management team introduced our business activities in China in 2006.
To accomplish this, we use our expertise and know how in specific agriculture and aquaculture technologies. Our “A Power Re-circulating Aquaculture System,” sometimes referred to herein as APRAS, is a patented and proven technology for indoor fish farming. We have developed modern techniques and technologies to grow, feed and house both fish and cattle. These are engineered into the designs of, and the management systems for, indoor and outdoor fishery and cattle farms. Our experience managing crops, and employing technologies, including hydroponic, to work within climate and growing conditions optimizes production of organic, green and natural agricultural produce.
We have acted as the master engineer, pioneering the construction and building of farms, from raw land into fully operational facilities. We complete the construction and building of infrastructure including staff quarters, offices, processing facilities, storage, and all related production facilities. Our management teams are responsible for developing all business activities into effective and efficient operations.
During the past years, SIAF has matured into a company dedicated to the agriculture and aquaculture industry in China.
Up until 30th September 2019, we maintained operation of our HU Plantation as well as our services in engineering consulting, specializing in the development of two major products, namely meat derived from the rearing of beef cattle and seafood derived from the growth of fish, prawns, eel and other marine species.
From October 1, 2016, onward, Tri-way has assumed the role as developer of aquaculture projects in China with CA contracted to provide turnkey contracted services for those projects.
Sino Agro Food Sweden AB Sweden (SIAF AB) was formed in 2016 to provide services to the European shareholders when SIAF listed on the Merkur Market in 2016 and SIAF AB was dissolved in October 2019 after the Company effectively delisted from the Merkur Market in September 2019.
However the fully integrated 2nd Cattle and Beef business was gradually being scaled down from year 2016 onward after the China Government relaxed its importation policies to allow many countries (i.e. Australia, NZ, Countries of South America and Canada etc.) to import beef into China affecting its domestic cattle rearing and beef industry. SJAP lost in excessive of US$30 million by year ended December 31st 2017 and by June 30th 2019, it reduced its large fully integrated activity into a small operation keeping and maintaining the production of fertilizer at less than 8,000 MT per year comparing to over 35,000 MT per year in 2015 and the production of concentrated live-stock feed at less than 3000 MT per year compares to over 15,000 MT in 2016 and fattening less than 1500 heads of live cattle at its own farm compares to 2015’s around 25,000 heads of live cattle reared and fattening by 20 corporative farms that consisted over 2,000 individual farmers collectively. From 1st October 2019 onward, SJAP contracted the said small maintaining operation to its existing management.
The Company currently maintains operations of its services in engineering consulting and specializing in the development of agriculture and aquaculture projects whereas operations of its HU Plantation, Asian “Yellow cattle” demonstration farm, and HSA’s manufacturing of fertilizer were contracted to their respective farm’s management since 30th September 2019.
Financial information of all management contracts are being described in the MD&A section of this report.
The Company is now the investor in two Associates originated from subsidiary status namely SJAP and Tri-way; whereas Tri-way is in the aquaculture segment contracting out it’s aqua-farms’ operations (inclusive Aqua-farm 1, 2 and 3a & b) to respective farm’s managements and JFD, it’s fully owned subsidiary in China, has the sole right to market and distribute the said Aqua-farms’ productions by buying from and selling all fishery productions of the said contracted aqua-farms.
Operation of Aqua-farm 4 and 5 of the Zhongshen Mega Farm Development ceased since September 30th 2019 failing the Company’s original ambition to become one of the biggest prawn producers in the world by year end of 2024.
Therefore from 1st October 2019 onward, Revenues of the Company are generated from (i). Incomes derived from CA’s Engineering Consulting and services, (ii). Incomes derived from the contractual agreements of JHST, MEIJI and HSA, (iii). CA’s (or the Corporate) marketing and Trading business and (iv). Incomes generated from its investments in SJAP and Tri-way.
Corporate Acquisitions
On September 5, 2007, we acquired two businesses in the People’s Republic of China (“PRC”):
(a) Tri-Way Industries Ltd., Hong Kong (“TRW”) (formerly known as Tri-way Industries Limited), a company incorporated in Hong Kong; and
(b) Macau EIJI Co. Ltd., Macau (“MEIJI”) (formerly known as Macau Eiji Company Limited), a company incorporated in Macau, and the owner of 75% equity interest in Enping City Juntang Town Hang Sing Tai Agriculture Co. Ltd. (“HST”), a PRC corporate Sino Foreign joint venture.
On November 27, 2007, MEIJI and HST established a corporate Sino Foreign joint venture, Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd, China (“JHST”) (formerly known as Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd.), a company incorporated in the PRC with MEIJI owning a 75% interest and HST owning a 25% interest. HST was dissolved in 2010.
In September 2009, we formed a 100% owned subsidiary in Macau, A Power Agriculture Development (Macau) Ltd., China (“APWAM”) (formerly known as A Power Agro Agriculture Development (Macau) Limited). APWAM presently owns 45% of a corporate Sino Foreign joint venture, Qinghai Sanjiang A Power Agriculture Co. Ltd. (“SJAP”). On March 23, 2017, a third party, Qinghai Quanwang Investment Management Company Limited acquired a 8.3% equity interest and APWAM owned 41.25% equity interest of SJAP as of December 31, 2017. SJAP is engaged in the business of manufacturing bioorganic fertilizer, livestock feed and development of other agriculture projects in the County of Huangyuan, in the vicinity of the Xining City, Qinghai Province, PRC.
On February 28, 2011, TRW applied to form a corporate joint venture, Enping City A Power Prawn Culture Development Co. Ltd., China (“EBAPCD”) (formerly known as Enping City Bi Tao A Power Fishery Development Co., Limited), which is incorporated in the PRC. TRW initially owned a 25% equity interest in EBAPFD. On November 17, 2011, TRW formed Jiangmen City A Power Fishery Development Co. Ltd, China (“JFD”) (formerly known as Jiang Men City A Power Fishery Development Co., Limited) in which it acquired a 25% equity interest, while withdrawing its 25% equity interest in EBAPFD. As of December 31, 2011, we had invested $1,258,607 in JFD. JFD operates an indoor fish farm. On January 1, 2012, we acquired an additional 25% equity interest in JFD for total cash consideration of $1,662,365. On April 1, 2012, we acquired an additional 25% equity interest in JFD for the amount of $1,702,580. Prior to October 5th 2016 we owned a 75% equity interest in JFD and control its board of directors. As of September 30, 2012, we had consolidated the assets and operations of JFD. From October 5th 2016 we brought out the remaining 25% equity interest in JFD for consideration of $4,517,426 and sold the 100% equity interest in JFD to Tri-way (inclusive all original assets of its one farm namely Fish Farm 1 that was changed to name Aqua-Farm 1 and of other additional assets transferred from work in progress etc.) for $33,538,480; and converted JFD into a Wholly Owned Foreign Entity (WOFE) such that Tri-way is holding 100% equity interest in JFD; and simultaneously (on October 5th 2016) JFD completed the acquisition: of the assets and operation from owners and investors of four other aquaculture farms (namely Aqua-farm 2, 3 and 4) for $277,055,897 collectively; and the acquisition of a Master License from CA for the rights of future development and operation of our APRAS farms in China for $30,000,000 resulting that we were owing 23.89% equity interest in Tri-way as at October 5th 2016. The Company converted the amount due from unconsolidated equity investee into equity interest during the fourth quarter of 2017, which resulted in equity interest in TRW from 23.89% to 36.60%.
On April 15, 2011, MEIJI applied to form Enping City A Power Beef Cattle Farm 2 Co. Ltd., China (“EAPBCF”) (formerly known as Enping City A Power Cattle Farm Co., Limited), all of which we would indirectly own a 25% equity interest in as of November 17, 2011. On September 13, 2012 MEIJI formed Jiangmen City Hang Mei Cattle Farm Development Co. Ltd., a company incorporated in the PRC (“JHMC”) (formerly known as Jiang Men City Hang Mei Cattle Farm Development Co., Limited) in which it owns 75% equity interest with an investment of $3,636,326, while withdrawing its 25% equity interest in ECF. As of September 30, 2012, we had consolidated the assets and operations of JHMC.
Cross-Listing on the Merkur Market
On January 13, 2016, securities representing beneficial interests in the shares of common stock on the Company, referred to as VPS Shares, began to be traded on the Oslo Børs’ Merkur Market under the symbol “SIAF-ME.” The Company’s common shares continued to trade on the OTCQB under the symbol “SIAF.”
The Merkur Market is a multilateral trading facility operated by Oslo Børs ASA. The Merkur Market is subject to the rules in the Norwegian Securities Trading Act and the Securities Trading Regulations that apply to such marketplaces. These rules apply to companies admitted to trading on the Merkur Market, as do the marketplace’s own rules, which are less comprehensive than the rules and regulations that apply to companies listed on Oslo Børs and Oslo Axess. The Merkur Market is not a regulated market, and is therefore not subject to the Norwegian Stock Exchange Act or to the Stock Exchange Regulations. Investors should take this into account when making investment decisions.
Uplisting to the OTC QX Premier
On January 19, 2016, the Company’s shares of common stock began to be traded on the OTCQX® Best Market in the U.S. under its existing ticker symbol “SIAF.” The Company upgraded to OTCQX Premier from the OTCQB® Venture Market.
The OTCQX® Market is the top tier of the U.S. over-the-counter markets operated by OTC Markets Company. It is reserved for established investor-focused companies meeting high financial and governance standards, and sponsored by professional third party advisors. SIAF has qualified to trade on OTCQX U.S. Premier, for which eligibility standards are higher still. For comparison, as of December 31, 2015, there were 942 companies traded on the OTCQB, 425 companies traded on the OTCQX and 98 companies traded on OTCQX U.S. Premier, of which only 17 are non-bank companies.
With OTCQX admission, OTC Market Company’s Blue Sky Monitoring Service provides the Company with a customized daily audit of its compliance status in all 50 states. Blue Sky compliance is mandatory for broker-dealers and registered investment advisors to solicit or recommend a security to investors.
U.S. investors can find current financial disclosure and Real-Time Level 2 quotes for the Company on www.otcmarkets.com.
However since January 22nd 2020, it was due to the Covid-19 events prevented the Company to complete the 10K 2019 audited report, the Company was forced to drop down to OTC Pink-Sheet Market for failing to meet the high financial and governance standards of the OTCQX and OTCQB market. The shares of common stock of the Company are now trading in OTC Pink-sheet market currently.
Delisting from the Merkur Market
In January of 2019 the Company applied to Oslo Børs ASA for the delisting from the Merkur Market. The principal reason for the delisting from the Merkur is the difference in the disclosure rules that the Merkur requires; the Merkur requires the disclosure of information prior to occurrence of a particular event which is inherently forward-looking in nature and thus potentially speculative; consequently, any such disclosure could thus be in conflict with US securities laws. On September 10th 2019, the Company was effectively delisted from the Merkur Market with all shares of common stock of the Company were trading in the OTC QX Premier Market.
Emerging Growth Company
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) in which we have total annual gross revenue of at least $1.0 billion or (b) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act” and references herein to “emerging growth company” shall have the meaning associated with it in the JOBS Act.
As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
| · | only two years of audited consolidated financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” disclosure; |
| · | reduced disclosure about our executive compensation arrangements; |
| · | no requirement that we hold non-binding advisory notes on executive compensation or golden parachute arrangements; and |
| · | exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. |
We have taken advantage of some of these reduced burdens, and thus the information we provide stockholders may be different from what you might receive from other public companies in which you hold shares.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Legal structure
The Company is primarily a holding company whose operations are carried out through its subsidiaries.
The table below sets out information about the entities in which the Company, as of the date of this Annual Report, holds (directly or indirectly) more than 10 percent of the outstanding capital and votes.
The table below sets out a brief description of the companies within the Company as well as the Company’s respective holdings within such companies and their domiciles.
| Company | | Country of
incorporation | | Field of activity | | % Holding | |
| Sino Agro Food, Inc. | | US | | General types of agricultural developments, business management, trading, sales and marketing | | | | |
| Capital Award Inc. (CA) | | Belize | | Engineering consulting in development of fishery, management of fishery operation, marketing and sales of fishery produces and products | | | 100 | |
| Tri-way Industries Limited (TRW) | | Hong Kong | | Holding company and holder of technology licenses | | | 36.6 | |
| Macau Eiji Company Limited (MEIJI) | | Macau | | Developments of cattle farming and vegetable farming), management service and marketing and sales of cattle and related products | | | 100 | |
| A Power Agro Agriculture Development (Macau) Limited (APWAM) | | Macau | | Holding company | | | 100 | |
| | | | | | | | | |
| Capital Stage Inc. (CS) | | Belize | | Dormant | | | 100 | |
| Capital Hero Inc. (CH) | | Belize | | Dormant | | | 100 | |
| Jiangmen City A Power Fishery Development Co. Ltd. (JFD) | | China | | (1): Operator in growing of fish (sleepy cod species), eels (flower pattern species) and prawns; Research and Development of growing technique and knowhow of live-seafood and (2) Marketing and Trading of seafood | | | 100% owned by Tri-way | |
| Jiangmen City Hang Mei Cattle Farm Development Co. Ltd. (JHMC or Cattle Farm 1) | | China | | A demonstration farm for growing cattle in a semi-tropical climate | | | 75 | |
| Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd. (JHST) | | China | | HU plantation, immortal vegetable and cash crops of vegetables planting, processing and sales of produces and products | | | 75 | |
| Hunan Shenghua A Power Agriculture Co. Ltd. (HSA) | | China | | Existing activities: manufacturing of organic fertilizer, 100% pure organic mixed fertilizer and lake fish farming organic fertilizer. Cattle rearing. | | | 76 | |
In addition to the legal entities included in the chart and table above, the Company is providing technology know-how with consulting service and turnkey contracting services (“C&S”) to various Chinese owned Project Companies (“C&S Project Company”) which mainly are private companies formed in China with Chinese citizens acting as legal representatives. The Company does not have any ownership in these C&S Project Companies. However, in consideration of the Company’s right to protect its technology and know-how granted to the C&S Project Companies, the Company has an option to acquire equity stakes in the future SFJVC at an agreed value equivalent to the project’s development cost.
In addition, regarding the investment agreement between QZH and QQI, (i) QQI enjoyed 6% annual interest on its capital contribution, but not any profit distribution; (ii) investment period was 3 years, and (iii) SJAP shared 100% (2016: 100%) on profit or loss after 6% interest payment to QQI and enjoyed 100% (2016: 100%) voting rights of QZH’s board and stockholders meetings.
As of December 30, 2017, the Company register authority approved the transferred of the Company’s (35.36%) equity interest in QZH to an unrelated third party, such that as from December 30, 2017 QZH was derecognized as a variable interest entity. (Further related information is provided throughout this report).
Business model
The Company works with Chinese investors to form operating companies, in which the Company retains the option to acquire equity interest. After a certain period of time and successful operating results, the Company and the Chinese investor may form a Sino Foreign Joint Venture Company (“SFJVC”). Prior to the formal naming, registration, and incorporation of an anticipated SFJVC, the Company prepays a deposit toward the consideration of its future SFJVC stake as a percentage of the assets of the fully developed farm. Upon conversion, the prepayments become equity capital.
Prior to September 30th 2019, the Company oversees financing and provides interoperating strategies, encouraging vertically integrated growth. China has problems with quality assurance in primary production, distribution and poor origin traceability, as well as low food quality. This has created a market where consumers will eventually pay significant price premiums for “BAP (Best Aquaculture Practice) Certified” seafood with brands guaranteeing quality and consistency.
A vertically integrated operation in a fragmented and poorly regulated environment such as in China is the strategy that will yield the most success for the Company.
Integration into fertilizer and feed production for rearing of beef cattle together with breeding of prawn brood stock help decrease primary production operational risks as well as helping to offset price fluctuations that sometimes occur in raw product input prices.
The Company uses expertise and know-how in specific agriculture for indoor fish farming. The Company has developed modern techniques and technologies to grow, feed and house both fish and cattle. These are engineered into the designs of, and the management systems for, indoor and outdoor fishery and cattle farms. In all developments the Company acts as the master engineer, pioneering the construction and building of farms, from raw land into fully operational facilities. The Company builds the infrastructure including staff quarters, offices, processing facilities, storage, and all related production facilities; then, manages developing of all business activities into effective and efficient operations. The Company’s largest customer represents a Company of thirty separate live seafood wholesalers at the Guangzhou wholesale markets.
The Company holds patents for fertilizer and aromatic feed formulas, 6 enzyme patents, and for 5 indoor fish farm techniques, including a “master license” in China for “A Power Technology” (“APT”), a modular land-based fish growing system and technology utilizing RAS.
The Company partners with Chinese investors in food projects as a turnkey project manager
The Company engages in projects as a technological and engineering expert, partnering with local and regional investors in food related projects. The Company generally has exclusive marketing, sales and distribution rights for each project company. For example, MEIJI purchases all marketable cattle from Cattle farm 2 and distributes them to wholesale markets. Up until September 30, 2016, prior to SIAF becoming an investment associate of Tri-way (i.e. post-carve-out), CA had been purchasing all seafood produced by the fishery farms and also supplied the fishery farms with fingerling, baby or adult fish or prawns and stock feed. Thus, CA is no longer involved in any sales, marketing and supplies of fishery goods being operated by Tri-way yet will continue to carry out its current contracts with other entities, as well as developing other business ties that are interested in utilizing its services.
Generally, the Company exercises an option to acquire a majority equity stake in the project company once development of the operating company has matured and successful operating results are demonstrated. Upon acquisition and conversion into a SFJVC, the pre-payments together with a cash consideration become equity capital, with the Company becoming a major shareholder.
Acquired project companies are operated and managed by the management team and the Chinese investor, and overseen by the Company.
Presently, as from October 1st 2019 onward, it is due to the collapse of the cattle industry domestically in China, the poor performances of Tri-way’s aqua-farm 4 and 5 and the delisting from Merkur Market etc.; as such by year ended 31st December 2019 the Company reduced its quantum of operation into a small scale described in the earlier chapter.
Subsequently, it is due to the impacts caused by the Covid-19 events in 2020, the Company further scaled down its operations whilst working on means to initiate business opportunities for the Company.
Business overview
Introduction
The Company is an agriculture technology and natural food holding company with principal operations in China participating in the ongoing transformation of China’s fragmented agrarian sector into a modern food production industry using sustainable and profitable methods. The Company focuses on seafood and beef production with integrated wholesale distribution. The Company acquires and maintains equity stakes in a cohesive portfolio of companies that the Company forms according to its core mission to produce, distribute, market and sell natural, sustainable protein food and produce, primarily seafood and cattle, to the rapidly growing middle class in China.
The Company employs a strategy of vertical integration from primary production through processing, distribution and marketing of high quality, organic food products in the food value chain. China’s fast growing middle class is creating rapidly rising demand for gourmet and high-quality protein food. The Company’s core products are live prawns, live eels, whole beef cattle and packaged beef meat.
The Company’s operations and strategy are executed through a number of subsidiaries located in China, and the Company contributes financial oversight and strategic direction to otherwise independent management teams which employ the Company’s intellectual property and proprietary methods.
The Company has enjoyed strong growth since the Company initiated its business activities in China in 2006. During the fiscal year of 2019, the Company’s consolidated revenues amounted to USD $135,598,314. The four principal factors that have enabled the growth are:
| | · | Joint venture investment models with existing local Chinese investors in agriculture and aquaculture; |
| | · | Technological competitive advantages in recirculating aquaculture, beef rearing and livestock slaughter; |
| | · | Strong growth in Chinese consumers’ demand for quality protein food; and |
| | · | The Chinese Government’s policy to consolidate the agrarian sector and increase the efficiency of China’s food production industry. |
The Company provides consulting and services to a number of private Chinese third party companies to construct and operate primary production facilities for fish, prawn and beef cattle, as well as wholesale marketing and distribution centers. As part of its consulting and service agreements, the Company has the option to acquire these operations in order to expand the Company’s proprietary production and wholesaling capacity.
Revenues are generated from activities as follows:
| 1. | Beef cattle rearing and fattening, live-stock feed and fertilizer under SJAP |
SJAP’s business operations are consisting beef cattle rearing and fattening, the bulk and concentrated livestock feed producing and manufacturing and the production of organic fertilizer.
However SJAP has slowed down its beef cattle rearing and fattening division since 2017 and is no longer involved with the corporative growers in the fattening of beef cattle due primarily to the depressed markets of the local cattle and beef industry caused mainly by the opening of the beef imports from a great number of developed countries that un-balanced the local cattle industry in turn, the revenues derived from production of livestock feed and fertilizer also went down accordingly.
Revenue for fiscal year ended December 31, 2019 was USD 11.29 million or 8.3 percent of the Company’s total sales of goods revenue of USD 135.60 million in the same period. Gross profit for same division in the fiscal year ended December 31,2019 was at USD3.02 million, or 14.66% of the Company’s total gross profit in sales of goods of USD 20.60 million in the same period.
SJAP now has in its own property twelve cattle houses, housing a minimum of 200 to 350 heads of cattle in each building fattening up to 2000 heads of cattle per year. As from 1st October 2019, SJAP became an investee of the Company when Mr. Solomon Lee resigned as chairman and losing management control of SJAP, as such SJAP is an unconsolidated associate of the Company. Also from 1st October 2019, SJAP leased its business operations to Mr. Zhou Yi Lim & Co. (the existing management team of SJAP) as such SJAP’s main revenue is derived from the said leasing incomes.
| 2. | The Organic fertilizer of HSA: |
HAS’s main business operation is in the manufacturing of organic fertilizer having other incomes generated from leasing of its pig farm complex situated on 35,000 m2 of land and building of 10,000 m2 to a third party to rear pigs and leasing of land of 13,200 m2 to another third party to do sand processing.
HSA’s fertilizer division’s revenue for fiscal year ended December 31, 2019 was USD 15.58 million or 11.48 percent of the Company’s total sales of goods revenue of USD 135.6 million in the same period. Gross profit for same division in the fiscal year ended December 31, 2019 was USD 2.3 million or 11.1% of the Company’s total gross profit in sales of goods of USD 20.60 million in the same period.
From 1st October 2019, HSA leased its fertilizer operation to Mr. Lee Ping (the head of the existing management team) as such HSA’s revenues are derived from leasing contracts thereon. (Please see MD&A Sector for more details of the Leasing Contract).
3. Cattle farms (MEIJI) division
The business division Cattle Farms, or MEIJI, refers to SIAF’s cattle rearing operations in Jiangmen, Guangdong Province. Revenue for fiscal year ended December 31, 2019 was $36.19 million, or 26.69%, of the Company’s total sales of goods revenue of USD 135.60 million in the same period. Gross profit for the Cattle Farm (MEIJI) division for the 12 months ended December 31, 2019 was $6.9 million, or 33.5% percent of the Company’s total gross profit on sales of goods of $20.60 million in the same period.
Up until 30th September 2019, the Cattle Farms (MEIJI) division has two operational farms namely Cattle Farm 1 and Cattle Farm 2, whereas.
Cattle Farm 1: Cattle Farm 1 was built as a demonstration farm to show that cattle can be raised in a semi-tropical climate using the Company’s semi-grazing and housing method. Using the Company’s semi-free growing management system, the cattle are allowed to graze in the field during the early morning and kept indoors and out of the sun during the hot summer days. This method has proven reliable, with the growth rate of the cattle measuring slightly higher than the cattle at SJAP (i.e., averaging around 0.28 kg per day per cattle).
Cattle Farm 2: Cattle Farm 2 is a beef cattle farm situated in Guangdong Province, Guangzhou City. Cattle Farm 2 is operated by a private company formed in China with Chinese citizens acting as its legal representative as required by Chinese law. Cattle Farm 2 is complementary to Cattle Farm 1, having an additional 76 acres of land suitable for growing the Company’s type of pasture (a cross between elephant grass and yellow grass) that has a very high yield rate of over 35 MT per 1/6 acre per year, and containing an average of over 9 percent protein that is very suitable for consumption by cattle. Between the two farms, under normal seasons, they have a capacity to produce up to 30,000 MT of pasture/year collectively that is capable to feed up to 5,000 head of cattle/year based on the consumption rate on average of 6 MT/head.
These farms are carrying on with the growing and fattening mainly AYC.
MEIJI is the marketing and distribution agent for all cattle farms that have been and will be developed by MEIJI using its “Semi-free growing” management systems and aromatic-feed programs and systems to grow beef cattle.
MEIJI purchases fully-grown cattle from Cattle Farm 1 and sells them to the cattle wholesalers. MEIJI also buys young cattle from other farmers and sells the young stock to Cattle Farm 1. All cattle farms developed by MEIJI will utilize its “semi-free growing” management system and aromatic-feed programs and systems (which is a feeding program with special selected Chinese herbs to improve the health of the cattle to avoid the use of antibiotics) to raise beef cattle, such that cattle raised under this program have a distinct aromatic flavor sought by many restaurants in the Guangdong Provinces.
From 1st October 2019, MEIJI leased its Cattle farms’ operation to Mr. Fan Xin June (the head of the existing management team) as such MEIJI’s revenues are derived from leasing contracts thereon. (Please see MD&A Sector for more details of the Leasing Contract
4. Plantation (JHST) division
The business division Plantation refers to SIAF’s produce production, situated at Enping City, Guangdong Province. Revenue for 12 months ended December 31, 2019 was $4.59 million or 22.28% of the Company’s total sales of goods revenue of $135.6 million in the same period. Gross profit for the plantation division for the 12 months ended December 31, 2019 was $0.88 million, or 4.27% percent of the Company’s total gross profit for sales of goods of $20.60 million in the same period.
JHST is an SFJVC that is 75% owned by SIAF consolidated as a subsidiary, and up until 30th September 219, was the owner and operator of a Plantation where mainly Hylocereus Undatus, or Dragon Fruit, and cash crop vegetables, are grown. It was due mainly to the suffering and combating of plant disease over a long period of time (2015 to 2019) and the heavy damages resulted from the strong typhoon in 2017 and 2018 , the Company found it no longer viable to keep working on the plantation. Therefore from 1st October 2019, JHST leased its Cattle farms’ operation to Mr. Fan Xin June (the head of the existing management team) as such MEIJI’s revenues are derived from leasing contracts thereon. (Please see MD&A Sector for more details of the Leasing Contract).
5. Marketing & Trading Division
Revenue for 12 months ended December 31, 2019 was $66.23 million or 48.8% of the Company’s total sales of goods revenue of $135.6 million in the same period. Gross profit for the plantation division for the 12 months ended December 31, 2019 was 7.36 million, or 35.72% of the Company’s total gross profit for sales of goods $20.60 million in the same period.
Primarily, the Company distributes beef meat imported from Australia and live-seafood from other countries through its distribution agents in China under their import and export permits conditioned under the China Government’s regulations.
Over the years this division has developed many reliable suppliers and supplied sources that are supplying quality foods to our trust-worthy customers / agencies. Therefore it is within reason to assume that this division will eventually become an effective and major revenue drive of the group once when some of the financing plans will have materialized to allow more working capital being employed in the division.
6. Project Development Division
The project developments (or Technology engineering consulting and services) works are carried out by CA on aquaculture related projects and by SIAF and MEIJI on non-aquaculture and agriculture projects:
The Project Development division earns revenue by providing turnkey project management, engineering services and financing mainly within aquaculture and related up and down-stream activities. Project development revenue for the12 months ended December 31 2019 was $1.72 million or 1.26% of the Company’s total revenue of $135.06 million and gross profit for project development for the same period was $0.13 million or 0.6% of the Company’s total gross profit of $20.6 million representing minimal financial contribution due primarily to the Company’s policy of recent years, (since end of year 2017), to restrict employment of capital development funds such that there was hardly any development being carried out since, affecting revenues and gross profits of this division.
7. Investments in investee associates:
The Company presently has investments in two associates that their financials are not being consolidated into the Company’s consolidated financials; from 1st October 2016 the carve-off of Tri-way mentioned in earlier 10Ks and 10Qs reports that the Company is holding 36.6 % equity interest in Tri-way and from 1st October 2019, the Company lost management control of and is the minority shareholder holding 45% equity stake in SJAP.
Historical events:
Historical Information and status of CA’s consulting and engineering service are shown in the table below:
| Number | | Year | | Name | | Stage of completion |
| 1 | | 2010 | | Fish Farm 1 (JFD) | | Completed and acquired by SIAF |
| 2 | | 2011 | | Fish Farm 2 | | Under expansion by Tri-way |
| 3 | | 2011 | | Cattle Farm 1 (JHMC) | | Completed and acquired by SIAF |
| 4 | | 2011 | | Prawn Farm 1 (EBAPCD) | | Completed with hydroponic farm to go |
| 5 | | 2011 | | Prawn Farm 2 (ZSAPP) | | Under expansion by Tri-way |
| 6 | | 2012 | | Cattle Farm 2 (EAPBCF) | | Completed |
| 7 | | 2012 | | Wholesale Center 1 - Guangzhou (APNW)(Phase 1 & 2) | | Completed |
| 8 | | 2012 | | Central kitchen, distribution network, signature restaurants | | Completed |
| 9 | | 2014 | | Zhongshan New Prawn Project (ZSNP) | | Commencing construction |
| 10 | | 2014 | | Wholesale Center 2 - Shanghai (APNW) (Phase 1) | | Completed |
| 11. | | 2016 | | Aqua-farm 4 & 5 of the (ZSNP) | | 90% completed under Tri-way’s direction |
Together with its subsidiaries, the Company essentially constitutes an engineering company providing services in engineering consultancy, supervision and management on the development of agriculture and food based projects in China. These include the construction of farms (or other facilities) as well as the development of business operations of related projects that are apply and use the Company’s principal technologies, including the following:
| | · | An indoor recirculating aquaculture system (APM-RAS) and designs for the growing of aquatic animals (fishery indoor); |
| | · | An open-dam recirculating Aquaculture System (ODRAS) for the growing of aquatic animals (Fishery outdoor); |
| | · | Semi-free range cattle growing systems and design for raising cattle and sheep in China tropical climate locations, (e.g. Cattle Farm 1 at Enping district); and |
| | · | Other associated technologies. |
CA’s standard principal terms and conditions for its Aquaculture project development consulting and service contracts are outlined below:
| | · | CA is the consulting and service provider as the turnkey contractor of the project; |
| | · | The Chinese businessmen are the clients of CA and the investors and owners of the project company; |
| | · | CA creates and manages development schedules for the project; |
| | · | CA is responsible to build the Aquaculture project (including development of its business operation) using the Company’s APRAS technology, systems, know-how, and management expertise and systems for and on behalf of the developer; |
| | · | The developer is responsible to pay CA for its work, including all subcontractors and suppliers appointed by CA in a timely manner, normally a 60-day term; |
| | · | Provision clauses allow CA to appoint and to select sub-contractors and suppliers; |
| | · | Clauses allow extra work and additional work and extra cost provisions; and |
| | · | Contracts generally include i) warranty and limitation of liabilities, ii) scope of work and lists of supplies (including all plant and equipment), iii) installation, training and commissioning of the developments and business operation; and iv) granting to CA rights to management of operation, and marketing and sales of the produce and products from the farm’s operation. |
The Company’s services are comprehensively supportive with vertically integrated operational activities to provide service for the construction of and the business development of the projects to joint ventures. Consulting services include research and development on grown and growing animals, supply of foundation animals (baby calves, fingerling and breeding stocks etc.), supplying designed and configured plants and equipment to the marketing and sales of the end product.
Aquaculture Project Development
Engineering consulting and services provide a comprehensive range of services in the field of aquaculture. These include research and development, brood stock supply, nurturing of fish fingerlings and prawn post-larvae as well as growing of fish and prawns, engineering designs and planning of farms and associated operations, technology and related implementation, supervision, training and conducting trials, management of farm operation and construction, supply of plants and equipment, training of maintenance and operational services, sales, transportation and marketing of fish and prawns, as well as financing. The Company’s management team and staff in Guangzhou conduct the engineering and consulting work. The Company directs the scope of work so that building subcontractors deliver projects efficiently and cost effectively. Using locally manufactured equipment, parts and components customized to the Company’s proprietary designs and engineering specifications, production costs for machinery and facilities are far lower compared to foreign aquaculture systems. The Company believes that it delivered the first indoor re-circulated aquaculture prawn farm in Asia.
From October 1, 2016, onward:
CA has granted to Tri-way a Technology Master License for China, such that starting from October 1, 2016, all future fishery project development in China using APM-RAS or ODRAS will be developed by Tri-way. CA has been hired by Tri-way as the Company’s turnkey contractor to provide consultation respective of Tri-way’s operations.
CA’s aim, in addition to providing quality service to Tri-way in China, is expecting to expand its reach to introduce and help implement its APM-RAS and ODRAS plant and equipment and services, worldwide.
2017 Research and development (R&D) works on technologies and associated future developments
The Mexican White Prawns (MWP)
During Q4 2017, CA started the construction and development of an indoor APM-RAS experimental farm (“MWEF”) at Enping’s Aqua-farm (1) (or FF1) for the growing of Mexican White prawns (“MWP”) which is a salt water spices of prawns grown mostly in China or other countries in open dams and channels that have access to sea water. However, due to the rapid growth of industrialization and the increase of prawn growing farms over the past years, pollution has been affecting the quality of sea water in terms of increasing diseases and other associated problems to the MWP industry, thus, reducing the economic viability of the prawn industry by reducing its productivity. The aim of the MWEF is to achieve the growing of MWP economically and commercially in stable environmental conditions supported by economic sustainability so that they can be developed at a lower capital expenditure and returning on capital investments within a reasonable period of time (targeting within 18 to 24 months).
Our teams (including some newly recruited technicians and experts) are working diligently on the project having already overcome various problems in construction and associated preparation work on growing MWP, expecting to stock prawn fingerling (PL7days) within the 1st week in April 2018 and if all goes according to plan, are anticipating harvests to begin taking place 7 weeks later (beginning of June 2018) for the smaller sized prawns (i.e. 50/60 pieces/Kg) and final harvest on or before end of June for the larger sized prawns (i.e. 20/25 pieces/Kg). This MWEF is being constructed on a 1000 m2 surface area that has 4 grow-out tanks (to contain 480 m3 of water, collectively) with each tank to have 120m3 of water that is being recycled and serviced by 2 tanks (each of 25m3) that have inbuilt filtration and water treatment systems aiming to produce 3Kg of small sized prawns/m3 of water within 7 weeks and 6Kg/m3 of larger sized prawns within 10 weeks. This production aims to enhance harvests by approximately 3,000 Kg (or 3 MT) per harvest (15 MT/year) of larger sized prawns based on 5 harvests per year. In 2017, the average of wholesale prices of (MWP) prawns is RMB50/kg for small sized prawn and RMB150/Kg for larger sizes. This will mean that there will be RMB2.25 million sales revenues generated per year per 1,000 m2 of developed floor area. We are optimistic to achieve this milestone of securing sound fundamentals for the growing MWP in high salinity water in China under our APRAS system. Up to the end December 2018, at AF1 we had conducted 5 trials in growing MWP in high salinity water (up to 26/1000) with mixed results. We had three trials associated with high mortality, low yield and disease problems, one trial affected by heavy minerals in the water and the final trial with good results where 85% of MWP reached an average body weight of 25 gram per piece during a grow-out period of 100 days from 10 days old where the quality of the MWP were excellent and had a great natural taste.
Although the final trial’s result was encouraging, the Company’s desire to develop and construct a production plant on 100 Mu of land next to AF1 using green-house construction systems has been put on temporary hold until such time that the Company improves its cash-flow.
| · | The Fresh Water Prawns (BJP)( M. Rosenbergii) & AF4/AF5 |
| | |
During 2017, the Aqua-farm (4) (“AF4”) at the Mega Farm Project tried to grow multiple batches of Fresh Water Prawns (“BJP”) in commercial quantity (i.e. stocked over 1 million fingerling (of PL24 days) per APM tank of 200m3 of water to nurture the fingerling up to 54 days old supported with 4 other APM tanks for further grow-out up to 18 weeks old) but did not obtain optimal results mainly due to the BJP having not reached their desired size on schedule, with the majority of them not showing any further growth occurring after week 12. As such, AF 4 had to alter its plan of growing mainly BJP to growing fish (i.e. Jade Perch, Silver cods and other mixed fish) within some of the APM tanks in order to maintain a certain level of productivity at the farm. In conjunction with this exercise, AF4 had to develop 800 Mu of open dams (“ODRAS”) that were built using CA’s 2nd generation open dam recirculating aquaculture systems) to grow fish to certain sizes before they were transferred to the indoor APM farm for final grow-out, and allow the transfer of the 12 week old BJP grown in the indoor APM tanks to be moved to the ODRAS dams for further grow-out in a larger area.
Also, in Q3 2017, AF4’s ODRAS open dams suffered damage to its temporary built properties (i.e. the staff quarters, offices, laboratory, etc.) as well as use of AF4, itself, losing many fish and prawns stocked in the open ODRAS dams by one of the strongest typhoons in the past decade hitting the Mega Farm property and other areas of the southern coast of Guangdong Province. Although there was no structural damage done to the main APM farm buildings the damage had interrupted production until repairs were performed to both the APM tanks and ODRAS dams for the transfer of the prawn and fish, and, as such, AF4 decided in Q4 2017 to slow down its grow-out activities until after the Chinese New Year (ended end of February 2018) and in the interim to concentrate on its research and development work on the grow-out of BJP in the APM tanks aiming to find a solution to improve the growth rates and grow-out sizes of BJP to 18-weeks. Research will be focused on system design and water quality limitations. Progress is being made to improve in-tank water chemical and physical characteristics, and source water mineral composition for prawn growth. In addition, progress has been made to understand and manipulate in-tank bacterial populations to create a healthier overall rearing environment. During the first quarter of 2018, research will also assess the biological and economic feasibility of all-female and all-male populations of prawns, using patented endocrine disruptor technologies from third-party collaborators. Such non-GMO technologies result in overall faster and more uniform growth of cohorts compared to mixed populations of both males and females.
In fact, the operation of AF4 (Production factory 1), the operation of AF5 (Production factory 2) and the open dams at the Mega Farm Project had a poor start and performed badly in 2017. During the first half of 2018, we incurred debts over RMB 30 million due the followings events and reasons:
| (i). | Unsuccessful management coordination resulting in low productivity and sales of products. |
| (ii). | Over spending on capital expenditure on Phase (1) of the Mega Farm Project which exceeded the original budget of US$50 million by more than 60%. |
| · | As a result, it limited cash-flow to support the needs of working capital that affected the overall production and sales. |
| · | And as a result, there were not enough funds to complete some of the supporting facilities needed by the APM farms (i.e., the external filtration systems, lighting, electrical wiring, external drainages for waste water and connection and fitting for the supply of fresh water etc.), supporting external water dams and waste water treatment dams, the heating facility and part of the internal filtration systems that made it difficult for the farms to carry out their production efficiently. |
(iii). AP4 and AP5 are the biggest AP farms that the Company built and the Company did not have a sufficient management team to support their production operations; most of the newly recruited APM farm management personnel & workers did not have the knowledge and experience with the APRAS technology and systems and as a result, there were many mistakes made during their learning curve affecting the farms’ production.
(iv). The two APM farms are the biggest indoor farms that we have ever built, and we didn't have enough experienced personnel to support their operation; and managers of other smaller sized APM farms could not work with the Mega Farm’s top management or his team under his management.
(v). The production operation of the AF4 and AF5 started prematurely before all the completion of their construction & development works leading to the situation that, at times, the property management team of the Mega Farm Project gave direction to the farm production operation teams resulting in wrong decisions that caused many mistakes.
(vi). Guangzhou experienced a very hot summary in 2017 that killed and retarded many stocks in the open dams and one of the big typhoons during August 2017 caused flooding that washed away hundreds of tons of fish and prawns in the open dams that would have been ready for harvest in September & October of 2017. Also, the extremely strong Typhoon in September 2018 caused power stoppage that killed hundreds of tons of stock including some valuable brood stock.
| · | By May 2018, our CEO & teams (the “Team”) at head office took the following actions: |
| 1. | Stop all production & operation of all farms (covering both in-door APM farms and open dam farms). |
| 2. | Sell off most inventories in all farms. |
| 3. | Trim down its work force by 85% or more from 155 persons. |
| 4. | Trim down all operational expenditures of the farms |
| 5. | Stop all capital expenditure of the MFP |
| 6. | Reorganize the management team |
| 7. | Form a selective team to start talking to the creditors. |
| · | By July 2018 the Team managed to rectify the following: |
| 1. | All open dam operations stopped with about two tanks of stock remaining in the APM farms. |
| 2. | There were just 20 workers remaining at the farm complex. |
| 3. | Closed the operation at the head quarter office at Zhongshan City. |
| 4. | Cut down the Mega Farm’s monthly expenditures from RMB1.5 million/month to within RMB 450,000/month. |
| 5. | Cut off more than 95% in capital expenditure spending. |
| 6. | Temporary clamming down many creditors and reduced the Mage Farm’s debt of RMB 30 million to just under RMB 21 million financed by other Segments of operation and loans granted by friendly third parties. |
| 7. | Starting to look into the revitalized plan of the MFP. |
| · | By August 2018, the Team initiated the interim direction of the MFP aiming to achieve the following objectives & directions as soon as possible: |
| 1. | Production of the APM farms are the most important fundamentals and it will not mean anything if that cannot be achieved within a short space of time considering that the Mega Farm Project still has a monthly operational expenditure of RMB 450,000/month excluding depreciation & amortization and the Research and Development (R&D) Team monthly wages and expenses are adding an extra (RMB 230,000 to RMB 240,000/month) making the total operation expenses at RMB 690,000/month collectively. |
| 2. | Must develop an operational team that can work effectively and cohesively for the benefit of the Company without fraction among one another and be friendly with one another to help each other to develop efficiency and proficiency as a team that can be relied upon. The Team must be able to work hard, relentlessly and diligently under the Chinese farming customs and practice that is a 24/7 hours per week such that management must keep that in mind and organize their respective roster schedule accordingly. |
| 3. | All management must try to do all interim retrofitting, remodeling, and reconstruction work at the lowest cost as possible and to use whatever is available from inventory without having to buy more new plants and equipment, materials and parts and component etc. The moral of the spirit is that no matter how hard and difficult, the priority is production that must be made to happen, and watch every penny that needs to be spent and don't spend any unless it is absolutely necessary. |
| 4. | To have all production sections find some extra-funds (whether from its own savings or from friendly investors) to support part of the working capital and capital expenditure needs during the interim periods. In this respect, the past attitude of looking at hand - out from the head quarter is definitely out. |
| 5. | There is no borrowing unless production will have the ability to repay the borrowings satisfactorily. |
| 6. | All production must be profitable ultimately within schedule; and any mistakes (if any) must be rectified within the shortest time possible and repetition of the same mistakes will not be tolerated. |
| 7. | A suitable program in "Award and Penalty" must be formulated to provide incentives to all working teams. |
| · | By end August 2018 the Interim Revitalization Plan was formulated and put into motion. |
The revitalization plan has the following basic fundamentals:
Essentially, the current Mega Farm Project has two major divisions: (i) the Property Management division and (ii) the Production division:
| · | The Property Management division is managing the properties of the Mega Farm Project by leasing out all of the land either to external operators or internal divisional operators at rental fees according to leasing market values (includes the open dams, in-door APM production factories and plantation land, etc.). This division supports the leases with basic maintenance, security and supplies of utilities, etc. |
| · | The Production division will have the following subdivisions: |
At AF4 (Factory 1)
| 1. | Fish fingerling production |
| 2. | Mexican White Prawn (“MWP”) production |
| 3. | Research and Development (R&D) and Bio-security Operation. |
At AF5 (Factory 2)
| 1. | Nurturing of fish fingerling |
At the end of December 2018, the early winter of the Guangdong districts slowed down the revitalization programs planned for AF4 and AF5 due primarily to the external supporting facilities (i.e. water holding dams, waste water treatment dams, external disinfection tanks and proper heating facilities etc.) were not completed. As such, the revitalization plan of these two farms was delayed. In the meantime, operations on a small scale are being carried out in both AF4 and AF5 with the aim of slowly recruiting the right personnel to move ahead after the spring of 2019.
However, by August 2019, efforts of the Company trying to revitalize Aqua-farm 4 and 5 failed due primarily to the lack of capital funding to continue to support farms’ developments and the necessity in adding new talents into the existing management teams to carry out the revitalization works, the Company finally decided to cease operation of Aqua-farm 4 and 5 during September 2019.
| · | R&D work and development the 3rd generation ODRAS. |
During Q1 2017 CA acted as the turnkey contractor to Tri-way’s Aqua-Farm 3 (formerly, PF2) helping it complete the construction and development of a 150 Mu open dam farm (with effective production dams totaled to 90 Mu) using its 3rd generation ODRAS technology and system (ODRAS (3G) Farm 1) at a sea-shore property in YangJiang district of Guangdong Province (the “YangJiang Farm”) to grow Mexican White Prawns (MWP). This farm started operation in Q2 2017 and by the end of Q4 2017, it produced over a 9 month-period a total of 600 MT of small to large sized MWP generating sales revenue of RMB7.2 million (or $1.152 million) representing an average yield of 6 MT/Mu/9 months/3 harvests (annually yielding 8 MT/Mu) on 100 Mu of net-effective grow-out areas. This farm was operating smoothly in 2018; however, its productivity was not as high as anticipated (i.e. current figures show 5 MT/Mu/year instead of the planned 8 MT/Mu/year). This was due mainly to the inconsistent quality of the sea water over the year affecting the growing conditions in the open dams; as a result, we could not restock at the planned frequencies thereby reducing the productiveness of the farm.
On December 2017, CA also acted as a turnkey contractor to AF3 starting the construction and development of ODRAS (3G) Farm 2 on 186 Mu of land located opposite to AF3’s old open dam farm’s property at Shenwan Town, Zhongshan City, Guangdong Province. ODRAS (3G) farm (2) is expecting to start production operation within April 2018 targeting annual production to exceed 1000 MT (annually yielding 8 MT/Mu) on net-effective grow-out area of 130 Mu. Up to date the farm is doing better than Yangjiang farm and on target (to get 8 MT/Mu/Year) judging on its harvest during Q2 2018 due to its location where there are good sources of water underground for supply of both salt and fresh water.
AF3’s old open dam farm’s property located at Shenwan Town, Zhongshan City, Guangdong Province was originally 390 Mu that had been expanded to 600 Mu in 2016 and among which 350 Mu are still operating on its old ODRAS systems, wherein 250 Mu was retrofitted into ODRAS (2G) using CA’s 2nd generation ODRAS technology and systems, starting production in Q2 2017. It is the intension of Tri-way to retrofit the original 350 mu farm into ODRAS (3G) within 2019, again dependent on when Tri-way will secure long-term financing. Up to date AF3 didn’t retrofit the 350 Mu due to limited funds allocated for capital expenditures such that these dams were stocked with mixed fish (i.e. mainly fresh water Carp species and other low priced fish with constant demands and stable prices).
At the same time since 2017, CA has been servicing groups of farmers aiming to develop some of their properties (estimated over 600 Mu collectively) in nearby regional districts as well as over 400 Mu of land next to ODRAS (3G) farm (1). In so far only a fraction of the land (up to 200 Mu) has been developed in 2018.
During 2017, CA improved its designs in ODRAS (3G) technology to have more frequencies in water flows, smaller sized grow-out dams (i.e. average of 6 Mu per dam reduced to 2.5 Mu) that will reduce energy costs by having the dams covered by greenhouse designed structures shaded by trees in between to act as wind breakers and weather adjusters that we think will be very adaptable in southern China to grow both MWP and BJP. These ODRAS (3G) farms can be built at 1/3 of the price of the MWP Farm (1) mentioned earlier for approximately RMB700/m2.
Other Project Development (historical)
The Company has also, acting as a turnkey project developer, built 8 restaurants with central kitchen and bakery facilities in the greater Guangzhou area.
| | · | Restaurant 1, at River South District, Guangzhou. Operated since Q1 2012. |
| | · | Restaurant 2, at the UU Park Complex in Tianhe District, Guangzhou. Operated since Q3 2012. |
| | · | Restaurant 3, at the Sporting Complex in Tianhe District, Guangzhou. Operated since Q1 2013. The Company stopped operating Restaurant 3 in Q3 2013 due to landlord’s failure to provide a Fire Safety Permit. |
| | · | Restaurant 4, at Harbor City Shopping Center, Guangzhou. Operated since Q3 2013. |
| | · | Restaurant 5, at the center of Zhungzhen City. Operated since Q1 2014. |
| | · | Restaurant 6, at the Li Wan District and next to Wholesale Center 1, Guangzhou. Operated since 2014. |
| | · | Restaurant 7, at Xining City which is the 2nd “BULL” restaurant established in Qinghai Province operated since 2015. |
| | · | Restaurant 8, at JianJiang City, JianJiang District, Guangdong Province, operated since August 2015. |
Intellectual Property Rights
The Company and its business are, to some extent, dependent on patents, licenses and other intellectual property rights. As of the date of this Annual Report, the Company holds intellectual property for fertilizer formulas, livestock feed fermenting formulas and indoor fish farm techniques. These include an enzyme technology master license registered under a Chinese patent for the manufacturing of livestock feed and bioorganic fertilizer, and an aromatic-feed formula technology for the production of aromatic cattle, and a bacterial cellulose technology license.
On 12 November 2008, Tri-way Industries Limited entered into a Sales and Purchase of Technology Master License Agreement with the inventor of a patent, Mr. Shan Dezhang, concerning the sale and purchase of the master license rights of a patent registered in China under the name of “Zhi Wu Jei Gan Si Liao Chan Ye Hua Ji Qi Zhi Bei Fang Fa”, with patent number ZL200510063039.9.
The patent relates to methods of processing plant straw into animal fodder and industrialization of product of plant straw fodder. Under the agreement, Tri-way Industries Limited is licensed to use and to license others to use the secrets, copyrights processes and other intellectual property rights associated with the patent in any territories in the world free from all encumbrances with all rights to the patented intellectual property and related brand and label as provided under the laws of China. The total purchase price of the patent was USD 8,000,000, to be paid in several installments. As Tri-way Industries Limited is not a Chinese company, relevant Chinese authorities must, under applicable Chinese law, approve the assignment. The patent assignment has not been registered. Consequently, under Chinese law, the patent shall not take priority over the interests of third parties who are in good faith.
On 15 May 2009, Tri-way Industries Limited (as licensor) entered into a sub-license agreement with SJAP (as licensee) concerning the sub-licensing of the above-mentioned patent (ZL200510063039.9). The license period is 50 years, and the annual license fee is stipulated at USD 450,000. However, as effective patent protection for the patent is 20 years, the excess part of the term is void under Chinese law. The contracting parties of the aforesaid sub-license agreement have never performed the terms of the said agreement and no payment has ever been made by the licensee to the licensor. The parties have no intention to perform the sub-license agreement, and the contracting parties have terminated the said agreement accordingly.
Rights to this technology has been transferred to HSA by SIAF after SIAF obtained it, as well as other assets, in exchange for assumed liabilities of Tri-way as a result of the carve-out.
On 20 June 2011, SJAP entered into an agreement with Guangzhou City Garwor Trading Company Limited, pursuant to which Guangzhou City Garwor Trading Company Limited transferred its trademarks with registration numbers, 3713869 and 3713868, as well as a microbial patent with patent number ZL200610033295.8. The total transfer fee for the trademarks and the patent was RMB 12 million and the transfer fee for the technology secrets was RMB 1 million. According to the said agreement, the transfer fees shall be paid by the interest generated from the utilization of the patent. Moreover, the said agreement stipulates that any new technology improvements of the invention shall belong to both parties, and that any resulting profits shall be shared equally. Guangzhou City Garwor Trading Company Limited is a shareholder in the transferee and therefore a related party. An evaluation report was not filed with the transaction. Although this is not a formal requirement under Chinese law and the contract is valid, this may lead to the contract being challenged in the future on the basis of unfairness. Moreover, as the transferor, Guangzhou City Garwor Trading Company Limited, is not the owner of the trademark, the said agreement is void under Chinese law and SJAP has therefore not obtained ownership of the aforementioned trademarks. This may be corrected if and when SJAP enters into an agreement with the trademark owner. If SJAP uses the trademark without prior consent of the trademark owner, this would constitute trademark infringement. However, SJAP is intending to write off said trademark, and does not intend to use the trademark in question.
Material Agreements
Joint Venture Agreements
The Company has two types of SFJVCs established under Chinese law:
| | · | Contractual Joint Ventures (“CJV”); and |
| | · | Equity Joint Ventures (“EJV”). |
Of the five Chinese joint venture project companies which are CJVs or EJVs, four are CJVs (JFD, JHMC, JHST and SJAP) and one is an EJV (HSA).1
The main difference between an EJV and a CJV is that in a CJV, the obligation of capital contribution shall be determined by the contractual parties themselves. The proportions of capital contribution do not have to be fixed between the Chinese and foreign parties. Profit distribution and risk sharing ratio shall also be determined by the contracting parties themselves which do not have to be the same proportions as the parties’ capital contribution or shareholding therein. The capital contributing parties may specify their profit and risk sharing ratio only and may or may not specify their shareholdings in the CJV. One party may make capital contribution by way of non-monetary assets such as rights in lands, factories and machineries etc. while the other party may make capital contribution by way of cash.
In an EJV, the shareholders contribute capital and operate business jointly, and share profits, risks and losses in proportion to their equity contributions. Foreign investor’s capital contribution shall not be less than 25 percent of the total registered capital.
The Company engages in projects based on consulting and service agreements (as described under “Consulting and Services Agreements” below), whereby the Company can choose whether the cooperation shall continue under a consulting and service agreement or be acquired by the Company.
Consulting and Services Agreement
Consulting and service (“C&S”) agreements are important for the operation of the Company’s subsidiaries and partners. Only the Company’s subsidiaries SJAP and HSA do not and have not operated under C&S agreements.
Initially, agriculture and aquaculture investors invite the Company to act as a developer and project manager of an agribusiness or food-related project. If the management of the Company sees the proposal as interesting, the Company carries out an in-depth study of the target company including legal due diligence, business plan, budget and projected financial information. The Company makes the decision through a resolution of the Board of Directors. If the Company determines to proceed, the Chinese investor forms a private Chinese company dedicated to the project and the parties sign a C&S agreement.
1 According to the official documents of the Company’s Chinese subsidiary JHMC, the registered capital of such subsidiary is USD 2 million that was paid in full by year ended 31 December 2014. As of the date of this Annual Report, MEIJI, a subsidiary of the Company, has contributed USD 400,000 of the subscribed capital, whereas USD 1.6 million of the subscribed capital has not been paid. Moreover, according to the official documents of the Company’s Chinese subsidiary HSA, the registered capital of such subsidiary is USD 2.5 million and shall be paid in full no later than 18 July 2013. As of the date of this Annual Report, MEIJI, a subsidiary of the Company, has contributed USD 865,000 of the subscribed capital, whereas USD 234,500 of the subscribed capital has not been paid by the Chinese owner. The aforementioned deadlines can be re-arranged by all the promoters. If no new deadline is agreed upon, failure by MEIJI to make full payment may lead to the other promoters making full payment of the capital contribution on MEIJI’s behalf and requesting MEIJI to compensate for their payment and losses.
The Company acts as the project manager providing turnkey services to the Chinese developer of the project, meaning that the Company builds the project using its technology, systems, know-how, and management expertise and systems. As such, the Company’s expenditure in the project includes the Company’s own administration and operational expenses provided for and incurred in the project (charged and recorded under the Company’s general and administrative operation expenses), which are billed to the Chinese developer. All other development expenditures (inclusive of the Company’s subcontractors’ and sub-suppliers’ costs and the Company’s marked up profits) are billed to the Chinese developer who will pay accordingly.
When the C&S Project Company initiates production the Company acts as the sole marketer of food products and as the supplier for the C&S Project Company under the terms and conditions of the C&S agreement. The Company acts as the selling supplier and buying wholesaler to the company supplying items such as feed, young cattle, and RAS technological components and buys mature prawns, sleepy cod, eels and live cattle. The Company earns a gross profit of between 10-15% based on the C&S Project Company’s revenue on this exclusivity.
The C&S Project Company will remain wholly-owned by the Chinese developer until the Company exercises the acquisition option and subsequently converts the company into an SFJVC where the Chinese investor remains as a minority shareholder. The acquisition price is normally determined in accordance with the book value of the Chinese company as of the acquisition date. Consideration will normally consist partly of cash and partly of project loans owed by the Chinese investor, which offset and decrease the purchase proceeds in the corresponding amount. Generally, the agreements that the Company has entered into governing the formation of the unincorporated companies into SFJVCs do not regulate the maturity date for the formation of SFJVC. The date for the formation of the SFJVC is generally left to the discretion of the Company, based on the development and profitability of the relevant project.
As of the date of this Annual Report, the Company has entered into ten C&S agreements. A portion of the C&S agreements contain an acquisition premium clause, in which the accumulated C&S project development fees billed by the Company will be paid in addition to the equity book value at the time of acquisition. In the event that either of the investors decides to sell all or part of its equity in the SFJVC to any third party, a portion of the agreements require the selling investor to obtain prior consent of the other investor before such sale and to grant the right of first refusal to the other investor on the like terms for the intended sale.
As of October 1, 2016, when Tri-way became the developer and operator of all fishery C&S Projects formerly under SIAF, CA’s new role is one of turnkey operator appointed by and working on behalf of Tri-way.
Land leases
Private ownership of land is not permitted in China. Therefore, the Company leases land that is either collectively owned land or state owned land, through land use rights. Corporate entities and individuals may own the property (buildings) erected on the land.
Land use rights may be transferred, but they are based on agricultural contracts and cannot be changed arbitrarily to non-agricultural purposes. The lease term varies from 27 to 60 years. There are certain uncertainties (e.g., lease term may not exceed 30 years and all transfers have not yet been registered correctly) in respect of certain leased land due to the fact that not all requirements have been fulfilled or not yet registered. However, the Company believes it is protected against these uncertainties through its agreements with the relevant local Chinese partners and relevant registration processes have been initiated. The Company’s subsidiary HSA has acquired land use rights for state owned land located in OuChi Village, FengHuo Town, LinLi County, Hunan Province. However, HSA has not obtained a land use right certificate for such land, which therefore, for the time being, cannot be lawfully mortgaged or transferred. Moreover, the Company’s subsidiary CA has entered into a Rural Land Management Rights Sub-Sales Agreement for the acquisition of the contractual operating and use rights of 202 mu of collective owned land located in Da San Dui Wei You Nan Village, Shenwan Town, Zhongshan City for a period of 30 years. However, the transfer procedures for the land in question have not been completed. CA is not an enterprise registered in mainland China and therefore, according to Chinese law, cannot acquire the contractual operating and use rights of collective owned land. The Company is currently negotiating with Beijing Hengxintianyi Investment Guarantee Co. Ltd. to designate a subsidiary of the Company in China for the purpose of entering into a new Rural Land Management Rights Sub-Sales Agreement.
License Rights
Through the past 10 years (from 2007 to present) the Company has improved and modified the Recirculating Aquaculture System (“RAS”) originally pioneered in Germany into a unique system designed for indoor systems referred to as A Power Module (“APM indoor”) and an outdoor module called open dam RAS (“ODRAS”). We provide two types of licenses under this technology namely, a Developer License permitting a fishery project license to utilize the technology in its design of the APM indoor or ODRAS farms, and an Operator license permitting the use of APM-indoor or ODRAS technology at their respective farms. Each license is granted a 50-year term per assigned module unit for a one-time fee of $50,000 per license, that is a $50,000 fee for rights to the Developer license and a $50,000 fee for rights to the Operator license for 50 years per developed module.
On November 12, 2008, the Company’s subsidiary TRW entered into an agreement with the inventor of a patent, Mr. Shan Dezhang, concerning the sale and purchase of the master license rights of a patent registered in China with patent number ZL200510063039.9.
On May 15, 2009, Tri-way (as licensor) entered into a sub-license agreement with SJAP (as licensee) concerning the sub-licensing of the above-mentioned patent (ZL200510063039.9). For further information on the aforementioned agreements, please refer to the section entitled “Intellectual Property Rights” above.
Industry Overview
This section discusses the industry in which the Company operates. Certain of the information in this section relating to market environment, market developments, growth rates, market trends, industry trends, competition and similar information are estimates based on data compiled by professional organizations, consultants and analysts, in addition to market data from other external and publicly available sources.
Economic outlook in China
China’s economy is at present second only to that of the United States. China's economy is expected to expand 6.2 percent in 2019 from 6.6 percent in 2018. Growth has slowed somewhat following government efforts to try and rein in high levels of debt. China has started feeling the effects of the trade war with the United States, which has resulted in new tariffs on more than $250 billion of Chinese exports. Based on the World Bank’s classification, China has had a remarkable period of rapid growth shifting from a centrally planned to a market based economy. Today, China is an upper middle-income country that has complex development needs.
Agriculture in China
Agriculture is a vital industry in China, employing over 300 million farmers. China ranks first in worldwide farm output, primarily producing rice, wheat, potatoes, tomato, sorghum, peanuts, tea, millet, barley, cotton, oilseed and soybeans and also the largest consumer of many agricultural products, such as pork, rice and soybeans. Although accounting for only 10 percent of arable land worldwide, it produces food for 20 percent of the world's population. While China generally has been successful in meeting its rapidly rising demand for food and grains by increasing domestic production, it has emerged as a leading global importer of several agricultural commodities, including cotton, soybeans, vegetable oils, and animal hides. As its domestic agricultural production has grown, China has also become the largest exporter in global markets for several horticultural products, including mandarin oranges, apples, apple juice, garlic and other vegetables.
China’s increasingly important position in global agricultural markets followed decades of gradual growth in domestic food production and consumption. After the introduction of market-based reforms in 1978 that included the elimination of the collective production system and relaxation of government direction over certain farmer production and marketing decisions, Chinese agricultural output grew significantly. Between 1978 and 2008, China almost doubled its production of grains (rice, wheat and corn) and quadrupled its production of meats; the production of fruit and milk was about 30 times greater in 2008 than in 1978. During these three decades, population growth of about 1 percent annually, coupled with annual per capita income growth of eight percent, fueled a large increase in demand for more and higher-value agricultural products, especially by China’s large and growing middle class. China’s rapid growth in food consumption was largely met by domestic production growth, enabling it to remain self-sufficient in most major commodities.
China’s support for agriculture
China’s government support for agriculture is low compared to that of developed countries, such as the United States and European Union, but in line with that of other rapidly growing economies, according to USITC. As measured by the OECD’s PSE2, the amount of support provided to Chinese farmers was low (and sometimes negative) during the 1990’s, but gradually rose during the period 2008-2010. Compared with other countries at a similar level of development, including Brazil, Mexico, Russia, and South Africa, China’s support for farmers falls in the middle of the range. China’s PSE reflects changes in the central government’s policy priorities from grain self-sufficiency and low consumer prices toward a stronger focus on raising farm household incomes, according to USITC. Government support to China’s agricultural sector indicates that Chinese policymakers are placing a renewed emphasis on the rural economy. Indirect support, in the form of general services, is very high relative to similar support programs in other countries, due largely to investments in agricultural infrastructure. General services include modern research and extension services, food safety agencies, and agricultural price information services, most of which provide benefits to producers and consumers throughout the economy. Compared with direct payments to farmers, general services support is less production-distorting to the sector.
Agricultural consumption
China is a major global consumer of agricultural products. It consumes one-third of the world’s rice, one-fourth of all corn, and half of all pork and cotton, and it is the largest consumer of oilseeds and most edible oils. The traditional Chinese diet centers around staple foods (mainly grains and starches), which account for nearly half of the daily caloric intake. Average Chinese per capita consumption recently stabilized at approximately 3,000 calories per day, one of the highest levels among Asian countries.
2 OECD: PSE is defined as the estimated monetary value of transfers from consumers and taxpayers to farmers, expressed as a percentage of gross farm receipts (defined as the value of total farm production at farmgate prices), plus budgetary support.
Chinese food consumption is influenced by factors such as population size and demographics, income, food prices, and general preferences. Per capita income growth and urbanization are the two factors most responsible for altering recent consumption patterns in China. Rising income translates into higher per capita food consumption, while increasing urbanization is driving diversification of food choices because of greater availability and choice offered through increasingly diverse sales outlets.
Chinese consumers generally fall into one of three categories: rural consumers; urban low-income consumers; or urban high-income consumers. Although urban high-income consumers can afford to buy more and better-quality food, the ubiquity of food outlets in cities means that nearly every urban resident, regardless of income, has available an increasingly diverse food selection. Compared to rural diets, urban diets contain less grain and more non-staple items, including processed and convenience foods. Rural migrants to cities tend to adopt the urban diet.
Expenditure on food
Food is the largest class of household expenditure for all Chinese income groups; even housing takes a smaller share of average household income, according to USITC. As income rises, the absolute amount of food expenditure increases, although the share of income spent on food falls. Urban residents spend substantially more on food than their rural counterparts, according to USITC. Higher incomes lead to an increase in both the quantity and quality of food demanded. However, while demand for higher quantities of food appears to level off in the top income households, demand for higher-quality foods continues to rise with income.
The market for aquatic products and aquaculture in China
The information in this section regarding aquatic and aquaculture, including graphs, is taken from the USDA’s GAIN Report Number: CH12073 per 12/28/2012 unless otherwise stated.3
Total Aquatic Products Production
China has the world’s largest aquatic production and its market share of the world’s fish production has risen from 7 percent in 1961 to 37 percent by 2012. China alone accounted for 62.5 percent of the aquaculture production in the world by volume in 2015. Aquaculture represents more than 71.9 percent of the total fish production in China. Total 2015 aquatic production in China increased 4.38 percent to reach 47.9 million tons, compared to the 45.8 million tons in 2014, per the FAO.
Fish production accounts for 59 percent of the total aquatic production, followed by shellfish and crustaceans at 22.6 percent and 10 percent, respectively. Fish production is, according to the USDA, expected to continue its upward growth trend to reach 34.5 million tons in 2012, up from 33 million tons in 2011 and 31.3 million tons in 2010.
In 2011, Shandong, Guangdong, Fujian and Zhejiang provinces profited from favorable coastal locations and abundant freshwater resources/facilities to rank as the top four aquatic production areas. In terms of freshwater cultured production, Hubei, Guangdong, and Jiangsu provinces are the largest producers.
According to @2020 undercurrent news, China’s seafood imports increased by 39% to $15bn in 2018.
The market for meat in China
China is by far the world’s largest producer and consumer of meat which includes pork, poultry and beef. Historically, this situation did not have a large impact on the rest of the world, as China, for the most part, maintained self-sufficiency in meat. However, since 2007 the situation has changed dramatically. China has gradually turned into a net importer of meats.
World meat production was 340 million tons in 2017.4 Global trade in meat is projected to be 20% higher in 2027, representing a slowing down of meat trade growth to an annual average of 1.5% compared to 2.9% during the previous decade.5 Meat imports into Asia account for 56% of global trade, and poultry will constitute more than half of this additional import demand. China’s meat production reached 86.60 million tons in 2018, where total meat production in the United States amounted to 47.06 million tons in 2018.
With strong economic growth and the improvement of living standards, the demand for beef in China is rising.6 China’s animal feed market is projected to grow at a CAGR of over 16% till 2019.7
3 Definition of terms: China’s definition of aquatic products includes both cultured (farm-raised) and wild caught products; aquatic products include fish, shrimp/prawn/crab, shellfish, algae, and other. Aquatic catch production is total volume of both fresh and seawater wild caught aquatic products; Aquaculture production is the total volume of both fresh and seawater cultured (farmed) aquatic products. This report will use Chinese terminology to maintain consistency between Chinese statistics and product categories. Total aquatic trade statistics below do not include fishmeal.
4 Review of Recirculation Aquaculture System Technologies and their Commercial Application, Stirling Aquaculture, Institute of Aquaculture.
5 Food Outlook, FAO, November 2018
6 Research Report on Beef Import in China, 2019-2023
7 China Animal Feed Market Forecast and Opportunities, 2019
There are several other specific market drivers which underpin the increase in demand for red meat. One driver is the improved living standard in China which stimulates the growth of beef markets since beef often sells at a much higher price and traditionally has been more expensive than what most people can afford. Another is the fact that Chinese people’s dietary structure is becoming more diversified and reasonable, bringing larger amount of beef consumption since beef has nutritional benefits. Lastly, a gradual lowering of import taxes is likely to support sufficient supply of cattle.
Feed grain prices are projected to remain low during 2018-2027. The year 2017 was affected by numerous outbreaks of Avian Influenza (AI) around the world which resulted in a slower increase in world output. China, the second largest producer after the United States, was particularly affected by several outbreaks over the last years. Thus, China can expect a return to historical trend growth in poultry production from 2018 onwards. Globally, the share of meat output traded is expected to remain constant at around 10%, with most of the increase in volume coming from poultry meat. The projected production growth in developing countries remains insufficient to satisfy demand grown, particularly in Asia and Africa. As a result, import demand is expected to remain strong.8
Market drivers
The improvement of living standard stimulates the growth of beef markets:
Traditionally, Chinese people eat pork and chicken to satisfy their desire for meat. This is largely due to the much higher price of beef which goes beyond normal people’s affordable level. With the improvement of living standards, Chinese people have begun the upgrade of their consumption of meat, and began to eat more beef.
Chinese people’s dietary structure becomes more diversified and reasonable, bringing larger amount of beef consumption:
At present, Chinese people are changing their diet patterns to higher and richer nutrition. From a nutritional perspective, beef not only contains high unsaturated fatty acids and high protein, it also has low fat and lots of nutrition, which makes it perfect for the healthy diet. Thus, in the future, beef is expected to replace some parts of the market shares in pork, chicken and other meats.9
The market for fertilizer in China
Sales of fertilizers are expected to be supported by healthy expansion of agricultural activities as the amount of sown areas continues to grow and rural income levels rise. Farmers will continue to register steadily increasing incomes, the result of growing crop prices and government subsidies designed to supplement their revenues and reduce their material costs. Subsidies aimed directly at cutting the cost of fertilizers is expected to encourage additional use. In addition, rising crop prices have encouraged farmers to invest in fertilizers to further boost crop yields. Advances will also be driven by increases in the acreage of sown land dedicated to growing cash crops. However, increasing demand for organic food and improved understanding of the correct application of fertilizers is expected to prevent demand from rising at a faster pace.
In value terms, fertilizer demand is expected to grow from over $195 billion in 2016 to over $245 billion in 2020.10 Faster value growth will be driven by strong demand for higher value multi-nutrient fertilizers. In addition, advances will be supported by continued growth in fertilizer prices as the cost of natural gas, oil, coal, and other raw materials continues to increase.
Demand for fertilizer nutrients in China is projected to grow 4.4 percent annually through 2015 to 98.1 million metric tons. Nutrient demand will be stimulated by increasing use of higher nutrient level products as income levels grow in rural areas in China. In addition, government efforts to promote multi-nutrient fertilizers will also support gains in fertilizer nutrient demand. Accounting for more than three-fourths of total fertilizer demand in 2010, single-nutrient fertilizers will remain the larger product type through 2015, despite a relatively low growth rate of 2.1 percent per year. Sales of single nutrient fertilizers will continue to be supported by their relatively low prices.
The size, growth and composition of fertilizer demand in the six regions that make up China vary considerably. The Central-South and Central-East will remain the two largest regional fertilizer markets. Due to the comparatively high income levels in the Central-South and Central-East - which enable residents to afford more expensive food items - demand for cash crops such as fruits and vegetables will rise in these regions, which in turn will fuel demand for fertilizer. Sales in the Northeast and Northwest regions will outpace the average through 2015, benefiting from the Great Western Development Strategy, the Northeast Revitalization Policy, and increasing income levels for farmers.11
8 Meat - OECD-FAO Agricultural Outlook 2018-2027
9 Frost & Sullivan: China’s beef market has great growth potential
10 Fertilizer Market Global Report 2017, Business Research Company
11 Fertilizers in China, Industry Study with Forecasts for 2015 & 2020, Freedonia Group; June 2012
In 2006, the central government started a program intended to partially compensate farmers for price increases in fuel, fertilizer and other agricultural inputs. In the case of fertilizers, government support is part of several separate programs targeting fertilizer producers, with cost reductions being passed along to farmers purchasing the input.
GOVERNMENT REGULATION
Regulation of M&A and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce (the “MOFCOM”), the State Assets Supervision and Administration Commission, the State Administration of Taxation (“SAT”), the State Administration of Industry and Commerce (the “SAIC”), the China Securities Regulatory Commission (“CSRC”), and the State Administration of Foreign Exchange (the “SAFE”), jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules include provisions that purport to require that an offshore special purpose vehicle formed for purposes of the overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On September 21, 2006, the CSRC published on its official Website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC. The application of this new PRC regulation remains unclear, with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.
The M&A Rules also establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise.
In February 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Circular 6”), which established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire “de facto control” of domestic enterprises with “national security” concerns. In August 2011, the MOFCOM promulgated the Rules on Implementation of Security Review System (the “MOFCOM Security Review Rules”), to replace the Interim Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the MOFCOM in March 2011. The MOFCOM Security Review Rules, which came into effect on September 1, 2011, provide that the MOFCOM will look into the substance and actual impact of a transaction and prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
Regulation of Foreign Currency Exchange and Dividend Distribution
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (the “FX Regulations”), which were last amended in August 2008. Under the FX Regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. On August 29, 2008, the SAFE issued a notice, Circular 142, regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that the registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, the SAFE increased its oversight of the flow and use of the registered capital of a foreign-invested company settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without the SAFE’s approval, and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result, Circular 142 may significantly limit our ability to transfer cash or other assets from The Company and/or our other non-PRC subsidiaries into our subsidiaries in the PRC, which may adversely affect our business expansion and we may not be able to convert the net proceeds into RMB to invest in or acquire any other PRC companies, or establish other variable interest entities (“VIEs”) in the PRC.
Dividends paid by a PRC subsidiary to its overseas shareholder are deemed income of the shareholder and are taxable in the PRC. Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in the PRC may purchase or remit foreign currency, subject to a cap approved by the SAFE, for settlement of current account transactions without the approval of the SAFE. Foreign currency transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities.
In October 2005, the SAFE promulgated the Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles (“Circular 75”). Under Circular 75, which was issued by SAFE effective November 1, 2005, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to the registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore company. Moreover, Circular 75 applies retroactively. As a result, PRC residents who, prior to November 1, 2005, had established or acquired control of offshore companies that had made onshore investments in the PRC prior to were required to complete the relevant registration procedures with the local SAFE branch by March 31, 2006.
Since May 2007, the SAFE has issued a series of guidance to its local branches with respect to the operational process for the SAFE registration under Circular 75. The guidance provides more specific and stringent supervision of the registration required by Circular 75. For example, the guidance imposes obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to the local SAFE authorities regarding any shareholder or beneficial owner of the offshore entity who is a PRC citizen or resident. Untrue statements by the onshore subsidiaries will lead to potential liability for the subsidiaries and, in some instances, for their legal representatives and other related individuals.
Under the relevant rules, failure to comply with the registration procedures set forth in Circular 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including increases in its registered capital, payment of dividends and other distributions to its offshore parent or affiliate and capital inflows from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC residents who control our company from time to time are required to register with the SAFE in connection with their investments in us.
On December 25, 2006, the People’s Bank of China (the “PBOC”) issued the Administration Measures on Individual Foreign Exchange Control and related Implementation Rules were issued by the SAFE on January 5, 2007. Both became effective on February 1, 2007. Under these regulations, all foreign exchange transactions involving an employee share incentive plan, share option plan, or similar plan participated in by onshore individuals may be conducted only with approval from the SAFE or its authorized branch. Under the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company (“Offshore Share Incentives Rules”), which was issued by the SAFE on February 15, 2012, PRC citizens who are granted share options, restricted share units or restricted shares by an overseas publicly listed company are required to register with the SAFE or its authorized branch and to comply with a series of other requirements. If we, or the PRC employees of ours who hold options, restricted share units or restricted shares fail to comply with these registration or other procedural requirements, we, and/or such employees may be subject to fines and other legal sanctions.
The principal regulations governing distribution of dividends of foreign holding companies include the Foreign Investment Enterprise Law (1986), which was amended in October 2000, and the Administrative Rules under the Foreign Investment Enterprise Law (2001). Under these regulations, foreign investment enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in China are required to allocate at least 10% of their accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.
Laws and Regulations Related to Employment and Labor Protection
On June 29, 2007, the National People’s Congress promulgated the Employment Contract Law of PRC (“Employment Contract Law”), which became effective as of January 1, 2008, and was amended on December 28, 2012. The Employment Contract Law requires employers to provide written contracts to their employees, restricts the use of temporary workers and aims to give employees long-term job security.
Pursuant to the Employment Contract Law, employment contracts lawfully concluded prior to the implementation of the Employment Contract Law and continuing as of the date of its implementation shall continue to be performed. Where an employment relationship was established prior to the implementation of the Employment Contract Law but no written employment contract was concluded, a contract must be concluded within one month after its implementation.
On September 18, 2008, the State Council promulgated the Implementing Regulations for the PRC Employment Contract Law which came into effect immediately. These regulations interpret and supplement the provisions of the Employment Contract Law.
As of December 31, 2015, we had entered written employment contracts with three of our employees.
Income Tax
On March 16, 2007, the National People’s Congress approved and promulgated the Enterprise Income Tax Law (the “EIT Law”). On December 6, 2007, the State Council approved the Implementing Rules. Both the EIT Law and its Implementing Rules became effective on January 1, 2008. Under the EIT Law and the Implementing Rules, which superseded the previous Income Tax Law, the enterprise income tax rate for both domestic companies and foreign invested enterprises is unified at 25%. On December 26, 2007, the State Council promulgated the Circular on Implementation of Enterprise Tax Transition Preferential Policy, or the Preferential Policy Circular. The EIT Law, its Implementing Rules and the Preferential Policy Circular provide a five-year transitional period for certain entities that had enjoyed a favorable income tax rate of less than 25% under the previous Income Tax Law and were established before March 16, 2007, during which period the applicable enterprises income tax rate shall gradually increase to 25%.
On April 14, 2008, the Administration Measures for Recognition of High and New Technology Enterprises, or the Recognition Measures, were jointly promulgated by the Ministry of Science and Technology, the Ministry of Finance, and the SAT, which sets out the standards and process for granting the high and new technology enterprises status. According to the EIT Law and its Implementing Rules as well as the Recognition Measures, enterprises which have been granted the high and new technology enterprises status shall enjoy a favorable income tax rate of 15%. The new EIT Law and its Implementation Rules also provide that “software enterprises” enjoy a two-year income tax exemption starting from the first profit making year, followed by a reduced tax rate of 12.5% for the subsequent three years.
The EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The Implementing Rules merely defines the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” The SAT issued the Circular regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. The SAT issued the Bulletin regarding the Administrative Measures on the Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Interim) on July 27, 2011, which became effective on September 1, 2011, providing more guidance on the implementation of Circular 82. This bulletin clarifies matters including resident status determination, post-determination administration and competent tax authorities. Although both Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not companies like us, the determining criteria set forth in Circular 82 and the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Based on a review of surrounding facts and circumstances, the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to January 1, 2008.
The EIT Law also imposes a withholding income tax of 10% on dividends distributed by a Foreign Invested Enterprise (an “FIE”) to its immediate holding company outside of China if such immediate holding company is considered a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous law. The State of Nevada, where the Company is incorporated, does not have such tax treaty with China. The SAT further promulgated a circular, or Circular 601, on October 27, 2009, which provides that the tax treaty benefits will be denied to “conduit” or shell companies without business substance and that a beneficial ownership analysis will be used based on a “substance-over-form” principle to determine whether to grant the tax treaty benefits. Most our subsidiaries in China are directly held by our non-Chinese subsidiaries. If we are regarded as a non-resident enterprise and our non-Chinese subsidiaries are regarded as resident enterprises, then our non-Chinese subsidiaries may be required to pay a 10% withholding tax on any dividends payable to us. If our non-Chinese subsidiaries are regarded as non-resident enterprises, then our PRC subsidiaries may be required to pay a 5% withholding tax for any dividends payable to our non-Chinese subsidiaries, however, it is still unclear at this stage whether Circular 601 applies to dividends from our PRC subsidiaries paid to our non-Chinese subsidiaries, and if our non-Chinese subsidiaries were not considered as “beneficial owners” of any dividends from their PRC subsidiaries, whether the dividends payable to our non-Chinese subsidiaries would be subject to withholding tax at a rate of 10%.
The EIT Law and its Implementation Rules have tried to scrutinize transactions between related parties. Pursuant to the EIT Law and its Implementation Rules, the tax authorities may impose mandatory adjustment on tax due to the extent a related party transaction is not in line with arm’s-length principle or was entered with a purpose to reduce, avoid or delay the payment of tax. On January 8, 2009, the SAT issued the Implementation Measures for Special Tax Adjustments (Trial), which clarifies the definition of “related party” and sets forth the tax-filing disclosure and documentation requirements, the selection and application of transfer pricing methods, and transfer pricing investigation and assessment procedures.
On December 10, 2009, the SAT issued a circular on Strengthening the Administration of Enterprise Income Tax Collection on Income Derived from Equity Transfer by Non-resident Enterprise, or Circular 698. Pursuant to Circular 698, non-resident enterprises should declare any direct transfer of equity interest of PRC resident enterprises and pay taxes in accordance with the EIT Law and relevant laws and regulations. For an indirect transfer, if the effective tax rate for the transferor (a non-PRC-resident enterprise) is lower than 12.5% under the law of the jurisdiction of the direct transferred target, the transferor is required to submit relevant transaction materials to PRC tax authorities for review. If such indirect transfer is determined by PRC tax authorities to be a transaction without any reasonable business purpose other than for tax avoidance, the gains derived from such transfer will be subject to PRC income tax.
In addition to the above, after the EIT Law and its Implementing Rules were promulgated, the SAT released several regulations to stipulate more details for carrying out the EIT Law and its Implementing Rules. These regulations include:
· Notice of the State Administration of Taxation on the Issues Concerning the Administration of Enterprise Income Tax Deduction and Exemption (2008);
· Notice of the State Administration of Taxation on Strengthening the Withholding of Enterprise Income Tax on Non-resident Enterprises’ Interest Income Sourcing from China (2008);
· Notice of the State Administration of Taxation on Several Issues Concerning the Recognition of Incomes Subject to the Enterprise Income Tax (2008);
· Opinion of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax (2008);
· Notice of the Ministry of Finance and State Administration of Taxation on Several Preferential Policies in Respect of Enterprise Income Tax (2008);
· Interim Measures for the Administration of Collection of Enterprise Income Tax on the Basis of Consolidation of Trans-regional Business Operations (2008);
· Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (2009);
· Circular of the State Council on Printing and Distributing Policies for Further Encouraging the Development of the Software Industry and the Integrated Circuit Industry (2011); and
· Circular on Income Tax Policies for Further Encouraging the Development of Software Industry and Integrated Circuit Industry (2012).
ITEM 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should carefully consider each of the following risks and all other information in this Annual Report before deciding to invest in our common stock. If any of these risks actually occur, our business, financial condition, results of operations, and our future growth prospects would suffer. Under these circumstances, the share price and value of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described in this Annual Report are the only material risks and uncertainties that we presently know to be facing our company.
This Annual Report contains forward-looking statements. Forward-looking statements anticipate future events or future financial performance. This Annual Report also contains market data related to our business and industry. This market data includes projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from projections based on them. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our common stock.
Currently, we conduct our business operations in the People’s Republic of China. As China’s economy and its laws, regulations and policies may and do differ from those found in the West, and change continually, we face certain risks that are summarized in this section.
Risks Related to Our Company
Subsequent to the Tri-way carve-out, the number of direct major customers associated with SIAF subsidiaries has been reduced.
Subsequent to the Tri-way carve-out, the number of direct major customers associated with SIAF subsidiaries has been reduced, with the concentration of major customers now handled through the SJAP and SIAF/CA’s import/export trading division (the “Corporate Division”) via its main distribution agent, Shanghai Virgo Trading Co. Ltd. (“Virgo”) such that a loss of business with Virgo will have an adverse effect on SIAF’s Corporate Division operational performance. The Corporate Division accounted for 8.2% of consolidated revenues during the fiscal year ended December 31, 2018.
We may be unable to maintain an effective system of internal control over financial reporting, and as a result we may be unable to accurately report our financial results.
Our reporting obligations as a public company place a significant strain on our management, operational and financial resources and systems. If we fail to maintain an effective system of internal control over financial reporting, we could experience delays or inaccuracies in reporting our financial information, or non-compliance with SEC reporting and other regulatory requirements. This could subject us to regulatory scrutiny and result in a loss of public confidence in our management, which could, among other things, cause our stock price to drop.
Because we will require additional financing to expand our vertically integrated operations according to our business plan and growth strategy, our failure to obtain necessary financing will impair our growth strategy; in addition, the risks of vertical integration are significant.
As of December 31, 2018, we had net working capital of $175,208,848, including cash and cash equivalents of $4,950,799. Our capital requirements to accomplish our planned vertically integrated development and growth plan of our business are significant.
In most developed countries, risks of agriculture operations are shared to a certain degree by different sectors in the industry. For example:
| · | Research and development are often initiated and supported by government departments; |
| · | Primary producers are mainly concerned with the growing risks of the produce; |
| · | Marketing companies assume the risks of marketing the produce; |
| · | Trading houses sell the produce and assume the credit risks of the sales; and |
| · | Logistics companies assume the risks of transporting the produce. |
However, as a vertically integrated operator, we must assume all the above-mentioned risks. China is a developing country; compared to other developed nations, its agriculture industry is not modern. Thus, management believes that it is essential for us to develop our business operation in a vertically integrated manner so that we can achieve reasonable profit margins for our products. We believe that the multiple layers of profits generated through vertical integration may compensate to some degree for the variety of risks that we face through the multiple operations; however, the overall risks are much greater. At the same time, our five year plan for vertically integrated developments is not fully completed, and the remaining developments may require significant capital expenditures and management resources. Failure to implement these vertically integrated developments could hurt our ability to manage our growth and our financial position.
To accomplish the objectives discussed above and to execute our business strategy, we need access to capital on appropriate terms. We currently have no commitments with any third party to obtain such additional financing and we cannot assure you that we will be able to obtain the requisite additional financing on any terms and, if we are able to raise additional funds, it may be necessary for us to sell our securities at a price which is at a significant discount from the market price and on other terms which may be disadvantageous to us. In connection with any such financing, we may be required to provide registration rights to the investors and pay damages to the investors in the event that the registration statement is not filed or declared effective by specified dates. The price and terms of any financing which would be available to us could result in both the issuance of a significant number of shares and significant downward pressure on our stock price. We cannot assure you that our business objectives, particularly over the longer term, will be met on a timely basis, if at all. Consequently, we may be unable to meet fixed obligations and expenses that will be generated in the operation of our business, whether as presently in existence or as proposed. Any failure to obtain requisite financing on acceptable terms could have material and adverse effect on our business, financial condition and future prospects.
No assurance of successful expansion of operations.
Our significant increase in the scope and the scale of our operations, including the hiring of additional personnel, has resulted in significantly higher operating expenses. We anticipate that our operating expenses will continue to increase. Expansion of our operations may also make significant demands on our management, finances and other resources. Our ability to manage the anticipated future growth, should it occur, will depend upon a significant expansion of our accounting and other internal management systems and the implementation and subsequent improvement of a variety of systems, procedures and controls. We cannot assure that significant problems in these areas will not occur. Failure to expand these areas and implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with our business could have a material adverse effect on our business, financial condition and results of operations. We cannot assure that attempts to expand our marketing, sales, manufacturing and customer support efforts will succeed or generate additional sales or profits in any future period. As a result of the expansion of our operations and the anticipated increase in our operating expenses, along with the difficulty in forecasting revenue levels, we expect to continue to experience significant fluctuations in its results of operations.
We may be unable to successfully expand our production capacity, which could result in material delays, quality issues, increased costs and loss of business opportunities, which may negatively impact our product margins and profitability.
Part of our future growth strategy is to increase our production capacity to meet increasing demand for our goods. Assuming we obtain sufficient funding to increase our production capacity, any projects to increase such capacity may not be constructed on the anticipated timetable or within budget. We may also experience quality control issues as we implement any production upgrades. Any material delay in completing these projects, or any substantial cost increases or quality issues in connection with these projects could materially delay our ability to bring our products to market and adversely affect our business, reduce our revenue, income and available cash, all of which could harm our financial condition.
Our business and operations are growing rapidly. If we fail to effectively manage our growth, our business and operating results could be harmed.
We have experienced, and may continue to experience, rapid growth in our operations. This has placed, and may continue to place, significant demands on our management, operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products and services could suffer, which could negatively affect our operating results. To effectively manage our growth, we must continue to improve our operational, financial and management controls and reporting systems and procedures. These systems improvements may require significant capital expenditures and management resources. Failure to implement these improvements could hurt our ability to manage our growth and our financial position.
If the Chinese government were to change its presently favorable policy toward the agriculture industry, we would no longer enjoy our present tax-related privileges, which would materially and adversely impact our sales performance, margins, and net profit and our costs structure.
As producers active in the agriculture industry, our subsidiaries are presently exempt from income tax and enjoy various incentive grants and subsidies given by the Chinese government. If the Chinese government were to change its presently favorable policy toward the agriculture industry, we would no longer enjoy our present tax-related privileges, which would materially and adversely impact our sales performance, margins, and net profit and our costs structure. We have experienced, and may continue to experience, quick changes of policies by the Chinese government. If we do not effectively and efficiently manage our growth on time due to lack of capital, we could suffer adversely from the consequences of any such policy changes.
Our intellectual property rights are valuable, and any inability to adequately protect, or uncertainty regarding validity, enforceability or scope of them could undermine our competitive position and reduce the value of our products, services and brand, and litigation to protect our intellectual property rights may be costly.
We attempt to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets to us. Various events outside of our control pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in China and other countries in which our products are sold. Also, although we have registered our trademark in China, our efforts to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete and hurt our results of operation. Also, protecting our intellectual property rights is costly and time consuming. Policing unauthorized use of our proprietary technology can be difficult and expensive. Litigation might be necessary to protect our intellectual property rights. But due to the relative unpredictability of the Chinese legal system and potential difficulties to enforce a court’s judgment in China, there is no guarantee that litigation would result in a favorable outcome. Furthermore, any such litigation may be costly and may divert our management’s attention from our core business. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation. Although we are not aware of any of such litigation, we have no insurance coverage against the litigation costs so we would be forced to bear all litigation costs if we cannot recover them from other parties. All foregoing factors could harm our business, financial condition, and results of operations. Any unauthorized use of our intellectual property could make it more expensive for us to do business and harm our operating results.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined against us, could adversely affect our business and subject us to significant liability to third parties.
Our success mainly depends on our ability to use and develop our technology and product designs without infringing upon the intellectual property rights of third parties. We may be subject to litigation involving claims of patent infringement or violations of other intellectual property rights of third parties. Holders of patents and other intellectual property rights potentially relevant to our product offerings may be unknown to us, which may make it difficult for us to acquire a license on commercially acceptable terms. There may also be technologies licensed to us and that we rely upon that are subject to infringement or other corresponding allegations or claims by third parties which may damage our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work with us possess appropriate intellectual property rights or licenses, we cannot fully avoid the risks of intellectual property rights infringement created by suppliers of components used in our products or by companies we work with in cooperative research and development activities. Our current or potential competitors may have obtained or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products. The defense of intellectual property claims, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming, and may significantly divert the efforts and resources of our technical personnel and management. These factors could effectively prevent us from pursuing some or all of our business operations and result in our customers or potential customers deferring, canceling or limiting their purchase or use of our products, which may have a material adverse effect on our business, financial condition and results of operations.
We rely on highly skilled personnel and the continuing efforts of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our business may be severely disrupted.
Our performance largely depends on the talents, knowledge, skills, know-how and efforts of highly skilled individuals and in particular, the expertise held by our chief executive officer, Solomon Lee. His absence, were it to occur, could impact development and implementation of our projects and businesses. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Our continued ability to compete effectively depends on our ability to attract new technology developers and to retain and motivate our existing contractors. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executives joins a competitor or forms a competing company, we may lose some customers.
Our financial and operating performance may be adversely affected by adverse weather conditions, natural disasters and other catastrophes.
Our financial and operating performance may be affected adversely by epidemics, bad weather conditions, natural disasters and other catastrophes. Our HU plantation and Mega Farm is situated in Enping district and Zhongshan district which are subject to flooding, especially during the typhoon season (from July through September); for examples we lost many live fish and prawns grown in our open dam area of 450 Mu at the Zhongshan Mage Farm due to flooding in 2017 and again the same farm lost most of its fish breed stocks due to power stoppage caused by the typhoon; meanwhile, at Enping’s HU Plantation we lost all the winter cash crops planted during August 2018 and 50 Mu of nursery herbal tea plants and 200 Mu of passion fruit tree planted during Q2 2018.
We do not expect to encounter any epidemics in our aquaculture fishery farms in districts of the Guangdong Province or cattle farms in Huangyuan District of the Qinghai Province. However in the event of epidemics, we expect that our marine animals and our cattle will be quarantined until such time as a sanitary certificate for clean bill of health is obtained, before any of our products will be sold. In an extreme situation where our products would fail to obtain the sanitary certificate, they will be destroyed subject to the direction of the Inspection Authorities of the Agriculture Department of China. There is compensation granted by the Chinese government for the destruction of our products but only for a fraction of our cost of production; as such the Company will bear virtually all losses under such circumstances.
If we make any acquisitions, they may disrupt or have a negative impact on our business.
Although we have no present plans for any specific acquisitions, in the event that we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
| · | difficulty of integrating acquired products, services or operations; |
| · | potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; |
| · | difficulty of incorporating acquired rights or products into our existing business; |
| · | difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities; |
| · | difficulties in maintaining uniform standards, controls, procedures and policies; |
| · | potential impairment of relationships with employees and customers as a result of any integration of new management personnel; |
| · | potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers; |
| · | effect of any government regulations which relate to the business acquired; |
| · | potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition. |
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
We face significant competition, including changes in pricing.
The markets for our products are both competitive and price sensitive. Many competitors have significant financial, operations, sales and marketing resources, plus experience in research and development, and compete with us by offering lower prices. Competitors could develop new technologies that compete with our products to achieve a lower unit price. If a competitor develops lower cost superior technology or cost-effective alternatives to our products and services, our business could be seriously harmed.
The markets for some of our products are also subject to specific competitive risks because these markets are highly price competitive. Our competitors have competed in the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This would reduce sales revenues and increase losses. Failure to anticipate and respond to price competition may also impact sales and aggravate losses.
Many of our competitors are larger and have greater financial and other resources than we do.
Our products compete and will compete with similar if not identical products produced by our competitors. These competitive products could be marketed by well-established, successful companies that possess greater financial, marketing, distribution personnel, and other resources than we do. Using said resources, these companies can implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts by competitors. They can introduce new products to new markets more rapidly. In certain instances, competitors with greater financial resources may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale of products that compete with our products or present cost features that consumers may find attractive.
Risks Related to our Industry
Our agricultural assets are situated in three provinces in China and crop disease, severe weather, natural disasters and other conditions affecting the environment, including the effects of climate change, could result in substantial losses and weaken our financial condition.
Our agricultural operations are situated in Qinghai Province, Hunan and Guangdong Province. Qinghai Province in particular is subject to occasional periods of drought. Crops require water in different quantities at different times during the growth cycle. The limited water resource at any given point can adversely impact production. In Qinghai our cropping and pasture land presently comprises over 5,000 acres, an area too big and too costly to afford drip irrigation systems for our crops. In Hunan, the district of Linli where we have over 300 acres of crop and pasture land may from time to time be subject to flooding that could affect our agriculture production. In Enping, Guangdong, our HU Plants are very susceptible to dry and wet seasonal variation that could also affect our agriculture production.
Crop disease, severe weather conditions, such as floods, droughts, windstorms and hurricanes, and natural disasters, may adversely affect our supply of one or more products, reduce our sales volumes, increase our unit production costs or prevent or impair our ability to ship products as planned. Since a significant portion of our costs are fixed and contracted in advance of each operating year, volume declines due to production interruptions or other factors could result in increases in unit production costs, which could result in substantial losses and weaken our financial condition. We may experience crop disease, insect infestation, severe weather and other adverse environmental conditions from time to time.
Severe weather conditions may occur with higher frequency or may be less predictable in the future due to the effects of climate change.
An occurrence of such an event might result in material disruptions to our operations, to the operations of our customers or suppliers, resulting in a decline in the agriculture industry. There can be no assurance that our facilities or products will not be affected by any such occurrence in the future, which occurrence may lead to adverse conditions to our operations and financial results.
Prices of agricultural products are subject to supply and demand, a market condition which is not predictable.
Because our agricultural products are commodities, we are not able to predict with certainty what price we will receive for our products. Additionally, the growth cycle of such products in many instances dictates when such products must be marketed to achieve the maximum profitability. Excessive supplies tend to cause severe price competition and lower prices throughout the industry affected. Conversely, shortages may drive the prices higher. Shortages often result from adverse growing conditions which can reduce the availability of the agricultural products affected. Since multiple variables can affect supply and demand, we cannot accurately predict or control from year to year what prices, either favorable or unfavorable, it will receive from the market.
In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, some of our agricultural products which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.
We could realize losses and suffer liquidity problems due to declines in sales prices for our agriculture products.
Sales prices for agricultural products are difficult to predict. It is possible that sales prices for our products will decline in the future, and sales prices for other agricultural products may also decline. In recent years, there has been increasing consolidation among food retailers, wholesalers and distributors. A significant portion of our costs is fixed, so that fluctuations in the sales prices have an immediate impact on our profitability. Our profitability is also affected by our production costs, which may increase due to factors beyond our control.
We are subject to the risk of product contamination and product liability claims.
The sales of our products may involve the risk of injury to consumers. Such injuries may result from tampering by unauthorized personnel, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, or residues introduced during the growing, packing, storage, handling or transportation phases. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, including internal product safety policies, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our brand image. We do not maintain product liability insurance.
We may not be successful in the implementation of our new technologies and new products, and our new products may not be widely accepted.
Our new technologies such as our drip irrigation system for precision agriculture or the introduction, testing and promotion of new agricultural varieties, must be able to adapt to local conditions. The term “drip irrigation” refers to a system whereby the exact amount of water is supplied to the plants’ roots at the correct moment. On the one hand, there exists the failure risk due to not being suitable for the local environment and market conditions; on the other hand, there are risks of loss of competitive advantages due to the rising of producing similar products enterprises and other enterprises that follow to produce the similar products.
We are a holding company whose subsidiaries are given certain degree of independence and our failure to integrate our subsidiaries may adversely affect our financial condition.
According to the specific characteristics of agricultural production in China, we have given our subsidiary companies and their farms a certain degree of independency in decision-making. On one hand, this independency increases the sense of ownership at all levels, on the other hand it has also increased the difficulty of the integration of operation and management, which has resulted in increased difficulty of management integration. In the event we are not able to successfully manage our subsidiaries this will result in operating difficulties and have a negative impact on our business.
One or more distributors could engage in activities that harm our brand and our business.
Our products are sold primarily through distributors, who are responsible for ensuring that our products have the appropriate licenses to be sold to farmers in their provinces, and are stored at the correct temperature to ensure freshness and meet shelf life terms. If distributors do not obtain the appropriate licenses, their sales of our products in those provinces may be illegal, and we may be subject to government sanctions, including confiscation of illegal revenues and a fine of between two and three times the amount of such illegal revenues. Unlicensed sales in a province may also cause a delay for our other distributors in receiving a license from the authorities for their provinces, which could further adversely impact our sales. In addition, distributors may sell our products under another brand licensed in a particular province if our product is not licensed there. If our products are sold under another brand, the purchasers will not be aware of our brand name, and we will be unable to cross-market other seed varieties or other products as effectively to these purchasers. Moreover, our ability to provide appropriate customer service to these purchasers will be negatively affected, and we may be unable to develop our local knowledge of the needs of these purchasers and their environment. Furthermore, if any of our distributors sell inferior seeds produced by other companies under our brand name, our brand and reputation could be harmed, which could make marketing of our branded seeds more difficult. As of the date of this Annual Report, we are not aware of the occurrence of any of the potential violations by our distributors described above.
The PRC agricultural market is highly competitive and our growth and results of operations may be adversely affected if we are unable to compete effectively.
The agricultural market in China is highly fragmented, largely regional and highly competitive, and we expect competition to increase and intensify within the sector. We face significant competition in our lines of business. Many of our competitors have greater financial, research and development and other resources than we have. Competition may also develop from consolidation within our industry in China or the privatization of producers that are currently operated by local governments in China. Our competitors may be better positioned to take advantage of industry consolidation and acquisition opportunities than we are. The reform and restructuring of state-owned equity in enterprises involved primarily in producing sectors will likely lead to the reallocation of market share in the agriculture industry, and our competitors may increase their market share by participating in the restructuring of state-owned agriculture companies. Such privatization would likely result in increased numbers of market participants with more efficient and commercially viable business models. As competition intensifies, our margins may be compressed by more competitive pricing and we may lose our market share and experience a reduction in our revenues and profit.
We may not possess all of the licenses required to operate our business, or we may fail to maintain the licenses we currently hold. This could subject us to fines and other penalties, which could materially adversely affect our results of operations.
We are required to hold a variety of permits and licenses to conduct business in China. We may not possess all of the permits and licenses required for each of our business segments. In addition, the approvals, permits or licenses required by governmental agencies may change without substantial advance notice, and we could fail to obtain the approvals, permits or licenses required to expand our business. If we fail to obtain or to maintain such permits or licenses, or if renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality of the products that we could offer. As a result, our business, results of operations and financial condition could be materially and adversely affected.
Risks Related to Doing Business in China
Under PRC law, we are required to obtain and retain permits and business licenses, and our failure to do so would adversely impact our ability to conduct business in China.
We hold various permits, business licenses, and approvals authorizing our operations and activities, which are subject to periodic review and reassessment by the Chinese authorities. Standards of compliance necessary to pass such reviews change from time to time and differ from jurisdiction to jurisdiction, leading to a degree of uncertainty. If renewals, or new permits, business licenses or approvals required in connection with existing or new facilities or activities, are not granted or are delayed, or if existing permits, business licenses or approvals are revoked or substantially modified, we may not be able to continue to operate our facilities which would have a material adverse effect on our operations. If new standards are applied to renewals or new applications, it could prove costly for us to meet these new standards.
The PRC economic cycle may negatively impact our operating results.
We believe that the rapid growth of the PRC economy before 2008 generally led to higher levels of inflation. We believe that the PRC economy has more recently experienced a decrease in its growth rate. We believe that a number of factors have contributed to this deceleration, including appreciation of the RMB, the currency of China, which has adversely affected China’s exports. In addition, we believe the deceleration has been exacerbated by the recent global crisis in the financial services and credit markets, which has resulted in significant volatility and dislocation in the global capital markets. It is uncertain how long the global crisis in the financial services and credit markets will continue and the significance of the adverse impact it may have on the global economy in general or the Chinese economy in particular. Slowing economic growth in China could result in weakening growth and demand for our products, which could reduce our revenues and income. In the event of a recovery in the PRC, renewed high growth levels may again lead to inflation. The government’s attempts to control inflation may adversely affect the business climate and growth of private enterprise. In addition, our profitability may be adversely affected if prices for our products rise at a rate that is insufficient to compensate for the rise in inflation.
Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi (RMB) into foreign currencies and, if the RMB were to decline in value, reducing our revenue in U.S. dollar terms.
The exchange rate of the RMB is currently managed by the Chinese government. On July 21, 2005, the People’s Bank of China, with the authorization of the State Council of the PRC, announced that the RMB exchange rate would no longer be pegged to the U.S. Dollar and would float based on market supply and demand with reference to a basket of currencies. According to public reports, the governor of the People’s Bank has stated that the basket is composed mainly of the U.S. Dollar, the European Union Euro, the Japanese Yen and the South Korean Won. Also considered, but playing smaller roles, are the currencies of Singapore, the United Kingdom, Malaysia, Russia, Australia, Canada and Thailand. The weight of each currency within the basket has not been announced.
The initial adjustment of the RMB exchange rate was an approximate 2% revaluation from an exchange rate of 8.28 RMB per U.S. Dollar to 8.11 RMB per U.S. Dollar. The People’s Bank announced that the daily trading price of the U.S. Dollar against the RMB in the inter-bank foreign exchange market would float within a band of 0.3% around the central parity published by the People’s Bank, while trading prices of non-U.S. Dollar currencies against the RMB would be allowed to move within a certain band announced by the People’s Bank. The People’s Bank has stated that it will make adjustments of the RMB exchange rate band when necessary according to market developments as well as the economic and financial situation. In a later announcement published on May 18, 2007, the band was extended to 0.5%. Since July 2008, the RMB has traded at 6.83 RMB per U.S. Dollar. Recent reports indicate an upward revaluation in the value of the RMB against the U.S. Dollar may be allowed. The People’s Bank announced on June 19, 2010 its intention to allow the RMB to move more freely against the basket of currencies, which increases the possibility of sharp fluctuations in the value of the RMB in the near future and thus the unpredictability associated with the RMB exchange rate.
However the RMB in 2018 is very sensitive to and influenced by its political situation with USA illustrated by its multiple changes in depreciation and appreciation against the US$ during the past year.
Despite this change in its exchange rate regime, the Chinese government continues to manage the valuation of the RMB. The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and the RMB. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.
The income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Uncertainties with respect to the PRC legal system could adversely affect us and we may have limited legal recourse under PRC law if disputes arise under our contracts with third parties.
Since 1979, we believe PRC legislation and regulations have significantly enhanced protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, sometimes we may not be aware of our violation of these policies and rules until sometime after violation.
The Chinese government has enacted laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
Under the PRC EIT Law, we may be classified as a “resident enterprise” of the PRC. Such classification could result in tax consequences to the Company or our non-PRC resident shareholders.
On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign company on a case-by-case basis.
If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we could be subject to the enterprise income tax at a rate of 25 percent on our worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from enterprise income tax. As a result, if we are treated as a PRC “qualified resident enterprise,” all dividends paid from our Chinese subsidiaries to us would be exempt from PRC tax.
Finally, the new “resident enterprise” classification could result in a situation in which a 10% PRC tax is imposed on dividends we pay to our non-PRC stockholders that are not PRC tax “resident enterprises” and gains derived by hem from transferring our common stock, if such income is considered PRC-sourced income by the relevant PRC authorities. In such event, we may be required to withhold a 10% PRC tax on any dividends paid to non-PRC resident stockholders. Our non-PRC resident stockholders also may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our common stock in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain.
Moreover, the SAT released Circular Guoshuihan No. 698 (“Circular 698”) on December 15, 2009 that reinforces the taxation of non-listed equity transfers by non-resident enterprises through overseas holding vehicles. Circular 698 addresses indirect share transfers as well as other issues. Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a foreigner (non-PRC resident) who indirectly holds shares in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers equity interests in a PRC resident enterprise by selling the shares of the offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5 percent or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant information within 30 days of the transfer. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities will be able to re-assess the nature of the equity transfer under the doctrine of substance over form. A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a relatively short history, there is uncertainty as to its application. We (or a foreign investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that we (or such foreign investor) should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations (or such foreign investor’s investment in us).
If any such PRC taxes apply, a non-PRC resident stockholder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a foreign tax credit against such stockholder’s domestic income tax liability (subject to applicable conditions and limitations). Prospective investors are encouraged to consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available foreign tax credits.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may materially adversely affect us.
In October 2005, the SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents inside China, generally referred to as Circular 75. The policy announced in this notice required PRC residents to register with the relevant SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Failure to comply with the requirements of Circular 75 and any of its internal implementing guidelines as applied by SAFE in accordance with Notice 106 may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
We requested our shareholders who are PRC residents to make the necessary applications, filings and amendments as required under Circular 75 and other related rules. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that our shareholders who are PRC residents will comply with our request to make any applicable registrations, and nor can we provide any assurances that our shareholders who are PRC residents will be able to obtain such applicable registration or comply with other requirements required by Circular 75 or other related rules or that, if challenged by government agencies, the structure of our organization fully complies with all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. Failure by such PRC resident shareholders or future PRC resident shareholders to comply with Circular 75 or other related rules, if SAFE requires it, could subject these PRC resident shareholders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends, or affect our ownership structure, which could adversely affect our business and prospects.
Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.
Our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
| · | the amount of government involvement; |
| · | the level of development; |
| · | the control of foreign exchange; and |
| · | the allocation of resources. |
While the Chinese economy has grown significantly in the past 20 years, we believe the growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. We believe some measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Contract drafting, interpretation and enforcement in China involve significant uncertainty.
We have entered into numerous contracts governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed by PRC law tend to contain less detail and to not be as comprehensive in defining contracting parties’ rights and obligations. As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant uncertainties. Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such disputes arise, we cannot assure you that we will prevail.
The application of PRC regulations relating to the overseas listing of PRC domestic companies is uncertain, and we may be subject to penalties for failing to request approval of the PRC authorities prior to listing our shares in the U.S.
As mentioned above, on August 8, 2006, six PRC government agencies, i.e., MOFCOM, the SAIC, the CSRC, SAFE, the State-Owned Assets Supervision and Administration Commission (“SASAC”) and SAT, jointly issued the New M&A Rules, which became effective on September 8, 2006. The New M&A Rules purport, among other things, to require offshore “special purpose vehicles” that are (1) formed for the purpose of overseas listing of the equity interests of PRC companies via acquisition and (2) are controlled directly or indirectly by PRC companies and/or PRC individuals, to obtain the approval of the CSRC prior to the listing and trading of their securities on overseas stock exchanges. On September 21, 2006, pursuant to the New M&A Rules and other PRC Laws, the CSRC published on its official website relevant guidance with respect to the listing and trading of PRC domestic enterprises’ securities on overseas stock exchanges (the “Related Clarifications”), including a list of application materials regarding the listing on overseas stock exchanges by special purpose vehicles. We were and are not required to obtain the approval of CSRC under the new M&A Rules in connection with this transaction because we were and are not a special purpose vehicle formed or controlled by PRC individuals.
However, there are substantial uncertainties regarding the interpretation, application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of a PRC-related company structured similar to ours is subject to the approval of CSRC. Any violation of these rules could result in fines and other penalties on our operations in China, restrictions or limitations on remitting dividends outside of China, and other forms of sanctions that may cause a material and adverse effect to our business, operations and financial conditions.
The New M&A Rules also established additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks or China’s traditional brands. We may grow our business in part by acquiring other businesses. Complying with the requirements of the New M&A Rules in completing this type of transaction could be time-consuming, and any required approval processes, including CSRC approval, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
We may face regulatory uncertainties that could restrict our ability to issue equity compensation to our directors and employees and other parties who are PRC citizens or residents under PRC law. The grant of stock options under any incentive plan that we adopt in the future would require registration with SAFE.
On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78”. It is not clear whether Circular 78 covers all forms of equity compensation plans or only those that provide for the grant of stock options. For any equity compensation plan which is so covered and is adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with, and obtain the approval of, SAFE prior to their participation in any such plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participate in an overseas listed company’s covered equity compensation plan prior to April 6, 2007. As of the date of this filing, we have not adopted any incentive plans, but may do so in the future. Any such plan may grant equity compensation, including, but not limited to, stock options, to our PRC employees and/or directors. The grant of any equity compensation under such a plan to a PRC citizen, however, may under Circular 78 require the PRC citizen to register with and obtain approval of SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it is determined that our such a plan, or any equity compensation grant under such a plan, is subject to Circular 78, failure to comply with such provisions of Circular 78 may subject us and any recipients thereof to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees and/or directors. In that case, our ability to compensate our employees and directors through equity compensation would be hindered and/or prevented.
Capital outflow policies in the PRC may hamper our ability to remit income to the United States.
The PRC has adopted currency and capital transfer regulations. These regulations may require that we comply with complex regulations for the movement of capital and as a result we may not be able to remit all income earned and proceeds received in connection with our operations or from the sale of our operating subsidiary to the U.S. or to our stockholders.
Our operations and assets in the PRC are subject to significant political and economic uncertainties.
Government policies are subject to rapid change and the government of the PRC may adopt policies that have the effect of hindering private economic activity and greater economic decentralization. There is no assurance that the government of China will not significantly alter its policies from time to time without notice in a manner with reduces or eliminates any benefits from its present policies of economic reform. In addition, a substantial portion of productive assets in China remains government-owned. For instance, all lands are state or rural collective economic organizations owned and leased to business entities or individuals through governmental grants of the land use rights. The grant process is typically based on government policies at the time of the grant, which could be lengthy and complex. This process may adversely affect our business. The government of China also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Uncertainties may arise as a result of changing governmental policies and measures. In addition, changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency, the nationalization or other expropriation of private enterprises, as well as adverse changes in the political, economic or social conditions in China, could have a material adverse effect on our business, results of operations and financial condition.
Our use of the allocated land may be subject to challenges in the future.
All land use rights that we own are land use rights relating to allocated land. The local governmental authorities have granted such land use rights to us for free use or at a discounted levy rate given our contribution to the development of the local economy. However, pursuant to the Catalogue on Allocated Land issued by the Ministry of Land Resources of the PRC (the “Catalogue”), the land use rights for allocated land may only be granted to those specific projects which are in compliance with the Catalogue, subject to the approval of the competent governmental authorities. We, as a privately owned agricultural producer, may not be qualified to be granted such land use rights for allocated land according to the Catalogue. Consequently, our use of such land may be subject to challenge in the future, and the legal consequences could include the confiscation of such land by the governmental authorities or a demand that we pay a market price for purchasing the land use rights for such land and converting the allocated land use right to a granted land use right.
Because Chinese law governs almost all of our material agreements, we may not be able to enforce our legal rights within China or elsewhere, which could result in a significant loss of business, business opportunities, or capital.
Chinese law governs almost all of our material agreements. We cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available outside of China. The system of laws and the enforcement of existing laws in China may not be as certain in implementation and interpretation as in the United States. Our inability to enforce or obtain a remedy under any of our current or future agreements could result in a significant loss of business, business opportunities or capital. It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China.
Substantially all of our assets will be located in the PRC and all of our officers and our present directors reside outside of the United States. As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under federal securities laws. Moreover, we have been advised that China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United States and China would permit effective enforcement of criminal penalties of the federal securities laws.
We do not have insurance coverage.
We currently do not purchase property insurance for our properties, including raw materials, semi-manufactured goods, manufactured goods, buildings and machinery equipment, livestock, and we currently do not carry any product liability or other similar insurance, nor do we have business liability or business disruption insurance coverage for our operations in the PR. There is no insurance covering risks incurred through seasonal variation consequences. In this respect, we as an engineering based company have qualified personnel and staffs to manage and to limited the happenings of these relevant risk factors; however there is no guarantee that accidents will not happen, and if they happen, the consequences may have a material adverse effect on our business, financial condition and results of operations.
Because our cash and cash equivalent are held in banks that do not provide capital guarantee insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of bank failure, we may not have access to, or may lose entirely, our funds on deposit. Depending upon the amount of cash we maintain in a bank that fails, our inability to have access to such cash deposits could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in the PRC. We cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
Labor laws in the PRC may adversely affect our results of operations.
On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on January 1, 2008. The New Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires that certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to effect such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
Your ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, will be limited because we conduct substantially all of our operations in the PRC and because the majority of our directors and officers reside outside of the United States.
We are a Nevada holding company and substantially all of our assets are located outside of the United States. Substantially all current operations are conducted in the PRC. In addition, all but one of our directors and officers are nationals and residents of countries other than the United States. Substantial portions of the assets of these persons are located outside the United States. Thus, it may be difficult to effect service of process within the United States upon these persons. It may also be difficult to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, none of whom are residents in the United States and the substantial majority of whose assets are located outside of the United States. It is also uncertain whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our PRC legal counsel has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in the PRC may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest. It is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
Risks Related to Ownership of our Common Stock
Volatility in our common stock price may subject us to securities litigation.
Stock markets, in general, have experienced in recent months, and continue to experience, significant price and volume volatility, and the market price of our common stock may continue to be subject to similar market fluctuations unrelated to our operating performance or prospects. This increased volatility, coupled with depressed economic conditions, could continue to have a depressing effect on the market price of our common stock. The following factors, many of which are beyond our control, may influence our stock price:
| | · | the status of our growth strategy including the building of our new production line with any proceeds we may be able to raise in the future; |
| | · | announcements of technological or competitive developments; |
| | · | regulatory developments in the PRC affecting us, our customers or our competitors; |
| | · | announcements regarding patent or other intellectual property litigation or the issuance of patents to us or our competitors or updates with respect to the enforceability of patents or other intellectual property rights generally in the PRC or internationally; |
| | · | actual or anticipated fluctuations in our quarterly operating results; |
| | · | changes in financial estimates by securities research analysts; |
| | · | changes in the economic performance or market valuations of our competitors; |
| | · | additions or departures of our executive officers; |
| | · | release or expiration of lock-up or other transfer restrictions on our outstanding common stock; and |
| | · | sales or perceived sales of additional shares of our common stock. |
In addition, the securities markets have, from time to time, experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. Any of these factors could result in large and sudden changes in the volume and trading price of our common stock and could cause our stockholders to incur substantial losses. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted securities class action litigation against that company. If we were involved in a class action suit or other securities litigation, it would divert the attention of our senior management, require us to incur significant expense and, whether or not adversely determined, have a material adverse effect on our business, financial condition, results of operations and prospects.
One of our directors and officers controls a majority of our common stock and his interests may not align with the interests of our other stockholders.
Solomon Lee, our chairman, chief executive officer and president, controls our company and beneficially owns in excess of 50.1% of our issued and outstanding common stock. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive a disadvantage in owning shares in a company with one or several controlling stockholders. Furthermore, our directors and officers, as a Company, have the ability to significantly influence or control the outcome of all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a change in control of our company that could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common stock. In addition, without the consent of Mr. Lee, we could be prevented from entering into transactions that could be beneficial to us. Mr. Lee may cause us to take actions that are opposed by other stockholders as his interests may differ from those of other stockholders.
Future issuances of capital stock may depress the trading price of our common stock.
Any issuance of shares of our common stock (or common stock equivalents) after the date hereof could dilute the interests of our existing stockholders and could substantially decrease the trading price of our common stock. We may issue additional shares of our common stock in the future for a number of reasons, including financing our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions).
Sales of a substantial number of shares of our common stock in the public market could depress the market price of our common stock, and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock.
We believe that the price of our shares in the OTC QX markets is adversely affected by the current stigma associated with Chinese companies quoted or listed publicly in the United States.
Although we managed to maintain our liquidity to a certain degree, our share price has suffered. Many Chinese companies suffer from this stigma, which tends to affect both market prices and liquidity, and our company is no exception. Reasons with varying degrees of legitimacy explain this stigma, including but not limited to: (i) investors’ experience of losses suffered in the course of investing in other Chinese companies, (ii) the difficulty some Chinese companies have had in preparing auditable financial statements, and (iii) the difficulty in enforcing US judgments in foreign courts generally. All of these have contributed to a negative perception by some US investors regarding all Chinese companies publicly traded on US markets. Regardless of the reasons for this perception, if it continues over a sustained period of time our market prices may continue to trade below net tangible asset value per share. This would increase risk that our shareholders could lose the funds they invested in our company. It could also impact our ability to maintain our growth plan on schedule, which would adversely affect our business and financial condition.
The issuance of any of our equity securities pursuant any equity compensation plan we may adopt may dilute the value of existing stockholders and may affect the market price of our stock.
In the future, we may issue to our officers, directors, employees and/or other persons equity based compensation under any equity compensation plan we may adopt to provide motivation and compensation to our officers, employees and key independent consultants. The award of any such incentives could result in an immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the value of our stock price. The exercise of these options and the sale of the underlying shares of common stock and the sale of stock issued pursuant to stock grants may have an adverse effect upon the price of our stock. In addition, if the holders of outstanding convertible securities convert such securities into common stock, you will suffer further dilution.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
We are a public company and subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley Act of 2002. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of our internal controls structure and procedures for financial reporting. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. If we fail to maintain compliance under Section 404, or if in the future management determines that our internal control over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by the NASDAQ Stock Market should we in the future be listed on this market, the SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our common stock. Any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company, particularly if we become fully subject to Section 404 and its auditor attestation requirements, which will increase costs. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and to meeting the obligations that are associated with being a public company, which may divert attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
Our shares of common stock may be thinly traded, so you may be unable to sell at or near ask prices or at all.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common stock is currently traded on the OTC QX where the shares have historically been thinly traded, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent.
This situation may be attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community who generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we have become more seasoned and viable. As a consequence, there may be periods of several days, weeks or months when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot assure you that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained or not diminish.
We may become involved in securities class action litigation that could divert management’s attention and harm our business.
The stock market in general, and the shares of early stage companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in the future, the market price of our shares could fall regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. If the market price or volume of our shares suffers extreme fluctuations, then we may become involved in this type of litigation, which would be expensive and divert management’s attention and resources from managing our business.
As a public company, we may also from time to time make forward-looking statements about future operating results and provide some financial guidance to the public markets. Our management has limited experience as a management team in a public company and as a result projections may not be made timely or set at expected performance levels and could materially affect the price of our shares. Any failure to meet published forward-looking statements that adversely affect the stock price could result in losses to investors, stockholder lawsuits or other litigation, sanctions or restrictions issued by the SEC.
Securities analysts may elect not to report on our common stock or may issue negative reports that adversely affect the stock price.
At this time, to our knowledge no securities analysts provide research coverage of our common stock, and securities analysts may not elect not to provide such coverage in the future. It may remain difficult for our company, with its small market capitalization, to attract independent financial analysts that will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect the stock’s actual and potential market price. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or more analysts elect to cover our company and then downgrade the stock, the stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which, in turn, could cause our stock price to decline. This could have a negative effect on the market price of our common stock.
| ITEM 1B | UNRESOLVED STAFF COMMENTS |
Not applicable.
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
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.
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.
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 |
In the ordinary course of business, we may be involved in legal proceedings from time to time. As of the date hereof, except as set forth herein, there are no known legal proceedings against the Company. No governmental agency has instituted proceedings, served, or threatened the Company with any complaints.
On March 26, 2019, a shareholder derivative complaint was filed in the United States District Court for the Southern District of New York against the Company, as well as four of its current directors, styled Heng Ren Silk Road Investments LLC, Heng Ren Investments LP, derivatively on behalf of Sino Agro Food Inc. v. Sino Agro Food Inc., Lee Yip Kun Solomon, Tan Poay Teik, Chen Bor Hann, Lim Chang Soh, and Sino Agro Food Inc., as the nominal defendant (Case No.: 1:19-cv-02680) (the “Complaint”). No hearings have been scheduled as of the date hereof.
The Complaint alleges violations of securities laws and state law, breaches of fiduciary duties (including gross mismanagement of the Company) by the individual defendants, a material default of its obligations under a commercial loan agreement, misleading and false statements (including material omissions) by the individual defendants, and unauthorized issuance of new shares of Common Stock to pay debts that, in the view of the plaintiffs, has diluted shareholder ownership and oppressed shareholders of the Company (the litigated claims). The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend against the Complaint. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action. However, an unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations.
On July 23, 2020, the Court issued an Order (the “Order”) preliminarily approving settlement, authorizing notice and scheduling the settlement hearing for the Complaint. Under the terms of the Order, among other things, within 10 calendar days of the Order (i) the Company shall provide notice of the Settlement by filing with the SEC a Form 8-K, which shall include as exhibits (A) the Notice of Proposed Settlement of Shareholder Derivative Litigation (the “Notice”) and (B) the Settlement, (ii) counsel for the Plaintiffs shall file the Notice via a national wire service and (iii) the Company shall make available on its corporate website the Form 8-K and exhibits for the time period set forth in the Order. In addition, the Order scheduled a settlement hearing for October 13, 2020 to consider whether to grant final approval to the Settlement. The Settlement contains no admission of wrongdoing. The Company has always maintained and continues to believe that it did not engage in any wrongdoing or otherwise commit any violation of federal or state securities laws or other laws.
On October 13th 2020, the Court granted the final approval to the Settlement of Shareholder Derivative Litigation and dismissed the Shareholder Derivative Litigation with prejudice. The Court found that the terms of the settlement are fair, reasonable and adequate as to each of the parties, and hereby approved the Settlement in all respects and as of October 13th 2020 SIAF, Lee Solomon Yip Kun, Tan Poay Teil, Chen Bor Hann and Lim Chang Soh have, fully, finally and forever released, relinquished, discharged and dismissed with prejudice from the litigated claims.
| ITEM 4 | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5 | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
On July 24, 2007, our Common Stock began to be quoted on the Pink OTC Markets under the symbol “SIAF.PK.” Commencing January 5, 2012, our common stock has been quoted on the OTC QB under the symbol of “SIAF.” 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 following table lists the closing sale price for our Common Stock as reported by The NASDAQ Stock Market for each quarter within the last two completed fiscal years. Our common stocks were delisted from the Merkur Market on 10th September 2019.
| Year 2019 | | High | | | Low | |
| First Quarter | | $ | 0.198 | | | $ | 0.155 | |
| Second Quarter | | $ | 0.286 | | | $ | 0.23 | |
| Third Quarter | | $ | 0.22 | | | $ | 0.18 | |
| Fourth Quarter | | $ | 0.12 | | | $ | 0.11 | |
| First Quarter of 2020 through April 3, 2020 | | $ | 0.07 | | | $ | 0.05 | |
| Year 2018 | | High | | | Low | |
| First Quarter | | $ | 1.23 | | | $ | 0.35 | |
| Second Quarter | | $ | 0.72 | | | $ | 0.25 | |
| Third Quarter | | $ | 0.36 | | | $ | 0.26 | |
| Fourth Quarter | | $ | 0.45 | | | $ | 0.19 | |
The closing price of our common stock on the OTC QX on April 3, 2020 was ($0.07) per share.
Holders
As of December 31, 2019, an aggregate of 49,963,607 shares of our common stock were issued and outstanding and were owned by approximately 115 holders of record.
Recent Sales
During the period covered by this Annual Report, we issued an aggregate of 77,443 shares of our common stock to certain Chinese persons who perform services to us. The shares were issued pursuant to the exemption from registration under the Securities Act provided by its Regulation S.
| ITEM 6 | SELECTED FINANCIAL DATA |
Not applicable.
| ITEM 7 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Annual Report 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 2017 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 Annual Report 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 Annual Report 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.
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 report. From 1st October 2019 onward, SJAP became an investee of associates of the Company with Mr. Solomon Lee resigned as its chairman and SJAP’s operation contracted out to its management as such it is not a variable interest entity and SJAP was reclassified as an unconsolidated equity investee and SJAP’s cattle and beef operation is discontinued on same date . |
| | (ii) | The operation of Hunan Shenghua A Power Agriculture Co. Ltd. (“HSA”) in manufacturing and sales of organic fertilizer. From 1st October 2019 the Company contracted out its manufacturing and sales of organic fertilizer to its management; as such income of HSA is derived mainly from said management contract. |
| · | 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. From 1st October 2019 the Company contracted out its plantation operation to its management; as such income of JHST is derived mainly from said management contract. . |
| · | 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. From 1st October 2019 the Company contracted out its cattle operation to its management; as such income of JHMC is derived mainly from said management contract. . |
| · | 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. |
| | |
| | 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 PSE1, the amount of support provided to Chinese farmers was low (and sometimes negative) during the 1990’s, but gradually rose during the period 2008-2010. Compared with other countries at a similar level of development, including Brazil, Mexico, Russia, and South Africa, China’s support for farmers falls in the middle of the range. China’s PSE reflects changes in the central government’s policy priorities from grain self-sufficiency and low consumer prices toward a stronger focus on raising farm household incomes, according to USITC. Government support to China’s agricultural sector indicates that Chinese policymakers are placing a renewed emphasis on the rural economy. Indirect support, in the form of general services, is very high relative to similar support programs in other countries, due largely to investments in agricultural infrastructure. General services include modern research and extension services, food safety agencies, and agricultural price information services, most of which provide benefits to producers and consumers throughout the economy. Compared with direct payments to farmers, general services support is less production-distorting to the sector. |
| | Agricultural consumption |
| | China is a major global consumer of agricultural products. It consumes one-third of the world’s rice, one-fourth of all corn, and half of all pork and cotton, and it is the largest consumer of oilseeds and most edible oils. The traditional Chinese diet centers around staple foods (mainly grains and starches), which account for nearly half of the daily caloric intake. Average Chinese per capita consumption recently stabilized at approximately 3,000 calories per day, one of the highest levels among Asian countries. |
1 OECD: PSE is defined as the estimated monetary value of transfers from consumers and taxpayers to farmers, expressed as a percentage of gross farm receipts (defined as the value of total farm production at farmgate prices), plus budgetary support.
| | Chinese food consumption is influenced by factors such as population size and demographics, income, food prices, and general preferences. Per capita income growth and urbanization are the two factors most responsible for altering recent consumption patterns in China. Rising income translates into higher per capita food consumption, while increasing urbanization is driving diversification of food choices because of greater availability and choice offered through increasingly diverse sales outlets. |
| | |
| | Chinese consumers generally fall into one of three categories: rural consumers; urban low-income consumers; or urban high-income consumers. Although urban high-income consumers can afford to buy more and better-quality food, the ubiquity of food outlets in cities means that nearly every urban resident, regardless of income, has available an increasingly diverse food selection. Compared to rural diets, urban diets contain less grain and more non-staple items, including processed and convenience foods. Rural migrants to cities tend to adopt the urban diet. |
| | |
| | Expenditure on food |
| | Food is the largest class of household expenditure for all Chinese income groups; even housing takes a smaller share of average household income, according to USITC. As income rises, the absolute amount of food expenditure increases, although the share of income spent on food falls. Urban residents spend substantially more on food than their rural counterparts, according to USITC. Higher incomes lead to an increase in both the quantity and quality of food demanded. However, while demand for higher quantities of food appears to level off in the top income households, demand for higher-quality foods continues to rise with income. |
| | |
| | The market for aquatic products and aquaculture in China |
| | The information in this section regarding aquatic and aquaculture, including graphs, is taken from the USDA’s GAIN Report Number: CH12073 per 12/28/2012 unless otherwise stated.2 |
| | |
| | Total Aquatic Products Production |
| | China has the world’s largest aquatic production and its market share of the world’s fish production has risen from 7 percent in 1961 to 37 percent by 2012. China alone accounted for 62.5 percent of the aquaculture production in the world by volume in 2015. Aquaculture represents more than 71.9 percent of the total fish production in China. Total 2015 aquatic production in China increased 4.38 percent to reach 47.9 million tons, compared to the 45.8 million tons in 2014, per the FAO. |
Fish production accounts for 59 percent of the total aquatic production, followed by shellfish and crustaceans at 22.6 percent and 10 percent, respectively. Fish production is, according to the USDA, expected to continue its upward growth trend to reach 34.5 million tons in 2012, up from 33 million tons in 2011 and 31.3 million tons in 2010.
In 2011, Shandong, Guangdong, Fujian and Zhejiang provinces profited from favorable coastal locations and abundant freshwater resources/facilities to rank as the top four aquatic production areas. In terms of freshwater cultured production, Hubei, Guangdong, and Jiangsu provinces are the largest producers.
According to @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.
2 Definition of terms: China’s definition of aquatic products includes both cultured (farm-raised) and wild caught products; aquatic products include fish, shrimp/prawn/crab, shellfish, algae, and other. Aquatic catch production is total volume of both fresh and seawater wild caught aquatic products; Aquaculture production is the total volume of both fresh and seawater cultured (farmed) aquatic products. This report will use Chinese terminology to maintain consistency between Chinese statistics and product categories. Total aquatic trade statistics below do not include fishmeal.
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 2017.3 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.4 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.5 China’s animal feed market is projected to grow at a CAGR of over 16% till 2019.6
There are several other specific market drivers which underpin the increase in demand for red meat. One driver is the improved living standard in China which stimulates the growth of beef markets since beef often sells at a much higher price and traditionally has been more expensive than what most people can afford. Another is the fact that Chinese people’s dietary structure is becoming more diversified and reasonable, bringing larger amount of beef consumption since beef has nutritional benefits. Lastly, a gradual lowering of import taxes is likely to support sufficient supply of cattle.
Feed grain prices are projected to remain low during 2018-2027. The year 2017 was affected by numerous outbreaks of Avian Influenza (AI) around the world which resulted in a slower increase in world output. China, the second largest producer after the United States, was particularly affected by several outbreaks over the last years. Thus, China can expect a return to historical trend growth in poultry production from 2018 onwards. Globally, the share of meat output traded is expected to remain constant at around 10%, with most of the increase in volume coming from poultry meat. The projected production growth in developing countries remains insufficient to satisfy demand grown, particularly in Asia and Africa. As a result, import demand is expected to remain strong.7
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.8
3 Review of Recirculation Aquaculture System Technologies and their Commercial Application, Stirling Aquaculture, Institute of Aquaculture.
4 Food Outlook, FAO, November 2018
5 Research Report on Beef Import in China, 2019-2023
6 China Animal Feed Market Forecast and Opportunities, 2019
7 Meat - OECD-FAO Agricultural Outlook 2018-2027
8 Frost & Sullivan: China’s beef market has great growth potential
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 2020.9 Faster value growth will be driven by strong demand for higher value multi-nutrient fertilizers. In addition, advances will be supported by continued growth in fertilizer prices as the cost of natural gas, oil, coal, and other raw materials continues to increase.
Demand for fertilizer nutrients in China is projected to grow 4.4 percent annually through 2015 to 98.1 million metric tons. Nutrient demand will be stimulated by increasing use of higher nutrient level products as income levels grow in rural areas in China. In addition, government efforts to promote multi-nutrient fertilizers will also support gains in fertilizer nutrient demand. Accounting for more than three-fourths of total fertilizer demand in 2010, single-nutrient fertilizers will remain the larger product type through 2015, despite a relatively low growth rate of 2.1 percent per year. Sales of single nutrient fertilizers will continue to be supported by their relatively low prices.
The size, growth and composition of fertilizer demand in the six regions that make up China vary considerably. The Central-South and Central-East will remain the two largest regional fertilizer markets. Due to the comparatively high income levels in the Central-South and Central-East ¨ ¨ which enable residents to afford more expensive food items ¨ demand for cash crops such as fruits and vegetables will rise in these regions, which in turn will fuel demand for fertilizer. Sales in the Northeast and Northwest regions will outpace the average through 2015, benefiting from the Great Western Development Strategy, the Northeast Revitalization Policy, and increasing income levels for farmers.10
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.
9 Fertilizer Market Global Report 2017, Business Research Company
10 Fertilizers in China, Industry Study with Forecasts for 2015 & 2020, Freedonia Group; June 2012
CONSOLIDATED RESULTS OF OPERATIONS
Part A. Audited Income Statements of Consolidated Results of Operations for the fiscal year ended December 31, 2019, compared to the fiscal year ended December 31, 2018.
A (1) Income Statements (audited)
| | | 2019 | | | 2018 | |
| Revenue | | | | | | | | |
| - Sale of goods | | $ | 133,879,067 | | | $ | 130,543,170 | |
| - Consulting and service income from development contracts | | | 1,719,247 | | | | 11,127,393 | |
| | | | 135,598,314 | | | | 141,670,563 | |
| Cost of goods sold | | | (113,401,961 | ) | | | (110,967,348 | ) |
| Cost of services | | | (1,590,017 | ) | | | (9,051,408 | ) |
| | | | | | | | | |
| Gross profit | | | 20,606,336 | | | | 21,651,807 | |
| General and administrative expenses | | | (17,286,419 | ) | | | (15,595,032 | ) |
| Net income from operations | | | 3,319,917 | | | | 6,056,775 | |
| Other income (expenses) | | | | | | | | |
| | | | | | | | | |
| Government grant | | | 739,283 | | | | 649,095 | |
| Sharee of income from unconsolidated equity investee | | | 7,537,498 | | | | 14,251,264 | |
| Other income | | | - | | | | 56,672 | |
| Non-operating expenses | | | (22,598,607 | ) | | | (4,609,253 | ) |
| Interest expense | | | (403,668 | ) | | | (600,519 | ) |
| Net income (expenses) | | | (14,725,494 | ) | | | 9,747,259 | |
| | | | | | | | | |
| Net income before income taxes | | | (11,405,577 | ) | | | 15,804,034 | |
| Provision for income taxes | | | | | | | | |
| | | | | | | | | |
| Net income | | | (11,405,577 | ) | | | 15,804,034 | |
| Less: Net (income) loss attributable to non - controlling interest | | | 1,063,310 | | | | 1,519,303 | |
| Net income attributable to Sino Agro Food Inc. and subsidiaries | | | (10,342,267 | ) | | | 17,323,337 | |
| Other comprehensive income (loss) - Foreign currency translation gain (loss) | | | 3,416,381 | | | | (14,555,377 | ) |
| Comprehensive income | | | (6,925,886 | ) | | | 2,767,960 | |
| Less: Other comprehensive (income) loss attributable to non - controlling interest | | | 915,590 | | | | 1,793,417 | |
| Comprehensive income attributable to the Sino Agro Food, Inc. and subsidiaries | | $ | (6,010,296 | ) | | | 4,561,377 | |
| | | | | | | | | |
| Earnings per share attributable to the Sino Agro Food, Inc. and subsidiaries common stockholders: | | | | | | | | |
| Basic | | $ | (0.21 | ) | | | 0.46 | |
| Diluted | | $ | (0.21 | ) | | | 0.46 | |
| | | | | | | | | |
| Weighted average number of shares outstanding: | | | | | | | | |
| | | | | | | | | |
| Basic | | | 49,963,607 | | | | 37,336,164 | |
| Diluted | | | 49,963,607 | | | | 37,336,164 | |
Comparative overview of FY2019 and FY2018 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, 2019 and the twelve months ended December 31, 2018.
| In US$ | | Sales of goods | | | Cost of Goods sold | | | Sales of Goods' Gross profit | |
| | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| SJAP | | Sales of live cattle | | | 3,752,843 | | | | 6,644,964 | | | | 3,527,690 | | | | 7,624,190 | | | | 225,153 | | | | -979,225 | |
| | | Sales of feedstock | | | | | | | | | | | | | | | | | | | - | | | | - | |
| | | Bulk Livestock feed | | | 746,232 | | | | 1,521,303 | | | | 333,275 | | | | 697,997 | | | | 412,957 | | | | 823,306 | |
| | | Concentrate livestock feed | | | 4,864,755 | | | | 8,043,813 | | | | 2,713,600 | | | | 4,477,767 | | | | 2,151,155 | | | | 3,566,046 | |
| | | Sales of fertilizer | | | 1,922,323 | | | | 3,028,357 | | | | 1,688,240 | | | | 2,137,582 | | | | 234,083 | | | | 890,775 | |
| | | SJAP Total | | | 11,286,153 | | | | 19,238,438 | | | | 8,262,804 | | | | 14,937,535 | | | | 3,023,349 | | | | 4,300,903 | |
| HSA | | Sales of Organic fertilizer | | | 2,597,088 | | | | 3,583,034 | | | | 2,154,282 | | | | 2,932,754 | | | | 442,806 | | | | 650,280 | |
| | | Sales of Organic Mixed Fertilizer | | | 4,746,144 | | | | 6,088,296 | | | | 2,854,337 | | | | 3,961,581 | | | | 1,891,807 | | | | 2,126,715 | |
| | | Ssles of Raw material | | | 6,986,988 | | | | | | | | 8,262,841 | | | | | | | | -1,275,853 | | | | | |
| | | Rental income | | | 1,253,823 | | | | | | | | | | | | | | | | 1,253,823 | | | | | |
| | | HSA Total | | | 15,584,043 | | | | 9,671,330 | | | | 13,271,460 | | | | 6,894,335 | | | | 2,312,583 | | | | 2,776,995 | |
| | | SJAP's& HSA/Organic fertilizer total | | | 26,870,196 | | | | 28,909,768 | | | | 21,534,264 | | | | 21,831,870 | | | | 5,335,932 | | | | 7,077,898 | |
| JHST | | Rental income | | | 615,784 | | | | - | | | | 439,747 | | | | | | | | 176,037 | | | | - | |
| | | Ssles of Raw material | | | 1,135,371 | | | | | | | | 1,135,371 | | | | | | | | | | | | | |
| | | Sales of Dried HU Flowers | | | | | | | 236,850 | | | | | | | | 214,793 | | | | - | | | | 22,057 | |
| | | Sales of Dried Immortal vegetables | | | 101,892 | | | | 423,152 | | | | 87,336 | | | | 314,720 | | | | 14,556 | | | | 108,433 | |
| | | Sales of Vegetable products | | | 2,732,556 | | | | 2,957,246 | | | | 2,055,771 | | | | 2,568,877 | | | | 676,785 | | | | 388,369 | |
| | | JHST/Plantation Total | | | 4,585,603 | | | | 3,617,249 | | | | 3,718,225 | | | | 3,098,390 | | | | 867,378 | | | | 518,859 | |
| MEIJI | | | | | | | | | | | | | | | | | | | | | - | | | | - | |
| | | Sale of Live cattle (Aromatic) | | | 34,062,396 | | | | 29,558,983 | | | | 27,519,186 | | | | 24,761,345 | | | | 6,543,210 | | | | 4,797,638 | |
| | | Ssles of Raw material | | | 1,630,277 | | | | | | | | 1,621,621 | | | | | | | | 8,656 | | | | | |
| | | Rental income | | | 498,362 | | | | | | | | 143,979 | | | | | | | | 354,383 | | | | | |
| | | MEIJI / Cattle farm Total | | | 36,191,035 | | | | 29,558,983 | | | | 29,284,786 | | | | 24,761,345 | | | | 6,906,249 | | | | 4,797,638 | |
| SIAF | | | | | | | | | | | | | | | | | | | | | - | | | | - | |
| | | Sales of goods through trading/import/export activities | | | | | | | | | | | | | | - | | | | - | |
| | | on seafood | | | 29,362,140 | | | | 35,468,172 | | | | 26,099,679 | | | | 31,553,391 | | | | 3,262,461 | | | | 3,914,781 | |
| | | on imported beef and mutton | | | 36,870,093 | | | | 32,988,998 | | | | 32,765,007 | | | | 29,722,352 | | | | 4,105,086 | | | | 3,266,646 | |
| | | SIAF/ Others& Corporate total | | | 66,232,233 | | | | 68,457,170 | | | | 58,864,686 | | | | 61,275,743 | | | | 7,367,547 | | | | 7,181,427 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Group Total | | | | | 133,879,067 | | | | 130,543,170 | | | | 113,401,961 | | | | 110,967,348 | | | | 20,477,106 | | | | 19,575,822 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Increases of 2019 to 2018 in $ | | | 3,335,897 | | | | | | | | | | | | | | | | 901,284 | | | | | |
| | | Increases of 2019 to 2018 in % | | | 3 | % | | | | | | | | | | | | | | | 5 | % | | | | |
The Company’s revenues generated from sale of goods increased by $3,335,897 or 3% from $130,543,170 for the year ended December 31, 2018 to $133,879,067 for the year ended December 31, 2019. Most segments maintained or reduced their sales revenues and gross profits without much improvements except MEIJI’s cattle farm segment improved on the sales of Asian yellow cattle generated sales of US$36.2 million and gross profits of 6.9 million in 2019 compares to sales of US$29.6 million and gross profits of US$4.8 million in 2018.
The Company’s cost of goods sold increased by $2,434,613 or 2% from $110,967,348 for the year ended December 31, 2018 to $113,401,961 for the year ended December 31, 2019. The increase was primarily due to the increase of cost of sales in MEIJI’s purchase of Asian Yellow Cattle having sold more cattle in 2019.
Gross profit of the Company generated from goods sold increased by $901,284 or 5% from $19,575,822 for the year ended December 31, 2018 to $20,477,106 for the year ended December 31, 2019. The overall increase was primarily due to the increase of the increase of sales and gross profits in MEIJI’s cattle farm segment.
| | · | 1. (i) Beef and Organic Fertilizer Division (SJAP and (discontinued) QZH): |
| SJAP | | Sales of live cattle | | | 3,752,843 | | | | 6,644,964 | | | | 3,527,690 | | | | 7,624,190 | | | | 225,153 | | | | -979,225 | |
| | | Sales of feedstock | | | | | | | 0 | | | | | | | | | | | | - | | | | | |
| | | Bulk Livestock feed | | | 746,232 | | | | 1,521,303 | | | | 333,275 | | | | 697,997 | | | | 412,957 | | | | 823,306 | |
| | | Concentrate livestock feed | | | 4,864,755 | | | | 8,043,813 | | | | 2,713,600 | | | | 4,477,767 | | | | 2,151,155 | | | | 3,566,046 | |
| | | Sales of fertilizer | | | 1,922,323 | | | | 3,028,357 | | | | 1,688,240 | | | | 2,137,582 | | | | 234,083 | | | | 890,775 | |
| | | SJAP Total | | | 11,286,153 | | | | 19,238,438 | | | | 8,262,804 | | | | 14,937,535 | | | | 3,023,349 | | | | 4,300,903 | |
| | | % of increase (+) or decrease (-) | | | -41 | % | | | | | | | -45 | % | | | | | | | -30 | % | | | | |
| In US$ | | | | | | | | | | | | | | | | | | | | |
| | | | | Sales of goods | | | Cost of Goods sold | | | Gross profit | |
| | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| HSA | | Sales of Organic fertilizer | | | 2,597,088 | | | | 3,583,034 | | | | 2,154,282 | | | | 2,932,754 | | | | 442,806 | | | | 650,280 | |
| | | Sales of Organic Mixed Fertilizer | | | 4,746,144 | | | | 6,088,296 | | | | 2,854,337 | | | | 3,961,581 | | | | 1,891,807 | | | | 2,126,715 | |
| | | Ssles of Raw material | | | 6,986,988 | | | | | | | | 8,262,841 | | | | | | | | (1,275,853 | ) | | | | |
| | | Rental income | | | 1,253,823 | | | | | | | | | | | | | | | | 1,253,823 | | | | | |
| | | HSA Total | | | 15,584,043 | | | | 9,671,330 | | | | 13,271,460 | | | | 6,894,335 | | | | 2,312,583 | | | | 2,776,995 | |
| | | SJAP's & HS.A./Organic fertilizer total | | | 26,870,196 | | | | 28,909,768 | | | | 21,534,264 | | | | 21,831,870 | | | | 5,335,932 | | | | 7,077,898 | |
| | | % of increase (+) or decrease (-) | | | -7 | % | | | | | | | -1 | % | | | | | | | -25 | % | | | | |
Revenue from the sector of beef and organic fertilizer decreased by $2,039,572 or 7% from $28,909,768 for the year ended December 31, 2018 to $26,870,196 for the year ended December 31, 2019. The decrease was mainly due to the decrease in sales of the discontinued operation of SJAP from $19.2 million in 2018 to $11.3million in 2019.
Cost of goods sold from beef and organic fertilizer decreased by $297,606 or 1% from $21,831,870 for the year ended December 31, 2018 to $21,534,264 for the year ended December 31, 2019. The decrease was mainly due to the decrease in cost of goods sold in the discontinued operation of SJAP from $14.9 million in 2018 to $8.3million in 2019.
Gross profit from the beef and organic fertilizer sector decreased by $1,741,966 or 25% from $7,077,898 for the year ended December 31, 2018 to $5,357,962 for the year ended December 31, 2019. The decrease was primarily due to the result in eliminating the losses from the discontinuing operation of SJAP (from $4.3 million in 2018 to $3.0 million in 2019).
The table below shows information of the sales of live cattle mostly from SJAP’s own farm in 2019/ 2018
| | | | | | | 2019 | | | | 2018 | | | | Difference | |
| SJAP | Production and Sales of live cattle | | Heads | | | 2,203 | | | | 3,886 | | | | (1,683 | ) |
| | Average Unit sales price | | US$/head | | | 1,704 | | | | 1,710 | | | | (6 | ) |
| | Unit cost prices | | US$/head | | | 1,601 | | | | 1,962 | | | | (361 | ) |
| | Production and sales of feedstock | | | | | - | | | | - | | | | 0 | |
| | Bulk Livestock feed | | MT | | | 4,318 | | | | 8,619 | | | | (4,301 | ) |
| | Average Unit sales price | | US$/MT | | | 173 | | | | 177 | | | | (4 | ) |
| | Unit cost prices | | US$/MT | | | 77 | | | | 81 | | | | (4 | ) |
| | Concentrated livestock feed | | MT | | | 11,068 | | | | 18,064 | | | | (6,996 | ) |
| | Average Unit sales price | | US$/MT | | | 440 | | | | 445 | | | | (6 | ) |
| | Unit cost prices | | US$/MT | | | 153 | | | | 248 | | | | (95 | ) |
| | Production and sales of fertilizer | | MT | | | 11,703 | | | | 23,204 | | | | (11,501 | ) |
| | Average Unit sales price | | US$/MT | | | 164 | | | | 131 | | | | 34 | |
| | Unit cost prices | | US$/MT | | | 144 | | | | 92 | | | | 52 | |
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 2019 averaging lower than US$5.68/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 4,318 MT and 11,068 MT in 2019 compares to 2018’s 8,619 MT and 18,064 MT respectively due primarily to decreased demands after 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. SJAP’s fertilizer segment also suffered reduction in sales and production with 2019’s 11,703 MT to 2018’s 11,703 MT.
From 1st October 2019 onward, SJAP became an investee of associates of the Company with Mr. Solomon Lee resigned as its chairman and SJAP’s operation was contracted out to its management as such it is not a variable interest entity and SJAP was reclassified as an unconsolidated equity investee and SJAP’s cattle and beef operation is discontinued on same date .
1. (ii). The operations of HSA in manufacturing and sales of organic fertilizer itemizing unit sales, costs and quantity of sales:
| | | | | | 2019 | | | 2018 | | | Difference | |
| HSA | Fertilizer operation | | | | | | | | | | | | | | |
| | Organic Fertilizer | | MT | | | 11,213 | | | | 15,105 | | | | (3,892 | ) |
| | Average Unit sales price | | $/MT | | | 232 | | | | 237 | | | | (6 | ) |
| | Unit cost price | | $/MT | | | 192 | | | | 194 | | | | (2 | ) |
| | Organic Mixed Fertilizer | | MT | | | 11,374 | | | | 14,638 | | | | (3,264 | ) |
| | Average Unit sales price | | $/MT | | | 417 | | | | 416 | | | | 1 | |
| | Unit cost price | | $/MT | | | 251 | | | | 271 | | | | (20 | ) |
HSA sold and produced 11,213 MT of organic fertilizer and 11,374 MT of organic mixed fertilizer in the year ended 30.09.2019, compares to 2018’s production sales of 15,105 MT organic fertilizer and 14,638 MT of mixed organic fertilizer.
From 1st October 2019 the Company contracted out its manufacturing and sales of organic fertilizer to its management; as such income of HSA is derived mainly from said management contract. The Management contract generates fixed annual income of RMB 19.15 million (equivalent to US$2,735,714) payable half yearly in advance effective from 1st October 2019. This contractual income is sufficient to cover HSA’s annual fixed expenditures / cost and capital debt repayments (that is excluding corporate administration expenses) as shown in table below:
| Management Contract | | Yrs. To go | | | RMB / year | | | % | | | US$ / Year | | | US$ / Quarter | |
| Revenue | | | | | | | | | | | | | | | | | | | | |
| Contractual fees | | | | | | | 19,150,000 | | | | 100 | % | | | 2,735,714 | | | | 683,929 | |
| Cost of contractual fees | | | | | | | | | | | | | | | | | | | | |
| Administration & expenses of all properties | | | | | | | 2,298,000 | | | | 12 | % | | | 328,286 | | | | 82,071 | |
| General maintenances of buildings | | | | | | | 1,532,000 | | | | 8 | % | | | 218,857 | | | | 54,714 | |
| Cost of security and guards of properties | | | | | | | 1,723,500 | | | | 9 | % | | | 246,214 | | | | 61,554 | |
| Cost of landscaping, drainage & roads | | | | | | | 2,489,500 | | | | 13 | % | | | 355,643 | | | | 88,911 | |
| Land levies and taxes | | | | | | | 957,500 | | | | 5 | % | | | 136,786 | | | | 34,196 | |
| Depreciation | | | | | | | 7,930,000 | | | | 41 | % | | | 1,132,857 | | | | 283,214 | |
| Gross Profits | | | | | | | 2,219,501 | | | | 12 | % | | | 309,123 | | | | 77,281 | |
| Repayments of capital debts | | | | | | | | | | | | | | | | | | | | |
| Balanced cost of construction of farm buildings (of RMB 8 million) inclusive interest | | | 2 | | | | 4,000,000 | | | | | | | | 557,103 | | | | 139,276 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balanced onstruction cost of Etherine gas station (RMB4 million inclusive interest) | | | 2 | | | | 2,000,000 | | | | | | | | 278,552 | | | | 69,638 | |
| Net cash flow | | | | | | | 4,149,501 | | | | | | | | 577,925 | | | | 144,481 | |
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.
| | | | Sales of goods | | | Cost of Goods sold | | | Gross profit | |
| | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| JHST | Sales of Fresh HU Flowers | | | | | | | | | | | | | | | | | | | | | | | - | |
| | Sales of Dried HU Flowers | | | | | | | 236,850 | | | | | | | | 214,793 | | | | - | | | | 22,057 | |
| | % of increases (+) or decreases (-) | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sales of Dried Immortal vegetables | | | 101,892 | | | | 423,152 | | | | 87,336 | | | | 314,720 | | | | 14,556 | | | | 108,433 | |
| | % of increases (+) or decreases (-) | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sales of Vegetable products | | | 2,732,556 | | | | 2,957,246 | | | | 2,055,771 | | | | 2,568,877 | | | | 676,785 | | | | 388,369 | |
| | % of increases (+) or decreases (-) | | | -8 | % | | | | | | | -20 | % | | | | | | | 74 | % | | | | |
| | Rental income | | | 615,784 | | | | | | | | 439,747 | | | | | | | | 176,037 | | | | | |
| | Ssles of Raw material | | | 1,135,371 | | | | | | | | 1,135,371 | | | | | | | | - | | | | | |
| | JHST/Plantation Total | | | 4,585,603 | | | | 3,617,249 | | | | 3,718,225 | | | | 3,098,390 | | | | 867,378 | | | | 518,859 | |
| | % of increases (+) or decreases (-) | | | 27 | % | | | | | | | 20 | % | | | | | | | 67 | % | | | | |
Revenue from our plantation increased by $968,354 or 27% from $3,617,249 for the year ended December 31, 2018 to $4,585,603 for the year ended 30th September, 2019.
Cost of goods sold from the plantation increased by $619,835 or 20% from $3,098,390 for the year ended December 31, 2018 to $3,718,225 for the year ended 30th September, 2019. The increase was primarily due to the increase in sales revenues.
Gross profit from our plantation increased by $348,519 (or 67%) from $518,859 for the year 2018 to $867,378 for the year 2019.
From 1st October 2019 the Company contracted out its plantation operation to its management; as such income of JHST is derived mainly from said management contract. The Management contract generates fixed annual income of RMB 4.43 million (equivalent to US$615,748) payable half yearly in advance effective from 1st October 2019. This contractual income is sufficient to cover JHST’s fixed annual expenditures / cost and capital debt repayments (that is excluding corporate administration expenses) as shown in table below:
| Management Contract | | Yrs. To go | | | RMB / year | | | % | | | US$ / Year | | | US$ / Quarter | |
| Revenue | | | | | | | | | | | | | | | | | | | | |
| Contractual fees | | | | | | | 7,000,000 | | | | 100 | % | | | 1,000,000 | | | | 250,000 | |
| Cost of contractual fees | | | | | | | - | | | | | | | | | | | | | |
| Adminstration & expenses of all properties | | | | | | | 840,000 | | | | 12 | % | | | 120,000 | | | | 30,000 | |
| General maintenances of buildings | | | | | | | 420,000 | | | | 6 | % | | | 60,000 | | | | 15,000 | |
| Cost of security and guards of properties | | | | | | | 560,000 | | | | 8 | % | | | 80,000 | | | | 20,000 | |
| Cost of landscaping, drainage & roads | | | | | | | 770,000 | | | | 11 | % | | | 110,000 | | | | 27,500 | |
| Land levies and taxes | | | | | | | 350,000 | | | | 5 | % | | | 50,000 | | | | 12,500 | |
| Depreciation | | | | | | | 4,230,435 | | | | 60 | % | | | 604,348 | | | | 151,087 | |
| Gross Profits | | | | | | | -170,435 | | | | -2 | % | | | -23,704 | | | | -5,926 | |
| Repayments of capital debts | | | | | | | | | | | | | | | | | | | - | |
| 2018 typhoon damages incurred repairs payments (at total cost of RMB 3.1 million with balance to be paid of RMB2.4 million) | | | 2 | | | | 1,200,000 | | | | | | | | 166,898 | | | | 41,725 - | |
| 2019 road repairs at cost of RMB 1.68 million with balance to be paid RMB 1.17 million | | | 2 | | | | 585,000 | | | | | | | | 81,363 | | | | 20,341 - | |
| Net cash flow | | | | | | | 2,275,000 | | | | | | | | 325,000 | | | | 81,250 | |
The Table below shows the itemized unit sales and cost prices of the produces and products:
| | | | | | | 2019 | | | 2,018 | | | Difference | |
| JHST | | | | | | | | | | | | | | | | | |
| | Dried HU Flowers | | | MT | | | | - | | | | 48 | | | | (48 | ) |
| | Average Unit sales price | | | US$/MT | | | | - | | | | 4,934 | | | | (4,934 | ) |
| | Unit cost prices | | | US$/MT | | | | - | | | | 4,475 | | | | (4,475 | ) |
| | Dried Immortal vegetables | | | MT | | | | 2 | | | | 7 | | | | -5.00 | |
| | Average Unit sales price | | | US$/MT | | | | 50,946 | | | | 60,450 | | | | -9,504.36 | |
| | Unit cost prices | | | US$/MT | | | | 43,668 | | | | 44,960 | | | | -1,291.95 | |
| | Vegetable products | | | MT | | | | 2,575 | | | | 2,846 | | | | (271 | ) |
| | Average Unit sales price | | | US$/MT | | | | 1,061 | | | | 1,039 | | | | 22 | |
| | Unit cost prices | | | US$/MT | | | | 798 | | | | 903 | | | | (104 | ) |
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.
| | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 |
| MEIJI | Sale of Live cattle (Aromatic) | | | 34,062,396 | | | | | | | | 27,519,186 | | | | | | | | 6,543,210 | |
| | Sales of Raw material | | | 1,630,277 | | | | | | | | 1,621,621 | | | | | | | | 8,656 | |
| | Rental income | | | 498,362 | | | | 29,558,983 | | | | 143,979 | | | | 24,761,345 | | | | 354,383 | | | 4,797,638 |
| | | | | | | | | | | | | | | | | | | | | | |
| | MEIJI / Cattle farm Total | | | 36,191,035 | | | | 29,558,983 | | | | 29,284,786 | | | | 24,761,345 | | | | 6,906,249 | | | 4,797,638 |
| | % of increases (+) & decreases (-) | | | 22 | % | | | | | | | 18 | % | | | | | | | 44 | % |
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 about US$12/Kg (live weight) which is doubling SJAP’s cattle prices.
Revenue from the cattle farm increased by $6,632,052 or 22% from $29,558,983 for the year ended December 31, 2018 to $36,191,035 for the year ended December 31, 2019. 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 $4,523,441 or 18% from $24,761,345 for the year ended December 31, 2018 to $29,284,786 for the year ended December 31, 2019.
Gross profit from cattle increased by $2,108,611 or 44% from $4,797,638 for the year 2018 to $6,906,249 for the year ended December 31, 2019, mainly due to lower stable production costs and higher sale prices.
The Table below shows the itemized unit sales and cost prices of the produces and products:
| | | 2019 | | 2018 | | Difference | |
| MEIJI | Production and trading on sale of Live cattle | Head | 9,073 | | 7,945 | | 1,128 | |
| | Average Unit sales price | $/head | 3,989 | | 3,720 | | 268 | |
| | Unit cost prices | $/head | 3,228 | | 3,117 | | 111 | |
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 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 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/year.
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 2018 and subsequent 10Qs 2019 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.
However during 2018, the Company decided to restrict all capital spending such that the said merger plan was temporary ceased, and as from 1st October 2019 the Company contracted out its cattle operation to its management of the farms; thus JHMC’s income is derived mainly from said management contract. The Management contract generates fixed annual income of RMB 19.88 million (equivalent to US$2.84 million) payable quarterly in advance and the Company is to share 20% of the net profit derived from the contracted management’s cattle operation effective from 1st October 2019. This contractual income is sufficient to cover JHMC’s fixed annual expenditures / cost and capital debt repayments (that is excluding corporate administration expenses) as shown in table below:
| Management Contract | | Yrs. To go | | | RMB / year | | | % | | | US$ / Year | | | US$ / Quarter | |
| Revenue | | | | | | | | | | | | | | | | | | | | |
| Contractual fees | | | | | | | 19,880,000 | | | | 100 | % | | | 2,840,000 | | | | 710,000 | |
| Cost of contractual fees | | | | | | | - | | | | | | | | | | | | | |
| Administration & expenses of all properties | | | | | | | 2,982,000 | | | | 15 | % | | | 426,000 | | | | 106,500 | |
| General maintenances of buildings | | | | | | | 994,000 | | | | 5 | % | | | 142,000 | | | | 35,500 | |
| Cost of security and guards of properties | | | | | | | 1,789,200 | | | | 9 | % | | | 255,600 | | | | 63,900 | |
| Cost of landscaping, drainage & roads | | | | | | | 2,584,400 | | | | 13 | % | | | 369,200 | | | | 92,300 | |
| Land levies and taxes | | | | | | | 994,000 | | | | 5 | % | | | 142,000 | | | | 35,500 | |
| Depreciation | | | | | | | 3,423,752 | | | | 49 | % | | | 489,107 | | | | 122,277 | |
| Gross Profits | | | | | | | 7,112,648 | | | | 4 | % | | | 989,242 | | | | 247,310 | |
| Repayments of capital debts etc. | | | | | | | | | | | | | | | | | | | - | |
| Repayments on 200 heads of breeding stocks (Bal. RMB 5m)(Total cost 200 x RMB50K)= RMB10m | | | 2 | | | | 5,000,000 | | | | | | | | 695,410 | | | | 173,853 | |
| | | | | | | | | | | | | | | | | | | | - | |
| Daily up-keep of 200 heads breeding stocks,(RMB20x30daysx200 heads) / month | | | 2 | | | | 1,440,000 | | | | | | | | 200,278 | | | | 50,070 | |
| Net cash flow | | | | | | | 4,096,400 | | | | | | | | 585,200 | | | | 146,300 | |
| · | 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 | |
| | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| SIAF | Sales of goods through trading/import/export activities | | | | | | | | | | | | | | | | | | |
| | on seafood (via imports) | | | 29,362,140 | | | | 35,468,172 | | | | 26,099,679 | | | | 31,553,391 | | | | 3,262,461 | | | | 3,914,781 | |
| | % of increases (+) and decreases (-) | | | -17 | % | | | | | | | -17 | % | | | | | | | -17 | % | | | | |
| | on imported beef mainly | | | 36,870,093 | | | | 32,988,998 | | | | 32,765,007 | | | | 29,722,352 | | | | 4,105,086 | | | | 3,266,646 | |
| | % of increases (+) and decreases (-) | | | 12 | % | | | | | | | 10 | % | | | | | | | 26 | % | | | | |
| | SIAF/ Others & Corporate total | | | 66,232,233 | | | | 68,457,170 | | | | 58,864,686 | | | | 61,275,743 | | | | 7,367,547 | | | | 7,181,427 | |
| | % of increases (+) and decreases (-) | | | -3 | % | | | | | | | -4 | % | | | | | | | 3 | % | | | | |
Revenue from the corporate division decreased by $2,224,937 or 3% from $68,457,170 for the year ended December 31, 2018 to $66,232,233 for the year ended December 31, 2019. The decrease was marginal primarily due to a decrease in the sales of imported seafood from $35.4 million in 2018 to $29.4 million in 2019
Cost of goods sold from corporate decreased by $2,411,057 from $61,275,743 for the year ended December 31, 2018 to $58,864,686 for the year ended December 31, 2019 due primarily to the decreased sales of some imported goods.
Gross profit from the corporate increased by $186,120 or 3% from $7,181,427 for the year ended December 31, 2018 to $7,367,547 for the year ended December 31, 2019. The increase was primarily due to a corresponding decrease in sales.
| Description of items | | 2019 | | 2018 | |
| SIAF | Seafood trading from imports | | | | | | |
| | Mixed seafood | | MT | 1,487 | | 1,927 | |
| | Average of sales price | | $/MT | 19,746 | | 18,409 | |
| | Average of cost prices | | $/MT | 17,552 | | 16,377 | |
| | Beef & Lamb trading from imports | | MT | 2,092 | | 1,706 | |
| | Average of sales price | | $/MT | 17,624 | | 19,337 | |
| | Average of cost price | | $/MT | 15,662 | | 17,422 | |
This trading (of mainly imported live-seafood) division has excellent growth potential due mainly to the demands for selective live-seafood (i.e. live crabs, lobsters and shell fish etc.) in China, but the growth of sales of this division is mainly subject to the availability of working capital that helps drive sales’ turnover since all live seafood suppliers demand cash payments upon purchases. Over the years this division has developed many reliable suppliers and supplied sources that are supplying quality live seafood 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.
| 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 2019 and 2018.
| | 2019 | | 2018 | | Difference |
| Revenue | | | | | |
| CA | 1,719,247 | | 11,127,393 | | (9,408,146) |
| Group Total Revenues | 1,719,247 | | 11,127,393 | | (9,408,146) |
| Cost of service | | | | | |
| CA | 1,590,017 | | 9,051,408 | | (7,461,391) |
| Group Total Cost of sales | 1,590,017 | | 9,051,408 | | (7,461,391) |
| Gross Profit | | | | | |
| CA | 129,230 | | 2,075,985 | | (1,946,755) |
| Group Total Gross Profit | 129,230 | | 2,075,985 | | (1,946,755) |
Revenues decreased by $9,408,149 or 85% from $11,127,393 for the year ended December 31, 2018 to $1,719,247 for the year ended December 31, 2019. 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 2018 and 2019 accordingly.
Cost of services for consulting, service, commission and management fee decreased by $7,461,391 or 82% from $9,051,408 for the year ended December 31, 2018 to $1,590,017 for the year ended December 31, 2019. The decrease was primarily due to the corresponding decreases in sales.
Gross profit of consulting, service, commission and management fees decreased by $1,946,755 or 94%, from $2,075,985 for the year ended December 31, 2018 to $129,230 for the year ended December 31, 2019 The decrease was primarily due to the corresponding decreases in sales.
.
Note to Table A 1 ( Net Expense):
Other income/(expense) decreased by $28,307,411 from $9,747,259 in 2018 to $(18,560,152) in 2019 was mainly due to i) an decrease in share of profit from a unconsolidated equity investee from $14,251,264 to $7,537,498; ii) change in non-operating expenses from $(4,609,253) to $(22,598,607);
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 $2,340,122 or 14% from $16,195,551 for the year ended December 31, 2018 to $13,855,429 for the year ended December 31, 2019. The decrease was mainly due to (i) a decrease in Wages and salaries of 201,111 from $1,862,232 for the year ended December 31, 2018 to $1,661,121 for the year ended December 31, 2019; and (ii) a decrease in Others and miscellaneous (including research and development) of $1,164,493 from $4,072,096 for the year ended December 31, 2018 to $2,907,603 for the year ended December 31, 2019; as shown in the table below:
Table (i)
| Category | | 2019 | | 2018 | | Difference |
| Office and corporate expenses | | 3,296,862 | | 3,354,114 | | (57,252) |
| Wages and salaries | | 1,661,121 | | 1,862,232 | | (201,111) |
| Traveling and related lodging | | 24,219 | | 45,430 | | (21,211) |
| Motor vehicles expenses and local transportation | | 38,243 | | 56,198 | | (17,955) |
| Entertainments and meals | | 45,672 | | 49,504 | | (3,832) |
| Others and miscellaneous | | 2,907,603 | | 4,072,096 | | (1,164,493) |
| Depreciation and amortization | | 5,478,041 | | 6,155,458 | | (677,417) |
| Sub-total | | 13,451,761 | | 15,595,032 | | (2,143,271) |
| Interest expense | | 403,668 | | 600,519 | | (196,851) |
| Total | | 13,855,429 | | 16,195,551 | | (2,340,122) |
Note to Table (i):
In this respect, total depreciation and amortization amounted to $7,311,242 for the year ended December 31, 2019, out of which amount $5,478,041 was reported under general and administration expenses and $1,833,201 was reported under cost of goods sold; whereas total depreciation and amortization amounted to $15,351,003 for the year ended December 31, 2019, 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.
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 | | | | |
| Name of China subsidiaries | | Ltd.(China) | | | Ltd.(China) | | | Limited (China) | | | Ltd (China) | | | Total | |
| Effective shareholding | | | 75 | % | | | 75 | % | | | 76 | % | | | 41.25 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Abbreviated names | | | (JHST) | | | | (JHMC) | | | | (HSA) | | | | (SJAP) | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) of the P.R.C. subsidiaries for the year in $ | | | (2,617,350 | ) | | | 1,995,528 | | | | (5,194,425 | ) | | | 576,694 | | | | (5,239,553 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| % of profit sharing of non-controlling interest | | | 25 | % | | | 25 | % | | | 24 | % | | | 58.75 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Non-controlling interest's shares of Net incomes in $ | | | (654,338 | ) | | | 498,882 | | | | (1,246,662 | ) | | | 338,808 | | | | (1,063,310 | ) |
The Net Loss attributed to non-controlling interest is $(1,063,310) shared by (JHST, JHMC, HSA and SJAP) for the year ended December 31, 2019 as shown in Table (F) above.
Note (7) to Table A 1 Earnings per share (EPS):
Earnings per share decreased by $0.67 (basic) and $0.67 (diluted) per share from EPS of $0.46 (basic) and $0.46 (diluted) in 2018 to per share of $(0.21) (basic) and $(0.21) (diluted) in 2019. The reason for the decrease is primarily due to the declined earnings in 2019 from all segmental operations losing over US$5.2 million and from CA’s consulting and services losing US$1.95 million.
Part B. MD &A on Audited Consolidated Balance Sheet as of the year 2019 compared to year 2018 (fiscal year)
| Consolidated Balance sheets | | December31,2019 | | | December31,2018 | | | Changes | | | Note | |
| ASSETS | | | | | | | | | | | | | | | | |
| Current assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | 185,895 | | | | 4,950,799 | | | | (4,764,904 | ) | | | 8 | |
| Inventories | | | - | | | | 54,582,241 | | | | (54,582,241 | ) | | | 9 | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | | 250,828 | | | | 250,828 | | | | - | | | | | |
| Deposits and prepaid expenses | | | 30,130,940 | | | | 52,241,190 | | | | (22,110,250 | ) | | | | |
| Accounts receivable | | | 98,528,589 | | | | 101,652,131 | | | | (3,123,542 | ) | | | 11 | |
| Other receivables | | | 95,565,376 | | | | 28,307,526 | | | | 67,257,850 | | | | 15 | |
| Total current assets | | | 224,661,629 | | | | 241,984,715 | | | | (17,323,086 | ) | | | | |
| Property and equipment | | | | | | | | | | | | | | | | |
| Property and equipment, net of accumulated depreciation | | | 103,064,238 | | | | 230,645,659 | | | | (127,581,421 | ) | | | 12 | |
| Construction in progress | | | 0 | | | | 12,515,527 | | | | (12,515,527 | ) | | | 13 | |
| Land use rights, net of accumulated amortization | | | 52,759,085 | | | | 53,814,281 | | | | (1,055,196 | ) | | | 14 | |
| Total property and equipment | | | 154,097,166 | | | | 296,975,467 | | | | (142,878,301 | ) | | | | |
| Other assets | | | | | | | | | | | | | | | | |
| Goodwill | | | 724,940 | | | | 724,940 | | | | - | | | | | |
| Proprietary technologies, net of accumulated amortization | | | 7,067,753 | | | | 8,937,071 | | | | (1,869,318 | ) | | | | |
| Investment in unconsolidated equity investee | | | 249,344,711 | | | | 207,074,626 | | | | 42,270,085 | | | | | |
| Temporary deposit paid to entities for investments in future Sino Joint Venture companies | | | 17,507,626 | | | | 34,905,960 | | | | (17,398,334 | ) | | | 10 | |
| Total other assets | | | 272,918,874 | | | | 251,642,597 | | | | 21,276,277 | | | | | |
| Total assets | | | 653,403,825 | | | | 790,602,779 | | | | (137,198,954 | ) | | | | |
| Current liabilities | | | | | | | | | | | | | | | | |
| Accounts payable and accrued expenses | | | 2,590,637 | | | | 8,280,358 | | | | (5,689,721 | ) | | | | |
| Billings in excess of costs and estimated earnings on uncompleted contracts | | | 5,386,711 | | | | 5,348,293 | | | | 38,418 | | | | | |
| Due to a director | | | 1,165,621 | | | | 2,046,499 | | | | (880,878 | ) | | | | |
| Other payables | | | 35,362,580 | | | | 42,523,811 | | | | (7,161,231 | ) | | | 16A | |
| Borrowings-Short term bank loan | | | 0 | | | | 4,589,828 | | | | (4,589,828 | ) | | | | |
| Derivative liability | | | - | | | | 2,100 | | | | (2,100 | ) | | | | |
| Convertible note payable | | | - | | | | 3,894,978 | | | | (3,894,978 | ) | | | | |
| Total current liabilities | | | 44,505,549 | | | | 66,685,867 | | | | (22,180,318 | ) | | | 16 | |
| Non-current liabilities | | | | | | | | | | | | | | | | |
| Other payables | | | 7,151,762 | | | | 7,792,774 | | | | (641,012 | ) | | | | |
| Borrowing-Long term debt | | | | | | | 5,536,938 | | | | (5,536,938 | ) | | | | |
| Total non-current liabilities | | | 7,151,762 | | | | 13,329,712 | | | | (6,177,950 | ) | | | | |
| Stockholders’ equity | | | | | | | | | | | | | | | | |
| Common stock | | | 51,576 | | | | 49,866 | | | | 1,710 | | | | | |
| Additional paid-in capital | | | 133,575,810 | | | | 181,501,056 | | | | (47,925,246 | ) | | | | |
| Retained earnings | | | 448,469,577 | | | | 458,811,844 | | | | (10,342,267 | ) | | | | |
| Accumulated other comprehensive income | | | (59,011,769 | ) | | | (10,415,786 | ) | | | (48,595,983 | ) | | | | |
| Treasury stock | | | (1,250,000 | ) | | | (1,250,000 | ) | | | - | | | | | |
| Total SIAF Inc. and subsidiaries' equity | | | 521,835,194 | | | | 628,696,980 | | | | (106,861,786 | ) | | | | |
| Non-controlling interest | | | 79,911,320 | | | | 81,890,220 | | | | (1,978,900 | ) | | | | |
| Total stockholders' equity | | | 601,746,514 | | | | 710,587,200 | | | | (108,840,686 | ) | | | | |
| Total liabilities and stockholders' equity | | | 653,403,825 | | | | 790,602,779 | | | | (137,198,954 | ) | | | | |
Note (8) Cash and Cash Equivalents
Cash and cash equivalents decreased by $(4,764,904) from $4,950,799 to $185,895 between December 31, 2018 and 2019.
Note (9) Break down on Inventories:
| | | 2019 | | | 2018 | | | Difference | |
| | | $ | | | $ | | | $ | |
| Bread grass | | | 0.00 | | | | 744,378 | | | | (744,378 | ) |
| Beef cattle | | | 0.00 | | | | 11,561,117 | | | | (11,561,117 | ) |
| Organic fertilizer | | | 0.00 | | | | 14,266,923 | | | | (14,266,923 | ) |
| Forage for cattle and consumables | | | 0.00 | | | | 7,252,280 | | | | (7,252,280 | ) |
| Raw materials for bread grass and organic fertilizer | | | 0.00 | | | | 18,885,258 | | | | (18,885,258 | ) |
| Immature seeds | | | | | | | 1,872,285 | | | | (1,872,285 | ) |
| | | | | | | | | | | | 0 | |
| | | | 0.00 | | | | 54,582,241 | | | | (54,582,241 | ) |
Note (10) Breakdown of Deposits and Prepaid Expenses:
| | | 2019 | | | 2018 | | | Difference | |
| | | $ | | | $ | | | $ | |
| Deposits for | | | | | | | | | | | | |
| - purchases of equipment | | | 2,037,425 | | | | 2,158,867 | | | | (121,442 | ) |
| - acquisition of land use rights | | | - | | | | 174,851 | | | | (174,851 | ) |
| - inventories purchases | | | 1,059,543 | | | | 16,921,188 | | | | (15,861,645 | ) |
| - construction in progress | | | - | | | | 4,789,035 | | | | (4,789,035 | ) |
| - issue of shares as collateral | | | 24,402,175 | | | | 24,928,324 | | | | (526,149 | ) |
| Shares issued for employee compensation and overseas professional and bond interest | | | - | | | | 643,457 | | | | (643,457 | ) |
| Others | | | 2,631,797 | | | | 2,625,468 | | | | 6,329 | |
| | | | 30,130,940 | | | | 52,241,190 | | | | (22,110,250 | ) |
| | | | | | | | | | | | | |
Note (11): Aging and breakdown of Accounts receivable:
| | | 2019 | |
| | | Accounts | | | | | | | | | | | | | | | | |
| | | receivable | | | | | | | | | | | | over 120 days and | | | | |
| | | | $ | | | 0-30 days | | | 31-90 days | | | 91-120 days | | | less than 1 year | | | Over 1 year | |
| Engineering consulting service (CA) | | | 39,321,639 | | | | | | | | | | | | | | | | 707,819 | | | | 38,613,820 | |
| Sales of imported seafood (SIAF) | | | 27,362,755 | | | | 5,836,253 | | | | 21,526,502 | | | | | | | | | | | | | |
| Sales of Cattle and Beef Meats (MEIJI) | | | 14,446,680 | | | | 1,331,775 | | | | 13,114,905 | | | | | | | | | | | | | |
| Sales of HU Flowers (Fresh & Dried) (JHST) | | | 5,037,397 | | | | | | | | 5,037,397 | | | | | | | | | | | | | |
| Sales of Cattle and Beef Meats (JHMC) | | | 1,091,224 | | | | 326,528 | | | | 210,465 | | | | 554,231 | | | | | | | | | |
| Sales Fertilizer from (HSA) | | | 8,305,681 | | | | 2,251,540 | | | | 563,284 | | | | 421,251 | | | | 5,069,606 | | | | | |
| | | | - | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 95,565,376 | | | | 9,746,096 | | | | 40,452,553 | | | | 975,482 | | | | 5,777,425 | | | | 38,613,820 | |
| % of total receivables | | | 100 | % | | | 10 | % | | | 42 | % | | | 1 | % | | | 6 | % | | | 40 | % |
| l | In CA’s engineering consulting services, over 120-day accounts receivable of $39,321,639 (including over 1 year balance of $38,613,820) represents a balance due from an unconsolidated investee, TRW, with $707,819 on-going engineering consulting services during the year. The management takes into consideration the significant influence it holds in TRW (36.6% of equity interest from October 5, 2017). |
| l | The normal credit period granted to the customers is 90 to 120 days. The Company will quarterly evaluate the recoverability of the over 120-day balance. |
| l | Provision of bad debts may be necessary for certain portions of HSA’s account receivables of $ 5.07 million if all or part of which will not be received by 30th June 2020. |
Information on Concentration of credit risk of account receivables:
Major customer’s revenues/our total revenues:
We have 4 major long-term customers (referring to Customer A, B, C and D mentioned in the Financial Statements of this Annual Report), who have accounted for 78.08% of our consolidated revenues for the year ended December 31, 2019 as shown in the table below:
| | | % of total revenue | | | Customer's Total Revenue | |
| Customer A | | | 31.05 | % | | | 43,798,678 | |
| Customer B | | | 24.77 | % | | | 34,135,176 | |
| Customer C | | | 16.28 | % | | | 22,433,555 | |
| Customer D | | | 5.98 | % | | | 8,240,811 | |
| | | | 78.08 | % | | | 108,608,221 | |
Customer A is Shanghai Hongchang Yili company (“Vigor”) that sells much of the imported beef and seafood as well as locally produced seafood. During 2019, the Company sold $43,798,678 of goods representing 31.05% of our total revenue of $137,785,374.
Customer B is Cattle Wholesale, represented by Mr. Zhen Runchi, who buys our fattened cattle to sell them in the Guangdong and Beijing cattle markets and at the same time supplies to us with young cattle. The fiscal year 2019, transactions through Mr. Zhen Runchi generated 24.77% of our total consolidated revenue (equivalent to $34,135,176) out of our total revenue of $137,785,374.
Customer C is GZ Nawei Trading Company who sells much of the imported beef and seafood as well as locally produced seafood. During 2019, the Company sold $8,240,811 of goods representing 5.98% of our total revenue of $137,785,374.
Customer D is Tri-way Industries Limited through our divestment when Tri-way (or “TRW”) became our “Investment Associate.” During 2019, transactions through TRW generated 16.28% of our total consolidated revenue equivalent to $22,433,555 out of our total revenue of $137,785,374.
Major customer’s account receivables:
These 4 major long-term customers (referred to as Customer A, B, C and D above & mentioned in the Financial Statements of this Annual Report), constitute accounts receivable in the aggregate amount of $81,131,075, which is equivalent to58.88% of our consolidated revenues of $137,785,374 for the year 2019 as shown in the table below:
| | | December 31,2019 % of total Accounts receivables | | | Total Accounts receivables | |
| Customer A | | | 39.91 | % | | | 39,321,639 | |
| Customer B | | | 16.11 | % | | | 15,871,509 | |
| Customer C | | | 14.66 | % | | | 14,446,680 | |
| Customer D | | | 11.66 | % | | | 11,491,246 | |
| | | | 82.34 | % | | | 81,131,075 | |
Note (12) Property and equipment, (P&E) net of accumulation depreciation:
| | | 2019 | |
| Plant and machinery | | $ | 9,652,132 | |
| Structure and leasehold improvements | | | 90,615,323 | |
| Mature seeds and herbage cultivation | | | 17,752,012 | |
| Furniture and equipment | | | 2,613,172 | |
| Motor vehicles | | | 3,241,556 | |
| | | | 123,874,195 | |
| | | | | |
| Less: Accumulated depreciation | | | 20,809,957 | |
| Net carrying amount | | $ | 103,064,238 | |
| | l | Depreciation expenses were $5,272,630 and $13,080,991 for the years ended December 31, 2019, and 2018, respectively. |
Note (13) Construction in progress (CIP):
| | | 2019 | |
| Construction in progress | | | 0 | |
| - Office, warehouse and organic fertilizer plant in HSA | | $ | 0 | |
| - Oven room, road for production of dried flowers | | | 0 | |
| - Organic fertilizer and bread grass production plant and office building | | | 0 | |
| - Rangeland for beef cattle and office building | | | 0 | |
| - Fish pond and breeding factory | | | 0 | |
| | | $ | 0 | |
Note (14): Land Use Rights, net of accumulated amortization:
| Item | | | Owner | | | Location | | | Acres | | | Date Acquired | | | Tenure | | | Expiry dates | | | Cost $ | | | | Monthly
amortization
$ | | | | 2019.12.31Balance$ | | Nature of
ownership | | Nature of project | |
Hunan
lot1 | | | HS.A | | | Ouchi Village, Fenghuo Town, Linli County | | | 31.92 | | | 4/5/2011 | | | 43 | | | 4/4/2054 | | | 242,703 | | | | 470 | | | | 193,316 | | Lease | | Fertilizer production |
Hunan
lot2 | | | HS.A | | | Ouchi Village, Fenghuo Town, Linli County | | | 247.05 | | | 7/1/2011 | | | 60 | | | 6/30/2071 | | | 36,666,141 | | | | 50,925 | | | | 31,471,771 | | Management Right | | Pasture growing |
Hunan
lot3 | | | HS.A | | | Ouchi Village, Fenghuo Town, Linli County | | | 8.24 | | | 5/24/2011 | | | 40 | | | 5/23/2051 | | | 378,489 | | | | 789 | | | | 296,483 | | Land Use Rights | | Fertilizer production |
Hunan
lot4 | | | HS.A | | | Ouchi Village, Fenghuo Town, Linli County | | | 24.71 | | | 6/1/2018 | | | 50 | | | 5/31/2068 | | | 3,021,148 | | | | 5,035 | | | | 2,925,478 | | Lease | | Pasture growing |
Guangdong
lot 1 | | | JHST | | | Yane Village, Liangxi Town, Enping City | | | 8.23 | | | 8/10/2007 | | | 60 | | | 8/9/2067 | | | 1,064,501 | | | | 1,478 | | | | 844,208 | | Management Right | | HU Plantation |
Guangdong
lot 2 | | | JHST | | | Nandu Village of Yane Village, Liangxi Town, Enping City | | | 27.78 | | | 3/14/2007 | | | 60 | | | 3/13/2067 | | | 1,037,273 | | | | 1,441 | | | | 815,412 | | Management Right | | HU Plantation |
Guangdong
lot 3 | | | JHST | | | Nandu Village of Yane Village, Liangxi Town, Enping City | | | 60.72 | | | 3/14/2007 | | | 60 | | | 3/13/2067 | | | 2,267,363 | | | | 3,149 | | | | 1,782,399 | | 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 | | | 2,041,949 | | | | 2,836 | | | | 1,622,215 | | 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 | | | 960,416 | | | | 1,334 | | | | 762,997 | | Management Right | | HU Plantation |
Guangdong
lot 6 | | | JHST | | | Liankai Village of Niujiang Town, Enping City | | | 31.84 | | | 1/1/2008 | | | 60 | | | 12/31/2068 | | | 821,445 | | | | 1,141 | | | | 657,156 | | Management Right | | Fish Farm |
Guangdong
lot 7 | | | JHST | | | Nandu Village of Yane Village, Liangxi Town, Enping City | | | 41.18 | | | 1/1/2011 | | | 26 | | | 12/31/2037 | | | 5,716,764 | | | | 18,323 | | | | 3,737,884 | | 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 | | | 1,566,393 | | | | 5,020 | | | | 1,024,180 | | 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 | | | 5,082,136 | | | | 21,176 | | | | 2,858,702 | | Management Right | | Cattle Farm |
Qinghai
lot 1 | | | SJAP | | | No. 498, Bei Da Road, Chengguan Town of Huangyuan County,Xining City, Qinghai Province | | | 21.09 | | | 11/1/2011 | | | 40 | | | 10/30/2051 | | | 527,234 | | | | 1,098 | | | | 419,591 | | 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 | | | 3/4/2013 | | | 10 | | | 3/3/2023 | | | 489,904 | | | | 4,083 | | | | 155,136 | | Management Right | | Processing factory |
| Guangdong lot 11 | | | CA | | | Da San Dui Wei ,You Nan Village, Conghua District of Guangzhou City | | | 33.28 | | | 10/28/2014 | | | 30 | | | 10/27/2044 | | | 4,453,665 | | | | 12,371 | | | | 3,674,274 | | Management Right | | Agriculture |
| | | | JHST | | | Land improvement cost incurred | | | | | | 12/1/2013 | | | | | | | | | 3,914,275 | | | | 6,155 | | | | 3,464,995 | | Management Right | | HU Plantation |
| Exchange difference | | | | | | | | | | | | | | | | | | -6,271,961 | | | | | | | | -3,947,113 | | | | |
| | | | | | | | | | 678 | | | | | | | | | | | | 63,979,840 | | | | 136,824 | | | | 52,759,085 | | | | |
Note (15) Other Receivables
| | | 2019 | | | Note | |
| Advanced to employees | | $ | 255,174 | | | | | |
| Advanced to suppliers | | | 2,543,541 | | | | 15A | |
| Advanced to customers | | | 14,131,956 | | | | 15B | |
| Advanced to SJAP | | | 76,404,954 | | | | 15C | |
| Others | | | 2,229,751 | | | | | |
| | | $ | 95,565,376 | | | | | |
15A. A portion of this consists of molds, parts and components necessary to manufacture and fit-out various types of filters in the APM systems requiring suppliers (manufacturers) to carry additional inventory. This inventory is billed to the Company at such times when the components are called to manufacture the APM filtration systems. Until then, the Company provides advances to the supplier to manufacture the components and hold in inventory on the Company’s behalf until the components are called and billed to the Company, i.e., offsetting the amount invoiced with the proceeds received in advance.
15B. Advanced to customers refers to our distribution agents (i.e., the Shanghai distribution center, the Guangzhou distribution centers, etc.) that CA was their turnkey contractor built and developed said centers for and on behalf of their respective owners with part of their respective capital expenditure in development costs are still outstanding as of the date of this report. These are similar arrangement as in the Fishery Farms developments that CA has the option to acquire up to 75% of stakes on the assets and operation of said distribution agents: however as of date of this report CA has yet to exercise any of said options as such these sum are recorded as other receivables.
15C. Advance to SJAP is referring the funds the Company advanced to SJAP since 2018 to present for building up its assets since 2008 to present.
Note (16) Current Liabilities:
| Current liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | | 2,590,637 | | | | | |
| Billings in excess of costs and estimated earnings on uncompleted contracts | | | 5,386,711 | | | | | |
| Due to a director | | | 1,165,621 | | | | | |
| Other payables | | | 35,362,580 | | | | 16A | |
| Borrowings - Short term bank loans | | | - | | | | | |
| | | | 44,505,549 | | | | | |
| | | | | | | | | |
Note (16A): Analysis of other payables (current liabilities):
As of December 31, 2019, we have other payables totaling $42,514,342, comprised of the following:
(1). Straight note payable of $29,367,999 represents a 10.5% Convertible Note in the aggregate principal amount of up to $33,300,000 issued on August 29, 2014. On July 18, 2018, the Company and the note holder entered into a restructuring agreement regarding the settlement of the Note as follows:
| (i) | 50% in cash settlement of $15,589,000 to be paid in monthly installments. |
| (ii) | The other 50% balance of $15,589,000 to be settled by the issuance of 5,196,333 common shares of the Company and 400,000 shares of Tri-way Industries Limited. |
As of the date of this report, the Company has paid $4 million with $11,589,000 remaining owed on the $15,589,000 balance.
February 3, 2019 the said repayment of $4 million was readjusted to $3.69 million.
• We filed an 8-K on December 12, 2019 to state that we received a notice of default (the “Notice”) from ECAB on December 12, 2018 contending that a new Note was in default because (i) SIAF had not made repayments on the new Note in the manner prescribed by its terms, and (ii) of certain other unspecified events of default. While ECAB stated in the Notice that it has not elected to accelerate the right to repayment of the entire principal amount, including accrued but unpaid interest on the ECAB Note, it reserves the right to do so.
Prior to receipt of the Notice from ECAB, the Company was attempting to reach a negotiated settlement with ECAB. Notwithstanding receipt of the Notice, the Company hopes to continue to work with ECAB to settle its obligations under the ECAB Note. The Company intends to vigorously defend its position should a mutually amicable resolution prove unattainable.
Subsequently, Note 1 would be matured on February 28, 2020 the Company intends to offer the settlement of the note to the accredited investors based on the following understanding, terms and conditions:
(i). The earlier understanding of the restructured indebtedness is to be carried as follows: (a) SIAF issues 5,196,333 shares of its common stock and transfer 400,000 shares of TRW to the note holder; and (b) SIAF is to pay the revised promissory note in the principal amount of $15,589,000 to the note holder.
(ii). It is the Company’s intension for the said 5,196,333 shares of its common stocks to be converted into the G Series Preferred Stocks at conversion ratio of the offer of the Initial Public Offer stated in the registration statement filed with SEC targeting on or before June 30, 2021.
(iii). There were 500,050 Common Shares of the Company loaned to the said accredited investor on (Date: July 22, 2014) valued at US$18.10 / share as security for the accredited investors to secure their investors to invest on the Bond prior to the completion of a registration statement filed with SEC on June 2014 to allow the official issuing of additional common stocks to ECAB’s BOND investors, and that ECAB would return back the loaned stocks back to the Company upon the time the said accredited investor invested the balance of the Note 1 proceed of (US$ 13,362,550) needed to complete the disbursement of the total loan proceed of US$25,000,000 on or before (Date: February 28th 2015). However the said investor sold the said loaned 500,050 common stocks of the Company in between the period (Date: February to March 2015) and invested part or the full sum from the sales proceeds of said 500,050 common stock of the Company (of US$10,500,000) back to the Company as part of the Note 1’s disbursement to the Company making total disbursement sum of US$22,137,450.00 being advanced to the Company on or before 30th June 2015, and in turn, the investor did not return the said 500,050 common stocks of the Company to the Company and didn’t help the Company to complete the said registration statement by not giving the Company the Debenture Agreement requested by SEC and needed to complete said registration statement with SEC.
(iv). In order that the principal amount of $15,589,000 of the cash settlement sum mentioned above may be settled amicably between the accredited investor and the Company, the sales proceeds (of US$13,362,550.00) from the sales of the 500,050 shares loaned in good faith to ECAB must be taken into consideration and be deduced from the said principal amount before this bond arrangements can be settled.
(2). As of the date of this report we have other payables due to various third parties totaling $15,345,811, comprising the following:
(i). A loan was granted by a friendly third party on October 12, 2017 for $6 million that was recorded at later date by a loan agreement executed on February 18, 2019 for $6,301,480 (inclusive of an additional loan of $301,480 granted by the same third party on February 2, 2019. This loan is to be re-paid in 3 tranches inclusive of accrued interest calculated to time of repayments comprising Tranche (1) for $2,300,000, Tranche (2) for $2,350,000 and Tranche (3) for $2,746,702 on August 31, 2019, October 30, 2019 and December 31, 2019, respectively, for total repayment amount of $7,346,702.
(ii). A number of friendly third parties granted various advances and extended debts to the Company during the past years, and as at the date of this report the total loan and debts recorded under other payables of the Company’s account amounting to $9,345,811 collectively that in general do not have fixed terms of repayments and interest.
Note (16B): Analysis of Convertible Note (“CB Notes”) Payable) in Other payables (current liabilities):
As of the date of this Annual Report there are various CB Notes amounting to $7,151,762 collectively.
Subsequently as of December 31, 2019 there is $7,151,762 in CB Notes remaining outstanding collectively and out of which $2,130,000 is secured by 2,666,735 shares due for redemption and the return of collateralized shares on September 23, 2019; the balance of $1,173,000 are CB Notes due to 5 holders that will be settled either by cash or shares at prevailing market prices or a combination thereof during 2019 that was extended to September 23 2021 under corresponding addendums dated September 20th 2019.
Income Taxes
The Company was incorporated in the State of Nevada, in the United States of America. The Company has no operations in United States of America and no US corporate tax has been provided for in the consolidated financial statements of the Company.
Undistributed Earnings of Foreign Subsidiaries
The Company intends to use the remaining accumulated and future earnings of foreign subsidiaries to expand operations outside the United States of America and, accordingly, undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States and no provision for U.S. Federal and State income tax or applicable dividend distribution tax has been provided thereon.
The Company filed USA tax returns for all previous year inclusive year 2016 to 2019.
As of December 31, 2018, the Company reviewed its tax position with the assistance of US tax professionals and believed that there would be no taxes and no penalties assessed by the IRS in the United States of America.
No EIT has been provided in the financial statements of SIAF, CA, JHST, JHMC, JFD, HSA, QZH and SJAP since they are exempt from EIT for the twelve months ended December 31, 2019 and 2018 as they are within the agriculture, dairy and fishery sectors.
CA, CS and CH are international business companies incorporated in Belize, and are exempt from corporate tax in Belize.
No Hong Kong profits tax has been provided in the consolidated financial statements, since TRW did not earn any assessable profits arising in Hong Kong for the twelve months ended December 31, 2019.
No Macau corporate income tax has been provided in the consolidated financial statements, since APWAM and MEIJI did not earn any assessable profits in Macau for the twelve months ended December 31, 2019 and 2018.
Swedish corporate income tax has been provided in the consolidated financial statements for SAFS at $1,684 for the twelve months ended December 31, 2019 and $0 for 2018.
No deferred tax assets and liabilities are payable as of December 31, 2019 and December 31, 2018 since there was no difference between the financial statements carrying amounts, and the tax basis of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to reverse.
Off Balance Sheet Arrangements:
None.
Liquidity and Capital Resources
As of December 31 2019, unrestricted cash and cash equivalents amounted to $185,595 (see notes to the consolidated financial statements), and our net working capital as of December 31, 2019 was $180,156,079.
Cash provided by operating activities amounted to $6,786,632 for the twelve months ended December 31, 2019. This compared with cash provided by operating activities totaled $20,175,276 for the twelve months ended December 31, 2018. The decrease in cash provided by operations is mainly due to the decrease in Other receivables from $(7,627,048) for the twelve months ended December 31, 2018 to that of $(67,257,850) for the twelve months ended December 31, 2019.
Cash used in investing activities totaled $11,506,614 for the twelve months ended December 31, 2019. This compares with cash used in investing activities totaling $13,828,019 for the twelve months ended December 31, 2018. The decrease in cash flows used in investing activities primarily resulted from the decrease in payment for construction in progress from $6.8million for the twelve months ended December 31, 2018 to that of $11 million for the twelve months ended December 31, 2019.
Cash provided by financing activities totaled $(73,741) for the twelve months December 31, 2019 compared with cash used in financing activities totaling $(75,563) for the twelve months ended December 31, 2018. The decrease in cash paid by financing activities is mainly due to net proceeds from convertible bonds payable of $4,533,777 during the year 2018, but 2019 is 0.
CRITICAL ACCOUNTING POLICIES
BASIS OF PRESENTATION
The audited consolidated financial statements for the twelve months ended December 31, 2019 are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of SIAF, its subsidiaries Capital Award, CS, CH, TRW, MEIJI, JHST, JFD, JHMC, HSA, APWAM, SAFS and its variable interest entities SJAP and QZH. All material inter-company transactions and balances have been eliminated in consolidation. The results of companies acquired or disposed of during the year are included in the consolidated Financial Statements from the effective date of acquisition.
BUSINESS COMBINATIONS
The Company adopted the accounting pronouncements relating to business combinations (primarily contained in ASC Topic 805 “Business Combinations”), including assets acquired and liabilities assumed arising from contingencies. These pronouncements established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquire as well as provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, these pronouncements eliminate the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria and require an acquirer to develop a systematic and rational basis for subsequently measuring and accounting for acquired contingencies depending on their nature. Our adoption of these pronouncements will have an impact on the manner in which we account for any future acquisitions.
NON - CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted the accounting pronouncement on non-controlling interests in consolidated financial statements, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance is primarily contained in ASC Topic “Consolidation”. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated financial statements. The adoption of this standard has not had material impact on our consolidated financial statements.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods covered thereby. Actual results could differ from these estimates. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. The following are some of the areas requiring significant judgments and estimates: determinations of the useful lives of assets, estimates of allowances for doubtful accounts, cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, estimates of the reliability of deferred tax assets and inventory reserves.
REVENUE RECOGNITION
The Company’s revenue recognition policies are in compliance with ASC 605. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer. Service revenue is recognized when services have been rendered to a buyer by reference to the stage of completion. License fee income is recognized on the accrual basis in accordance with the underlying agreements.
Government grants are recognized upon (i) the Company has substantially accomplished what we must be done pursuant to the terms of the policies and terms of the grant that are established by the local government; and (ii) the Company receives notification from the local government that the Company has satisfied all of the requirements to receive the government grants; and or (iii) the amounts are received.
Multiple-Element Arrangements
To qualify as a separate unit of accounting under ASC 605-25“Multiple Element Arrangements”, the delivered item must have value to the customer on a standalone basis. The significant deliverables under the Company’s multiple-element arrangements are consulting and service under development contract, commission and management service.
Revenues from the Company's fishery development services contract are performed under fixed-price contracts. Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (“ASC 605”). Under the percentage-of-completion method, the Company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognized that profit over the contract term. The percentage of costs incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the installation contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as either costs or estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts.
The Company determines a customer’s credit worthiness at the time an order is accepted. Sudden and unexpected changes in a customer’s financial condition could put recoverability at risk.
The percentage of completion method requires the ability to estimate several factors, including the ability of the customer to meet its obligations under the contract, including the payment of amounts when due. If the Company determines that collectability is not assured, we will defer revenue recognition and use methods of accounting for the contract such as the completed contract method until such time as the Company determines that collectability is reasonably assured or through the completion of the project.
For fixed-price contracts, the Company uses the ratio of costs incurred to date on the contract (excluding uninstalled direct materials) to management's estimate of the contract's total costs, to determine the percentage of completion on each contract. This method is used as management considers expended costs to be the best available measure of progression of these contracts. Contract costs included all direct material, subcontract and labor costs and those indirect costs related to contract performance, such as supplies, tool repairs and depreciation. The Company accounts for maintenance and repair services under the guidance of ASC 605 as the services provided relate to construction work. Contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract. Changes in job performance, job conditions, and estimated profitability arising from contract penalty, change orders and final contract settlements may result in revisions to the estimated profitability during the contract. These changes, which include contracts with estimated costs in excess of estimated revenues, are recognized as contract costs in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. At the point the Company anticipates a loss on a contract, the Company estimates the ultimate loss through completion and recognizes that loss in the period in which the possible loss was identified.
The Company does not provide warranties to customers on a basis customary to the industry; however, the customers can claim warranty directly from product manufacturers for defects in equipment or products. Historically, the Company has experienced no warranty claims.
The Company’s fishery development consultancy services revenues are recognized when the relevant services are rendered, and are subject to a Chinese business tax at a rate of 0% of the gross fishery development contract service income approved by the Chinese local government.
COST OF GOODS SOLD AND SERVICES
Cost of goods sold consists primarily of direct purchase cost of merchandise goods, and related levies. Cost of services consists primarily of direct cost and indirect cost incurred to date for development contracts and provision for anticipated losses on development contracts.
SHIPPING AND HANDLING
Shipping and handling costs related to cost of goods sold are included in general and administrative expenses, which totaled $156,103 and $26,129 for the years ended December 31, 2019 and 2018, respectively.
ADVERTISING
Advertising costs are included in general and administrative expenses, which totaled $956,056, and $1,541,484 for the years ended December 31, 2019 and 2018, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are included in general and administrative expenses, which totaled $855,167 and $453, 378 for the years ended December 31, 2019 and 2018, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents kept with financial institutions in the People’s Republic of China (“PRC”) are not insured or otherwise protected. Should any of those institutions holding the Company’s cash become insolvent, or the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit on that institution.
ACCOUNTS RECEIVABLE
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis.
The standard credit period of the Company’s most of customers is three months. Any amount that has an extended settlement date of over one year is classified as a long term receivable. Management evaluates the collectability of the receivables at least quarterly. There was a written off on bad debts of $14,394,402 arising due to the dispose of QZH for the twelve months ended December 31, 2019 or (2018: Nil)
INVENTORIES
Inventories are valued at the lower of cost (determined on a weighted average basis) and net realizable value. Costs incurred in bringing each product to its location and conditions are accounted for as follows:
| • | raw materials - purchase cost on a weighted average basis; |
| • | manufactured finished goods and work-in-progress - cost of direct materials and labor and a proportion of manufacturing overhead based on normal operation capacity but excluding borrowing costs; and |
| • | retail and wholesale merchandise finished goods - purchase cost on a weighted average basis. |
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Such costs include the cost of replacing parts that are eligible for capitalization when the cost of replacing the parts is incurred. The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at the end of each year.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets.
| Milk cows | | 10 years |
| Plant and machinery | | 5 - 10 years |
| Structure and leasehold improvements | | 10 - 30 years |
| Mature seed and herbage cultivation | | 20 years |
| Furniture, fixtures and equipment | | 2.5 - 10 years |
| Motor vehicles | | 4 - 10 years |
An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statements of income in the period the item is disposed.
GOODWILL
Goodwill is an asset representing the fair economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is tested for impairment on an annual basis at the end of the company’s fiscal year, or when impairment indicators arise. The Company uses a fair-value-based approach to test for impairment at the level of each reporting unit. The Company directly acquired MEIJI, which is engaged in Hu Plantation. As a result of this acquisition, the Company recorded goodwill in the amount of $724,940. This goodwill represents the fair value of the assets acquired in these acquisitions over the cost of the assets acquired.
PROPRIETARY TECHNOLOGIES
The Company has determined that technological feasibility is established at the time a working model of products is completed. Master license of stock feed manufacturing technology was acquired and the costs of acquisition were capitalized as proprietary technologies when technological feasibility had been established. Proprietary technologies are intangible assets of finite lives. Proprietary technologies are amortized using the straight-line method over their estimated lives of 25 years.
An aromatic cattle-feeding formula was acquired and the costs of acquisition are capitalized as proprietary technologies when technological feasibility has been established. Cost of acquisition on aromatic cattle-feeding formula is amortized using the straight-line method over its estimated life of 20 years.
The cost of sleepy cod breeding technology license is capitalized as proprietary technologies when technological feasibility has been established. Cost of granting sleepy cod breeding technology license is amortized using the straight-line method over its entitled life of 25 years.
Bacterial cellulose technology license and related trademark are capitalized as proprietary technologies when technological feasibility has been established. Cost of license and related trademark is amortized using the straight-line method over its estimated life of 20 years.
Management evaluates the recoverability of proprietary technologies on an annual basis of the end of the company’s fiscal year, or when impairment indicators arise. As required by ASC Topic 350 “Intangible - Goodwill and Other”, the Company uses a fair-value-based approach to test for impairment.
CONSTRUCTION IN PROGRESS
Construction in progress represents direct costs of construction as well as acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use.
LAND USE RIGHTS
Land use rights represent acquisition of land use right rights of agriculture land from farmers and are amortized on the straight line basis over the respective lease periods. The lease period of agriculture land is in the range from 10 years to 60 years. Land use rights purchase prices were determined in accordance with the PRC Government’s minimum lease payments of agriculture land and mutually agreed between the company and the vendors. No independent professional appraiser performed a valuation of land use rights at the balance sheet dates.
CORPORATE JOINT VENTURE
A corporation formed, owned, and operated by two or more businesses (ventures) as a separate and discrete business or project (venture) for their mutual benefit is considered to be a corporate joint venture. Investee entities, in which the company can exercise significant influence, but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the company’s share of the earnings or losses of these companies is included in net income.
A loss in value of an investment that is other than a temporary decline is recognized as a charge to operations. Evidence of a loss in value might include, but would not necessarily be limited to absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.
VARIABLE INTEREST ENTITY
An entity (investee) in which the investor has obtained less than a majority-owned interest, according to the Financial Accounting Standards Board (FASB). A variable interest entity (VIE) is subject to consolidation if a VIE is an entity meeting one of the following three criteria as elaborated in ASC Topic 810-10, Consolidation.
(a) the equity-at-risk is not sufficient to support the entity's activities;
(b) as a group, the equity-at-risk holders cannot control the entity; or
(c) the economics do not coincide with the voting interests.
If a firm is the primary beneficiary of a VIE, the holdings must be disclosed on the balance sheet. The primary beneficiary is defined as the person or company with the majority of variable interests.
TREASURY STOCK
Treasury stock consists of a Company’s own stock which has been issued, but is subsequently reacquired by the Company. Treasury stock does not reduce the number of shares issued but does reduce the number of shares outstanding. These shares are not eligible to receive cash dividends. Accounting for excesses and deficiencies on treasury stock transactions is governed by ASC 505-30-30.
State laws and federal agencies closely regulate transactions involving a company’s own capital stock, so the purchase of outstanding shares and converting them into treasury shares must have a legitimate purpose. Some of the most common reasons for purchasing outstanding shares are as follows:
(i) to meet additional stock needs for various reasons, including newly implemented stock option plans, the issuance stock for convertible bonds or convertible preferred stock, or a stock dividend;
(ii) to eliminate the ownerships interests of a stockholder;
(iii) to increase the market price of the stock that returns capital to shareholders; and
(iv) to potentially increase earnings per share of the stock by decreasing the shares outstanding on the same earnings.
The Company has adopted the cost method of accounting for treasury stock shares. The purchase of outstanding shares is treated as a temporary reduction in shareholders’ equity in view of the expectation to reissue the shares instead of retiring them. When the Company reissues the treasury shares, the temporary account is eliminated. The cost of treasury stock shares reacquired is charged to a contra account, in this case a contra equity account that reduces the stockholder equity balance.
INCOME TAXES
The Company accounts for income taxes under the provisions of ASC 740 “Accounting for Income Taxes.” Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred taxes area accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also adjusted in the equity accounts. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. ASC 740 also prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense.
POLITICAL AND BUSINESS RISK
The Company's operations are carried out in the PRC Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS
In accordance with ASC 360, “Property, Plant and Equipment”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, at the end of each fiscal year. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of December 31, 2017, the Company’s impairment on interests in an unconsolidated investee of $153,046 was recorded.(2016: Nil).
EARNINGS PER SHARE
As prescribed in ASC Topic 260 “Earning per Share,” Basic Earnings per Share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common stock shares outstanding during the year plus potential dilutive instruments such as stock options and warrants. The effect of stock options on diluted EPS is determined through the application of the treasury stock method, whereby proceeds received by the Company based on assumed exercises are hypothetically used to repurchase the Company’s common stock at the average market price during the period.
For the years ended December 31, 2019 and 2018, basic (loss)/earnings per share attributable to Sino Agro Food, Inc. and subsidiaries common stockholders amounted to $(0.21) and $0.46, respectively. For the years ended December 31, 2019 and 2018, diluted (loss)/earnings per share attributable to Sino Agro Food, Inc. and its subsidiaries’ common stockholders amounted to $(0.21) and $0.46, respectively.
FOREIGN CURRENCY TRANSLATION
The reporting currency of the Company is the U.S. dollars. The functional currency of the Company is the Chinese Renminbi (RMB). For those entities whose functional currency is other than the U.S. dollars, all assets and liabilities are translated into U.S. dollars at the exchange rate on the balance sheet date; shareholder equity is translated at historical rates and items in the statements of income and of cash flows are translated at the average rate for the period.
Because cash flows are translated based on the weighted average translation rate, amounts related to assets and liabilities reported in the statements of cash flows will not necessarily agree with changes in the corresponding balances in the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statements of equity.
For the fiscal year ended December 31, 2019
Translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of income and comprehensive income as incurred. The balance sheet amounts with the exception of equity as of December 31 2019 and December 31, 2018 were translated at RMB6.98 to $1.00 and RMB6.86 to $1.00, respectively. The average translation rates applied to the consolidated statements of income and comprehensive income and of cash flows for the years ended December 31, 2019 and December 31 2018 were RMB6.87 to $1.00 and RMB6.61 to $1.00, respectively.
For the fiscal year ended December 31, 2018
Translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of income and comprehensive income as incurred. The balance sheet amounts with the exception of equity as of December 31 2018 and December 31, 2017 were translated at RMB6.86 to $1.00 and RMB6.53 to $1.00, respectively. The average translation rates applied to the consolidated statements of income and comprehensive income and of cash flows for the years ended December 31, 2018 and December 31 2017 were RMB6.61 to $1.00 and RMB6.75 to $1.00, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME
ASC Topic 220 “Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments.
RETIREMENT BENEFIT COSTS
PRC state managed retirement benefit programs are defined contribution plans and the payments to the plans are charged as expenses when employees have rendered service entitling them to the contribution.
STOCK-BASED COMPENSATION
The Company adopts both ASC Topic 718, “Compensation - Stock Compensation” and ASC Topic 505-50,”Equity-Based Payments to Non-Employees” using the fair value method in which an entity issues its equity instruments to acquire goods and services from employees and non-employees. Stock compensation for stock granted to non-employees has been determined in accordance with this accounting standard and the accounting standard regarding accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling goods or services, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured. This accounting standard allows the “simplified” method to determine the term of employee options when other information is not available. Under ASC Topic 718 and ASC Topic 505-50, stock compensation expenses is measured at the grant date on the value of the option or restricted stock and is recognized as expenses, less expected forfeitures, over the requisite service period, which is generally the vesting period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
NEW ACCOUNTING PRONOUNCEMENTS
The Company does not expect any recent accounting pronouncements to have a material effect on the Company’s financial position, results of operations, or cash flows.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new standard further requires new disclosures about contracts with customers, including the significant judgments the company has made when applying the guidance. We will adopt the new standard effective January 1, 2018, using the modified retrospective transition method. We finalized our analysis and the adoption of this guidance will not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for us in the first quarter of 2019 on a modified retrospective basis and early adoption is permitted. We will adopt the new standard effective January 1, 2019. We have selected a lease accounting system and we are in the process of implementing such system as well as evaluating the use of the optional practical expedients. While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases, as disclosed in Note 9 - Commitments and Contingencies, will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16), which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. We will adopt the new standard effective January 1, 2018, using the modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the effective date. A cumulative-effect adjustment will capture the write-off of income tax consequences deferred from past intra-entity transfers involving assets other than inventory, new deferred tax assets, and other liabilities for amounts not currently recognized under U.S. GAAP. Based on transactions up to December 31, 2017, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We will adopt the new standard effective January 1, 2018, using the retrospective transition approach for all periods presented. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. We will adopt the new standard effective January 1, 2018, on a prospective basis and do not expect the standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance will be effective for us in the first quarter of 2020 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.
Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its consolidated financial position, operating results or statements of cash flows.
| l | Other relevant historical events and subsequent matters: |
| l | Historical bridge financing |
The bulk of the Company’s agriculture-zoned land banks are owned by the Government that through land-usage rights permit the Company to develop properties, but to which no property title can be granted for them to be recognized as first-tier assets from which to borrow against, thus making obtaining any conventional lending based on those assets, virtually impossible to attain. Therefore, up until the time that the Company secured the convertible loan of $25m from ECAB, the Company’s capital expenditures had been financed strictly through many individual investors and private entities either through private placements, debt, or services rendered to the Company settled with common shares.
l Debt Conversion: From 2010 to present, part of the capital funding realized by the Company has been by issuing shares to some of the unrelated third parties consisting of service providers, suppliers, lenders, and debtors, etc., totaling 38,809,550 shares.
l Shares issued to staff, management, professional consultants and agencies to date of this report amount to 7,479,675 shares.
Since the beginning of the Company’s operations in China the Company provided share entitlement programs to selective staff and personnel that exemplified services and performance beyond their standard responsibilities; the annual amount capped at $1.5 million from 2007 to 2013, and increased to $2.5 million to present date with share values calculated at their respective market rates with the understanding that the Company reserves the right to defer share distribution until a later date, based on the Company’s assessment that market prices may improve and/or the rate at which they are issued could help mitigate any impact they could pose to the market.
Also, shares have been issued to professional consultants and agencies for services rendered that were pre-approved by the Company and written into their respective service contracts, some requiring immediate payment and others allowing their shares to be distributed over a period of time.
l Collateral shares: This includes the Trade Facility consisting of 5,708,312 collateral shares, and Third-Party Loans consisting of 2,662,735 collateral shares, collectively that do not hold voting or dividend rights to be returned to the Company upon repayment. The maturity date on the Third-Party Loans and Trade Facility originally run through to 30th September 2019 that was subsequently extended to 30th September 2021 due to the impacts of the Covid-19 events, however reduction of the Trade Facility line from $20,000,000 to $13,000,000 and the third parties’ loan debt has been reduced from $10,428,034 to $2,103,000 as at December 31st 2019..
l The total consideration received from the above referred issuance of shares for $181,198,847 (fully paid up capital) together with (i) retained earnings of $458,811,844, (ii) accumulated other comprehensive income of ($10,415,786) and (ii) treasury stock of (1,250,000) forms the Company’s total equity (or, net assets) of $628,696,980 as December 31, 2019 (the equivalent of $16.83/share representing a decrease of $1.70/share compares to 2018’s $18.53/share).
l The Company experienced a bad year in 2018 with SJAP suffered operation losses exceeding $30 million due to the down-turn of the cattle industry in China coupled with the 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% and 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 2018 suffering heavy losses such that by the first half of 2019, the Mega farm project had incurred debts over $4.5 million that really affected and tightened the Company’s cash-flow. At the same time, although the Company tried and worked extremely diligently to pursue some of the short term and long term loans the Company has been applying yet none of them was materialized enhancing the reason of why the Company had to issue over 20 million shares and 10 million shares to redeem part of its outstanding debts in 2019 and 2020 respectively.
l There was no loan made during 2019.
l The Company remains committed to minimize any further use of equity in helping to bridge finance its operations yet remains open to the use of equity whenever it serves the purpose of securing conventional financing and other purposes accretive to the Company and its shareholders.
| l | Third Party Loans to Tri-way (related party) secured by shares of the Company: |
The Company has depended from time to time on bridge loan financing, namely from four individual third parties (“ITP”) whose loans had been repaid either in cash, shares or both. The issuance of shares (referred to as “Debt Settlement”) was in practice until the time that the Company committed in its August 14, 2014 Convertible Bond agreement with ECAB to discontinue repayment of loans through the issuance of Debt Settlement shares.
As it was mentioned in the 10-K for the fiscal year ended 2018, the ITP loans (provided through the same third parties) were provided to Tri-way (“Borrower”) with the final agreement entered into on August 5, 2016; the loan proceeds having been incrementally received between July 15, 2016 through September 28, 2016 for a total net principal amount of $10,428,034 at interest free term collateralized by 2.66 million shares (inclusive all top-up shares) matures by 23, September 2019 that was extended to 23rd September 2021 under corresponding addendums dated 20th September 2019. When the loan principal amount will be fully repaid the collateralized shares will be returned to the Company. As of the date of this report, there is $2,103,000 outstanding in this ITP.
General terms of the loans, include:
| | a) | Tri-way Industries Limited (Tri-way) is the responsible party to cover loan principal, interest, closing and any other related loan costs. |
| | b) | SIAF, on behalf of Tri-way, acts as “Security Provider” providing shares of common stock as collateral against the loans. |
| | c) | SIAF’s only liability is contingent upon failure of Tri-way to repay the loan. Since the shares have not been sold, but strictly are utilized as security collateral, and, to date, have not incurred further liability to SIAF, the Company has recorded the Consideration (Face Value $13.9 million ; LTV $10.4 million) as Non-Current Assets, offset by the issuance of (collateral) shares, which are reported in our Qs and Ks, accordingly. |
| l | The Trade Facility secured by shares of the Company: |
As it was stated in the 10K 2017 report that “The Trade Facility” was originally entered into on September 22, 2015 that was finalized into an agreement dated June 17th 2016 consisting of SIAF having securitized the loan with 2,133,333 of its common shares valued at $12.50/share equivalent to the full face-value of the loan ($26,666,666), and the TPA having the full use of the trade facility to borrow and repay, against, as warranted, i.e. revolving LOC.
As such, the principal terms of this agreement are:
· SIAF acts as “Security Provider” to initiate the Trade Facility to be employed.
· The Third-Party Agent (“TPA”) (described as an Import & Export Trading House in Shanghai acting as distribution agent for the Company) is the responsible party to cover loan principal, interest, closing and any other related loan costs.
· SIAF’s only liability is contingent upon failure of TPA to repay the loan. Since the shares are strictly utilized as security collateral, and, to date, have not incurred further liability to SIAF, the Company has recorded the Consideration (Face Value: $26,666,666; LTV: $20,000,000) as Non-Current Assets, offset by the issuance of collateral shares. The loan’s face value is to be secured by 133% of the value of the collateralized shares calculated to the prevailing market values from time to time based on request of the facility provider.
| l | Shares issued as security were not issued for market trading, but as security against the loan required to be returned to SIAF upon full loan repayment by TPA, which, to date, has not incurred any liability to the Company. |
As of December 31, 2018 there were a total of 5,708,312 shares (inclusive of top up shares) issued as collateral for the Trade Facility carrying an average value at $2.63/share, which still stands well above SIAF’s current market value.
TPA repaid $5,000,000 in Cash payment on December 19th 2018 to the Trade Facility Provider and agreed to have its facility face-value reduced to $20,000,000 and the net amount employed to $15,000,000. This amended arrangement was agreed to avoid further issuance of shares due to the current share price. As at December 31, 2019 PA has further reduced the net amount employed to $13 million and corresponding loan agreement was extended to December 31st 2021 caused and due to the Covid-19 situations.
| l | Information related to Tri-way Industries Limited (The unconsolidated investee of the Company) |
Some of the information listed below were reported in 10K 2018 and recapped for 2019
| l | The disposal of JFD and Tri-way (The Carve-out exercise) |
At present, Tri-way remains a private company, but it is intended to be registered at the Hong Kong Stock Exchange within a few years. The Company’s ownership in Tri-way has been valued at USD 124.7 million, equal to 36.6% of the enterprise value of USD 340.6 million. This includes (i) 23.89% (EV = USD 81.4 million) as a result of retained interest in Tri-way, and (ii) 12.71% (EV = USD 43.3 million) acquired in exchange for outstanding debt owed to the Company. These values result from Aquafarm 1, assets held in Aquafarms 2-5 and rights to technology licensed from Capital Award, a wholly owned subsidiary of the Company. An independent appraisal was obtained to determine fair value, and this appraisal resulted in a one-time (deemed) gain of USD 56.9 million for SIAF, as further detailed, below.
| Amounts shown incorporate audited adjustments: | | HK$ | | | HK$ | | | $ equivalent | |
| Fair value of interest retained in Tri-way | | | | | | | | | | | | | | | | |
| (US$340,594,377 x 23.89%) | | | | | | | 630,601,974 | | | | | | | | 81,367,997 | |
| Less: | | | | | | | | | | | | | | | | |
| Amount recognized prior to divestment of Tri-way | | | | | | | | | | | | | | | | |
| Net asset of Tri-way | | | 251,946,656 | | | | | | | | 32,509,246 | | | | | |
| Non-controlling interest at divestment | | | -62,683,968 | | | | | | | | 8,088,254 | | | | | |
| Controlled group assets divested | | | | | | | 189,262,688 | | | | | | | | 24,420,992 | |
| Gain on disposal (including master licensing fees) | | | | | | | 441,339,286 | | | | | | | | 56,947,005 | |
| | | | | | | | | | | | | | | | | |
| Net controlled group assets disposed | | | | | | | | | | | | | | | | |
| ($27,872,348 x 76.11%) | | | | | | | -144,047,832 | | | | | | | | -18,586,817 | |
| Gain on revaluation of retained interest | | | | | | | | | | | | | | | | |
| Fair value of interest retained in Tri-way | | | | | | | 630,601,974 | | | | | | | | 81,367,997 | |
| Portion of divested assets retained in Tri-way | | | | | | | | | | | | | | | | |
| ($27,872,348 x 23.89%) | | | | | | | -45,214,856 | | | | | | | | -5,834,175 | |
| Gain on disposal (including master licensing fees) | | | | | | | 441,339,286 | | | | | | | | 56,947,005 | |
| l | Table X below shows the derivation of $/shares after the injection of farms’ assets |
| | | Fair values of Injected farms' assets | |
| | | Inclusive respective indoor and open dams properties | |
| US$1=RMB6.7 | | FF1 | | | PF1 | | | PF2 | | | PF3 | | | PF4 | | | | | | | |
| US$1=HK$7.7 | | AquaFarm(1) | | | Aqua Farm 2 | | | Aqua farm 3 | | | Aqua Farm 4 | | | Aqua Farm 5 | | | Master License | | | Total | |
| In US$ equivalent | | US$ | | | US$ | | | US$ | | | US$ | | | US$ | | | US$ | | | US$ | |
| The Chattels | | | 8,787,115.6 | | | | 4,199,237.9 | | | | 21,338,881.5 | | | | 33,609,047.1 | | | | - | | | | - | | | | 67,934,282.1 | |
| The P&E | | | 5,148,769.2 | | | | 5,391,657.1 | | | | 2,326,044.8 | | | | 24,045,576.5 | | | | - | | | | - | | | | 36,912,047.6 | |
| The Intellectual Properties | | | 5,672,862.0 | | | | 6,348,029.3 | | | | 13,669,794.7 | | | | 30,228,181.0 | | | | 69,053,863.7 | | | | 30,000,000.0 | | | | 154,972,730.7 | |
| The Buildings | | | 8,256,870.8 | | | | 12,832,764.2 | | | | 12,659,859.0 | | | | 11,883,710.4 | | | | - | | | | - | | | | 45,633,204.4 | |
| Immovable structures | | | 5,672,862.0 | | | | 9,897,263.4 | | | | 9,080,438.4 | | | | 8,597,279.9 | | | | 1,894,268.2 | | | | - | | | | 35,142,111.9 | |
| Total values | | | 33,538,479.5 | | | | 38,668,951.9 | | | | 59,075,018.4 | | | | 108,363,794.9 | | | | 70,948,132.0 | | | | 30,000,000.0 | | | | 340,594,376.7 | |
| | | Equity shares of Tri-way Industrial Limited (HK) | | | | | | | |
| | | | | | Par value | | | Share Capital | | | Value/share | |
| | | # of shares | | | HK$ | | | HK$ | | | US$ equivalent | | | HK$ | | | US$ equivalent | |
| Shares issued prior to Injection | | | 10,000 | | | | 1 | | | | 10,000 | | | | 1,299 | | | | 1 | | | | 0.13 | |
| Addition shares issued after injection | | | 99,990,000 | | | | 1 | | | | 2,622,576,701 | | | | 340,594,377 | | | | | | | | | |
| Total Issued shares | | | 100,000,000 | | | | 1 | | | | 2,622,586,701 | | | | 340,595,675 | | | | 26.23 | | | | 3.41 | |
| l | Relevant dates of the transactions: |
| 1 | 18-AUG-2016 | Execution of Investment Agreement (IA) |
| 2 | 18-AUG-2016 | Jiangman Fishery Development Co. Ltd (JFD) acquired 25% of Guangzhou Kangi Enterprize Management Co. Ltd such that JFD becomes 100% owned by Tri-way Industries Limited (HK) (Tri-way) |
| 3 | 18-AUG-2016 | Effective Date that Investors agreed to inject their respective assets and businesses into the Assets Recipient, JFD, at the exchange value described in the Investment Agreement. |
| 4. | 30-SEP-2016 | SIAF assumed ownership of Tri-way’s original assets in exchange for its original investment in Tri-way, in conjunction with TRW/JFD’s exercise of other farm assets owned by other investors injected into it, as well. |
| 5. | 05-OCT-2016 | Completion Date on which Tri-way, with JFD having assumed ownership of said farms’ assets (inclusive, all farms), allocated equitable allotments of shares to the Investors (or, their Nominees) in exchange for their injected farms’ assets. |
In reference to the press release dated January 17, 2017, wherein the Company had indicated that legal due diligence had been completed in relation to the carve-out of its aquaculture operations, the announcement that legal due diligence had been performed had been released in conjunction with what had been the main announcement, which was SIAF wishing to convey to its shareholders that JFD had been officially registered as a Wholly Foreign Owned Enterprise of Tri-way, making it legally eligible for SIAF shareholders to now own shares of Tri-way, directly.
| l | The list of shareholders of record in Tri-way filed with Hong Kong Company Registrar: |
| Owner | | Shares | | | % | |
| Sino Agro Food (OTCQX:SIAF) | | | 36,590,000 | | | | 36,6 | % |
| Ample Rise Limited | | | 1,650,000 | | | | 1.6 | % |
| Fortune Legend Investments Limited | | | 2,750,000 | | | | 2,8 | % |
| Sino Agro Food (HK) Limited | | | 31,998,572 | | | | 32 | % |
| Good Sea Limited | | | 4,250,000 | | | | 4,3 | % |
| Green & Natural Limited | | | 3,250,000 | | | | 3,3 | % |
| Lucky Shine Development Limited | | | 2,750,000 | | | | 2,8 | % |
| Yongfeng Agricultural Investment Co | | | 4,180,068 | | | | 4,2 | % |
| The Business Advocate | | | 4,521,360 | | | | 4,5 | % |
| Fine Happy Limited | | | 2,750,000 | | | | 2,8 | % |
| Flying Cristal Limited | | | 4,200,000 | | | | 4,2 | % |
| Mr. Arne Fredly and Heng Ren Sild Roads | | | | | | | | |
| Mr. Arne Fredly and Heng Ren Sild Roads | | | 1,100,000 | | | | 1.1 | |
Tri-way Industries is a privately held company, and the Company (holding 36.6% of the shares) is not able to disclose the identity of the remaining holders.
Based on information which has been filed with the Hong Kong Companies Registrar and which is publicly available, the following information can be provided about the shareholders of record:
Ø Sino Agro Food (the Company) holds 36.6% of the shares
Ø Sino Agro Food (HK) Limited, holding 32%, is primarily formed as a holding company for certain outside owners (ownership interests in Aquafarms 2-5, other than the Company) that when combined with the ownership of the Company provides a majority voting block (68.6%) necessary to meet minimum listing requirements in Hong Kong for adequate “continuation of management/operations”. The Company has no ownership in Sino Agro Food (HK) Limited.
Ø The Business Advocate (4.5%) and Flying Cristal Limited (4.2%) are companies appointed by Tri-way to hold in trust on behalf of certain holders of debt owed by Aquafarms 2-5 to keep shares in reserve in the event that their respective debts owed are converted to equity, at maturity. The debt in question relates to costs of development of the Aquafarms 2-5 incurred in connection with the development and construction stages.
Ø The remaining smaller holding companies are held by Nominees of ownership interests in Aquafarms 2-5 with their related Beneficial Owners becoming registered at the time that Tri-way becomes a registered public company.
The carve-out of Tri-way Industries Inc. (“Tri-way”) from Sino Agro Food Inc. is not a related party transaction. Tri-way is held at 36.6 % by the Company and is thus considered an investment in associate and no longer registered as a subsidiary of the Company. Transactions made in connection with the carve-out process are with entities/parties not related to the Company.
Sino Agro Food (HK) Limited is not an affiliate of the Company. To this effect, its directors or officers have not been nor are they currently an officer, director, 10% (or greater) shareholder, or in any other way an affiliate of the Company as that term is defined by Rule 405 of the U.S. Securities Act of 1933, and are not directly or indirectly through one or more intermediaries, in control of, controlled by, or under common control with the Company.
No board members of Sino Agro Food Inc., nor members of management of Sino Agro Food Inc., have any positions in the Board of Directors or management of Sino Agro Food (HK) Limited.
GOVERNMENT REGULATION
Regulation of M&A and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce (the “MOFCOM”), the State Assets Supervision and Administration Commission, the State Administration of Taxation (“SAT”), the State Administration of Industry and Commerce (the “SAIC”), the China Securities Regulatory Commission (“CSRC”), and the State Administration of Foreign Exchange (the “SAFE”), jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules include provisions that purport to require that an offshore special purpose vehicle formed for purposes of the overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On September 21, 2006, the CSRC published on its official Website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC. The application of this new PRC regulation remains unclear, with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.
The M&A Rules also establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise.
In February 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Circular 6”), which established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire “de facto control” of domestic enterprises with “national security” concerns. In August 2011, the MOFCOM promulgated the Rules on Implementation of Security Review System (the “MOFCOM Security Review Rules”), to replace the Interim Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the MOFCOM in March 2011. The MOFCOM Security Review Rules, which came into effect on September 1, 2011, provide that the MOFCOM will look into the substance and actual impact of a transaction and prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
Regulation of Foreign Currency Exchange and Dividend Distribution
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (the “FX Regulations”), which were last amended in August 2008. Under the FX Regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. On August 29, 2008, the SAFE issued a notice, Circular 142, regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that the registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, the SAFE increased its oversight of the flow and use of the registered capital of a foreign-invested company settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without the SAFE’s approval, and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result, Circular 142 may significantly limit our ability to transfer cash or other assets from The Company and/or our other non-PRC subsidiaries into our subsidiaries in the PRC, which may adversely affect our business expansion and we may not be able to convert the net proceeds into RMB to invest in or acquire any other PRC companies, or establish other variable interest entities (“VIEs”) in the PRC.
Dividends paid by a PRC subsidiary to its overseas shareholder are deemed income of the shareholder and are taxable in the PRC. Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in the PRC may purchase or remit foreign currency, subject to a cap approved by the SAFE, for settlement of current account transactions without the approval of the SAFE. Foreign currency transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities.
In October 2005, the SAFE promulgated the Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles (“Circular 75”). Under Circular 75, which was issued by SAFE effective November 1, 2005, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to the registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore company. Moreover, Circular 75 applies retroactively. As a result, PRC residents who, prior to November 1, 2005, had established or acquired control of offshore companies that had made onshore investments in the PRC prior to were required to complete the relevant registration procedures with the local SAFE branch by March 31, 2006.
Since May 2007, the SAFE has issued a series of guidance to its local branches with respect to the operational process for the SAFE registration under Circular 75. The guidance provides more specific and stringent supervision of the registration required by Circular 75. For example, the guidance imposes obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to the local SAFE authorities regarding any shareholder or beneficial owner of the offshore entity who is a PRC citizen or resident. Untrue statements by the onshore subsidiaries will lead to potential liability for the subsidiaries and, in some instances, for their legal representatives and other related individuals.
Under the relevant rules, failure to comply with the registration procedures set forth in Circular 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including increases in its registered capital, payment of dividends and other distributions to its offshore parent or affiliate and capital inflows from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC residents who control our company from time to time are required to register with the SAFE in connection with their investments in us.
On December 25, 2006, the People’s Bank of China (the “PBOC”) issued the Administration Measures on Individual Foreign Exchange Control and related Implementation Rules were issued by the SAFE on January 5, 2007. Both became effective on February 1, 2007. Under these regulations, all foreign exchange transactions involving an employee share incentive plan, share option plan, or similar plan participated in by onshore individuals may be conducted only with approval from the SAFE or its authorized branch. Under the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company (“Offshore Share Incentives Rules”), which was issued by the SAFE on February 15, 2012, PRC citizens who are granted share options, restricted share units or restricted shares by an overseas publicly listed company are required to register with the SAFE or its authorized branch and to comply with a series of other requirements. If we, or the PRC employees of ours who hold options, restricted share units or restricted shares fail to comply with these registration or other procedural requirements, we, and/or such employees may be subject to fines and other legal sanctions.
The principal regulations governing distribution of dividends of foreign holding companies include the Foreign Investment Enterprise Law (1986), which was amended in October 2000, and the Administrative Rules under the Foreign Investment Enterprise Law (2001). Under these regulations, foreign investment enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in China are required to allocate at least 10% of their accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.
Laws and Regulations Related to Employment and Labor Protection
On June 29, 2007, the National People’s Congress promulgated the Employment Contract Law of PRC (“Employment Contract Law”), which became effective as of January 1, 2008, and was amended on December 28, 2012. The Employment Contract Law requires employers to provide written contracts to their employees, restricts the use of temporary workers and aims to give employees long-term job security.
Pursuant to the Employment Contract Law, employment contracts lawfully concluded prior to the implementation of the Employment Contract Law and continuing as of the date of its implementation shall continue to be performed. Where an employment relationship was established prior to the implementation of the Employment Contract Law but no written employment contract was concluded, a contract must be concluded within one month after its implementation.
On September 18, 2008, the State Council promulgated the Implementing Regulations for the PRC Employment Contract Law which came into effect immediately. These regulations interpret and supplement the provisions of the Employment Contract Law.
As of December 31, 2015, we had entered written employment contracts with three of our employees.
Income Tax
On March 16, 2007, the National People’s Congress approved and promulgated the Enterprise Income Tax Law (the “EIT Law”). On December 6, 2007, the State Council approved the Implementing Rules. Both the EIT Law and its Implementing Rules became effective on January 1, 2008. Under the EIT Law and the Implementing Rules, which superseded the previous Income Tax Law, the enterprise income tax rate for both domestic companies and foreign invested enterprises is unified at 25%. On December 26, 2007, the State Council promulgated the Circular on Implementation of Enterprise Tax Transition Preferential Policy, or the Preferential Policy Circular. The EIT Law, its Implementing Rules and the Preferential Policy Circular provide a five-year transitional period for certain entities that had enjoyed a favorable income tax rate of less than 25% under the previous Income Tax Law and were established before March 16, 2007, during which period the applicable enterprises income tax rate shall gradually increase to 25%.
On April 14, 2008, the Administration Measures for Recognition of High and New Technology Enterprises, or the Recognition Measures, were jointly promulgated by the Ministry of Science and Technology, the Ministry of Finance, and the SAT, which sets out the standards and process for granting the high and new technology enterprises status. According to the EIT Law and its Implementing Rules as well as the Recognition Measures, enterprises which have been granted the high and new technology enterprises status shall enjoy a favorable income tax rate of 15%. The new EIT Law and its Implementation Rules also provide that “software enterprises” enjoy a two-year income tax exemption starting from the first profit making year, followed by a reduced tax rate of 12.5% for the subsequent three years.
The EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The Implementing Rules merely defines the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” The SAT issued the Circular regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. The SAT issued the Bulletin regarding the Administrative Measures on the Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Interim) on July 27, 2011, which became effective on September 1, 2011, providing more guidance on the implementation of Circular 82. This bulletin clarifies matters including resident status determination, post-determination administration and competent tax authorities. Although both Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not companies like us, the determining criteria set forth in Circular 82 and the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Based on a review of surrounding facts and circumstances, the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to January 1, 2008.
The EIT Law also imposes a withholding income tax of 10% on dividends distributed by a Foreign Invested Enterprise (an “FIE”) to its immediate holding company outside of China if such immediate holding company is considered a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous law. The State of Nevada, where the Company is incorporated, does not have such tax treaty with China. The SAT further promulgated a circular, or Circular 601, on October 27, 2009, which provides that the tax treaty benefits will be denied to “conduit” or shell companies without business substance and that a beneficial ownership analysis will be used based on a “substance-over-form” principle to determine whether to grant the tax treaty benefits. Most our subsidiaries in China are directly held by our non-Chinese subsidiaries. If we are regarded as a non-resident enterprise and our non-Chinese subsidiaries are regarded as resident enterprises, then our non-Chinese subsidiaries may be required to pay a 10% withholding tax on any dividends payable to us. If our non-Chinese subsidiaries are regarded as non-resident enterprises, then our PRC subsidiaries may be required to pay a 5% withholding tax for any dividends payable to our non-Chinese subsidiaries, however, it is still unclear at this stage whether Circular 601 applies to dividends from our PRC subsidiaries paid to our non-Chinese subsidiaries, and if our non-Chinese subsidiaries were not considered as “beneficial owners” of any dividends from their PRC subsidiaries, whether the dividends payable to our non-Chinese subsidiaries would be subject to withholding tax at a rate of 10%.
The EIT Law and its Implementation Rules have tried to scrutinize transactions between related parties. Pursuant to the EIT Law and its Implementation Rules, the tax authorities may impose mandatory adjustment on tax due to the extent a related party transaction is not in line with arm’s-length principle or was entered with a purpose to reduce, avoid or delay the payment of tax. On January 8, 2009, the SAT issued the Implementation Measures for Special Tax Adjustments (Trial), which clarifies the definition of “related party” and sets forth the tax-filing disclosure and documentation requirements, the selection and application of transfer pricing methods, and transfer pricing investigation and assessment procedures.
On December 10, 2009, the SAT issued a circular on Strengthening the Administration of Enterprise Income Tax Collection on Income Derived from Equity Transfer by Non-resident Enterprise, or Circular 698. Pursuant to Circular 698, non-resident enterprises should declare any direct transfer of equity interest of PRC resident enterprises and pay taxes in accordance with the EIT Law and relevant laws and regulations. For an indirect transfer, if the effective tax rate for the transferor (a non-PRC-resident enterprise) is lower than 12.5% under the law of the jurisdiction of the direct transferred target, the transferor is required to submit relevant transaction materials to PRC tax authorities for review. If such indirect transfer is determined by PRC tax authorities to be a transaction without any reasonable business purpose other than for tax avoidance, the gains derived from such transfer will be subject to PRC income tax.
In addition to the above, after the EIT Law and its Implementing Rules were promulgated, the SAT released several regulations to stipulate more details for carrying out the EIT Law and its Implementing Rules. These regulations include:
• Notice of the State Administration of Taxation on the Issues Concerning the Administration of Enterprise Income Tax Deduction and Exemption (2008);
• Notice of the State Administration of Taxation on Strengthening the Withholding of Enterprise Income Tax on Non-resident Enterprises’ Interest Income Sourcing from China (2008);
• Notice of the State Administration of Taxation on Several Issues Concerning the Recognition of Incomes Subject to the Enterprise Income Tax (2008);
• Opinion of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax (2008);
• Notice of the Ministry of Finance and State Administration of Taxation on Several Preferential Policies in Respect of Enterprise Income Tax (2008);
• Interim Measures for the Administration of Collection of Enterprise Income Tax on the Basis of Consolidation of Trans-regional Business Operations (2008);
• Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (2009);
• Circular of the State Council on Printing and Distributing Policies for Further Encouraging the Development of the Software Industry and the Integrated Circuit Industry (2011); and
• Circular on Income Tax Policies for Further Encouraging the Development of Software Industry and Integrated Circuit Industry (2012).
| ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable
| ITEM 8 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements required by this item are located following the signature page of this Annual Report.
| ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures have improved but yet were not deemed effective at a reasonable assurance level as of the end of such period. This conclusion was based on the material weakness identified in our internal control over financial reporting related, but which may or may not be entirely exclusive, to our accounting for disposal of assets resulting from discontinued operations, as described below.
Limitations on the Effectiveness of Controls
Our Chief Executive Officer and Chief Financial Officer does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our system of internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of our consolidated and combined financial statements for external purposes in accordance with generally accepted accounting principles.
Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2017 and December 31, 2018. In making this assessment, he used the framework included in Internal Control — Integrated 2013 Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated 2013 Framework, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2016, our internal control over financial reporting had not been effective due to the identification of a material weakness related, but which may or may not be entirely exclusive, to our controls over our accounting for disposal of assets related to discontinued operations. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Remediation Efforts to Address Material Weakness
To remediate the material weakness in our internal control over financial reporting described above, that Company has initiated implementing new control procedures regarding our accounting for reporting discontinued operations and disclosures of disposal of asset components, specifically regarding ‘timely disclosure’ on matters related to Discontinued Operations. The changes to the control environment include, but are not limited to, the following:
· For future disposition of assets and / or discontinued operations, the Company has retained ECOVIS Financial Accounting specialists to augment internal resources utilized for due diligence and analysis of the technical accounting aspects of the transaction. Such resources will be retained by management at the direction of the audit committee.
· For future disposition of assets and / or discontinued operations, the Company will prepare an accounting memorandum for each disposal to address the guidance outlined in ASC 205-20 ‘Presentation of Financial Statements — Discontinued Operations’ as necessary, as well as further educate itself regarding matters of disposition / discontinued operations through related accounting literature, that will be reviewed by the Chief Financial Officer and presented to the audit committee.
· We recently appointed two new directors, both of whom will serve on the Audit Committee. We expect appointing these individuals will augment our ability to ameliorate any weaknesses in our internal control over financial reporting.
· Presently, Solomon Lee serves as both our Chief Executive Officer and our interim Chief Financial Officer due to the unfortunate passing of Daniel Ritchey, our former Chief Financial Officer, as reported in a Current Report on Form 8-K filed with the Commission on December 4, 2018. We are conducting a search for a suitable replacement for Mr. Ritchey but have not yet identified a candidate. We expect that appointing a new chief financial officer will augment our ability to ameliorate any weaknesses in our internal control over financial reporting.
These remediation initiatives are intended to enhance the Company’s timely disclosure by establishing a formal process and specific control activities regarding disposition of assets / discontinued operations. Management believes that these measures, currently being implemented, will remediate the deficiency identified. Other than as noted above, other changes may be implemented in the future to enhance and improve the Company’s ICFR measures to prevent this deficiency from recurring.
However, the material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period and the Chief Executive Officer and Chief Financial Officer, Independent Audit Committee, and Independent Auditor have concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
Except as described above, there were no other deficiencies discovered in our internal control over financial reporting during the fourth quarter period ended December 31, 2016 and throughout all periods of FY2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
This annual report includes an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10 | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The Board of Directors elects our executive officers annually. A majority vote of the directors who are in office is required to fill vacancies. Each director shall be elected for the term of one year and until his successor is elected and qualified or until his earlier resignation or removal. Our directors and executive officers are as follows:
| Name | | Age | | Position |
| Lee Yip Kun Solomon | | 77 | | CEO, Interim CFO and Chairman of the Board |
| Tan Poay Teik | | 61 | | Chief Marketing Officer and Director |
| Chen Bor Hann | | 55 | | Secretary and Director |
Colanukuduru Ravindran Muson Cheung | | 63 48 | | Independent Director Independent Director |
Lee Yip Kun Solomon. Mr. Lee has been a Director and our Chief Executive Officer since August 2007. From March 2004 to date he has been Company Managing Director of Capital Award Inc. Since May, 1993, he has been the CEO of Irama Edaran Sdn. Bhd. (Malaysia), a modern fishery developer. There was no formal relationship between Sino Agro Food and Irama Edaran. He received a B.A. Major in Accounting and Economics from Monash University, Australia in July 1972. As a member of the board, Mr. Solomon contributes his knowledge of our company and a deep understanding of all aspects of our business, products and markets, as well substantial experience developing corporate strategy, assessing emerging industry trends, and business operations.
Tan Paoy Teik. Mr. Tan has been a Director and our Chief Marketing Officer since August 2007. Since July, 2005, he has been Company Managing Director of Milux Corporation Bhd. (Malaysia), a manufacturer of home and gas appliances. He received an MBA from South Pacific University in 2005. Mr. Tan is currently the Managing Director of Milux Corporation Bhd; as such, he spends half of his working time with Milux and half with our company. As a member of the board, Mr. Tan contributes his knowledge of the company and a deep understanding of all aspects of our business, products and markets, as well substantial experience developing corporate strategy, assessing emerging industry trends, and business operations.
Chen Bor Hann. Mr. Chen has been a Director and Secretary since August 2007. Since March, 2004, he has been Director and Business Development Manager of Capital Award Inc. From September 1995 to March 2004, he was Fishery Supervisor of Irama Edaran Sdn. Bhd. (Malaysia). As a member of the board, Mr. Chen contributes his knowledge of the company and a deep understanding of all aspects of our business, products and markets, as well substantial experience developing corporate strategy, assessing emerging industry trends, and business operations.
Colanukuduru Ravindran. Mr. Ravindran has been serving as a director and as an executive in a variety of industries including energy (e.g. oil & gas) and information technology with 36 years of experience in strategy, finance, fundraising, and “techno commercial”, in the U.S., India and Singapore. From 2011 to 2015, Mr. Ravindran served as the Chief Executive Officer of Terrasoft, a software development and services company. Beginning in 2015 through the present, Mr. Ravindran has acted as the Director at Union King Corporation and Atlantic Resources, a company based out of Hong Kong that is involved in worldwide trading of garments, electronic household goods, seafood etc. IN addition, in 2016 he was appointed as Director of Tri-way Industries Ltd, an independent private limited company based in Hong Kong. Mr. Ravindran received a Bachelor’s degree in Chemical Technology from Annamalai University in Tamilnadu, India in 1978 and subsequently obtained a post graduate degree in Plastics as well as in International Trade from the Indian Institute of Foreign Trade.
Muson Cheung. Mr. Cheung’s high credential is including Doctor of Business and Administration and Master of Finance, over 10 years experiences as lecturer of tertiary education responsible for risk and security management and investment and he has more than 15 years of experiences in financial markets, was the pioneer of and is a director in MC Financial Services Limited, and was the vise-president of Tiger Securities Asset Management Limited and holder of Security Broker License (Hong Kong Stock Exchange).
Family Relationships
There are no family relationships among our officers or directors.
Involvement in Certain Legal Proceedings
None of the director(s) or executive officers of the Company: (i) has been involved as a general partner or executive officer of any business which has filed a bankruptcy petition; (ii) has been convicted in any criminal proceeding nor is subject to any pending criminal proceeding; (iii) has been subjected to any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (iv) has been found by a court, the United States Securities and Exchange Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law.
Board Committees:
Audit Committee
Our Audit Committee currently consists of Mr. Ravindran. Mr. Ritchey was a member of the Audit Committee until his appointment as the Company’s Acting Chief Financial Officer effective March 1, 2016. Mr. Yap resigned from our board of directors on August 15, 2017. Mr. Sandberg resigned from our board of directors on November 8, 2018. The Board has determined that:
| | · | all members of the Audit Committee (i) are “independent” under the independence requirements of Marketplace Rule 5605(a)(2) of the NASDAQ Stock Market, Inc., (ii) meet the criteria for independence as set forth in the Exchange Act, (iii) have not participated in the preparation of our financial statements at any time during the past three years and (iv) are financially literate and have accounting and finance experience. |
Compensation Committee
Our Compensation Committee currently consists of Mr. Muson Cheung. The Board has determined that:
| | · | all members of the Compensation Committee qualify as “independent” under the independence requirements of Marketplace Rule 5605(a)(2) of the NASDAQ Stock Market, Inc.; |
| | · | all members of the Compensation Committee qualify as “non-employee directors” under Exchange Act Rule 16b-3; and |
| | · | all members of the Compensation Committee qualify as “outside directors” under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “ Code “). |
Compensation Committee Interlocks and Insider Participation
None of the members of our Compensation Committee is an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one of more executive officers serving on our Board or Compensation Committee.
Code of Conduct
The Board has established a corporate Code of Conduct which qualifies as a “code of ethics” as defined by Item 406 of Regulation S-K of the Exchange Act. Among other matters, the Code of Conduct is designed to deter wrongdoing and to promote:
| | • | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| | • | full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications; |
| | • | compliance with applicable governmental laws, rules and regulations; |
| | • | prompt internal reporting of violations of the Code of Conduct to appropriate persons identified in the code; and |
| | • | accountability for adherence to the Code of Conduct. |
Waivers to the Code of Conduct may be granted only by the Board. In the event that the Board grants any waivers of the elements listed above to any of our officers, we expect to announce the waiver within four business days on a Current Report on Form 8-K.
The Code of Conduct applies to all of the Company’s employees, including our principal executive officer, the principal financial and accounting officer, and all employees who perform these functions. If we amend our Code of Conduct as it applies to the principal executive officer, principal financial officer, principal accounting officer or controller (or persons performing similar functions), we shall disclose such amendment through the filing of a Current Report on Form 8-K.
| ITEM 11 | EXECUTIVE COMPENSATION |
Summary Compensation Table
The table below summarizes all compensation awarded to, earned by, or paid to our Principal Executive Officer, our two most highly compensated executive officers other than our CEO who occupied such position at the end of our latest fiscal year and up to two additional executive officers who would have been included in the table below except for the fact that they were not executive officers at the end of our latest fiscal year, by us, or by any third party where the purpose of a transaction was to furnish compensation, for all services rendered in all capacities to us or our subsidiary for the latest fiscal year ended December 31, 2017.
Name and
Principal Position | | Year | | | Salary($) | | | Bonus ($) | | | Option
Awards ($) | | | Non-equity
incentive plan
compensation | | | Nonqualified deferred
compensation earnings ($) | | | All other
compensation ($) | | | Total ($) | |
| Lee Yip Kun Solomon | | | 2018 | | | | 336,000 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 336,000 | |
| Chief Executive Officer | | | 2019 | | | | 336,000 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 336,000 | |
| Tan Paoy Teik | | | 2018 | | | | 174,000 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 174,000 | |
| Chief Marketing Officer | | | 2019 | | | | 174,000 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 174,000 | |
| Chen Bor Hann | | | 2018 | | | | 60,000 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 60,000 | |
| Secretary | | | 2019 | | | | 60,000 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 60,000 | |
Summary Equity Awards or payments for remuneration
There has been no equity incentive award made to any of our executive officers as of our fiscal year ended December 31, 2018 and 2019.
Employment Agreements
Lee Yip Kun Solomon. On December 29, 2018, we renewed the three-year employment agreement effective and continuing as of January 1, 2022 with Lee Yip Kun Solomon, our Chief Executive Officer and President (the “Lee Agreement”). Pursuant to the Lee Agreement, Mr. Lee is entitled to an annual base salary of $336,000 and to receive a certain number of our common stock per year calculated in accordance with a formula of (Number of shares (X) = $336,000 / $ / share ($Y) at time of settlement). Such shares have not been issued to Mr. Lee. Mr. Lee shall also be eligible for discretionary performance bonus payments; no such bonus has been paid. The Lee Agreement provides for Mr. Lee to be eligible to participate in any incentive compensation established by the Company; no such plan has been established. The Lee Agreement also includes confidentiality obligations to which Mr. Lee must adhere.
Tan Paoy Teik. On December 29, 2018, we renewed the three-year employment agreement effective and continuing as of January 1, 2022 with Tan Paoy Teik, our Chief Marketing Officer (the “Tan Agreement”). Pursuant to the Tan Agreement, Mr. Tan is entitled to an annual base salary of $174,000 and to receive a certain number of our common stock per year calculated in accordance with a formula of (Number of shares (T) = $174,000 / $ / share ($Y) at time of settlement). Such shares have not been issued to Mr. Tan. Mr. Tan shall also be eligible for discretionary performance bonus payments; no such bonus has been paid. The Tan Agreement provides for Mr. Tan to be eligible to participate in any incentive compensation established by the Company; no such plan has been established. The Tan Agreement also includes confidentiality obligations to which Mr. Tan must adhere.
Chen Bor Hann. On December 29, 2018, we renewed the three-year employment agreement effective and continuing as of January 1, 2022 with Chen Bor Hann, our Secretary (the “Hann Agreement”). Pursuant to the Hann Agreement, Mr. Hann is entitled to an annual base salary of $60,000 and to receive a certain number of our common stock per year calculated in accordance with a formula of (Number of shares (W) = $60,000 / $ / share ($Y) at time of settlement). Such shares have not been issued to Mr. Hann. Mr. Hann shal1 also be eligible for discretionary performance bonus payments; no such bonus has been paid. The Hann Agreement provides for Mr. Hann to be eligible to participate in any incentive compensation established by the Company; no such plan has been established. The Hann Agreement also includes confidentiality obligations to which Mr. Hann must adhere.
General
At no time during the last fiscal year with respect to any person listed in the table above was there:
| • | any outstanding option or other equity-based award re-priced or otherwise materially modified (such as by extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined; |
| • | any waiver or modification of any specified performance target, goal or condition to payout with respect to any amount included in non-stock incentive plan compensation or payouts; |
| • | any option or equity grant; |
| • | any non-equity incentive plan award made to a named executive officer |
| • | any nonqualified deferred compensation plans including nonqualified defined contribution plans; or |
| • | any payment for any item that should be included as All Other Compensation in a Summary Compensation Table. |
We have no compensation arrangements (such as fees for retainer, committee service, service as chairman of the board or a committee, and meeting attendance) with directors. Directors did not receive any compensation except for that received as executive officers as set forth above.
| ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information concerning the number of shares of our common stock owned beneficially based on 49,963,607 issued and outstanding shares of common stock as of December 31, 2019 by: (i) each of our directors; (ii) each of our named executive officers; and (iii) each person or Company known by us to beneficially own more than 5% of our outstanding shares of common stock.
Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Other than as described in the notes to the table, we believe that all persons named in the table have sole voting and investment power with respect to shares beneficially owned by them. All share ownership figures include shares issuable upon exercise of options or warrants exercisable within 60 days of the date of this Annual Report, which are deemed outstanding and beneficially owned by such person for purposes of computing his or her percentage ownership, but not for purposes of computing the percentage ownership of any other person.
| Name and address | | Shares of Common Stock | | | Percent of Common Stock | | | Shares of Series A Preferred Stock | | | Percent of Series A
Preferred Stock | | | Percent of Capital Stock (1) | |
Directors and Officers (2): | | | | | | | | | | | | | | | | | | | | |
| Lee Yip Kun Solomon | | | 2,459,697 | | | | 4.93 | % | | | 75 | | | | 75 | % | | | 60.99 | % |
| Tan Poay Teik | | | 220,000 | | | | * | | | | 20 | | | | 20 | % | | | 16.09 | % |
| Chen Bor Hann | | | 82,787 | | | | * | | | | 5 | | | | 5 | % | | | 4.03 | % |
| Anthony Soh | | | 14,887 | | | | * | | | | - - - | | | | 0 | | | | * | |
| Colanukuduru Ravindran | | | - - - | | | | * | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| All Officers and Directors as a Company (5 persons) | | | 2,777,371 | | | | 5.57 | % | | | 100 | | | | 100 | % | | | 81.11 | % |
| | | | | | | | | | | | | | | | | | | | | |
| 5% or Greater Beneficial Owners | | | | | | | | | | | | | | | | | | | | |
| Nordnet Pensionsförsäkring AB | | | 4,642,283 | | | | 9.31 | % | | | - - - | | | | 0 | | | | 1.86 | % |
| Forsakringsaktiebolaget Avanza Pension | | | 4,561,382 | | | | 9.15 | % | | | - - - | | | | 0 | | | | 1.83 | % |
| Iliad Research & Trading, LP (3) | | | 4,736,292 | | | | 8.67 | % | | | - - - | | | | 0 | | | | 1.86 | % |
| Garrett R. D’Alessandro | | | 2,821,458 | | | | 5.66 | % | | | - - - | | | | 0 | | | | 1.13 | % |
* Less than one percent
(1) Includes the voting power of the 100 shares of Series A Preferred Stock issued and outstanding, which in the aggregate carry the voting power of eighty percent (80%) of all votes entitled to be voted at any annual or special meeting of shareholders of our company or action by written consent of our shareholders. Each outstanding share of the Series A Preferred Stock shall represent its proportionate share of the 80%, which is allocated to the outstanding shares of Series A Preferred Stock.
(2) The address for each of the officers and directors is c/o Sino Agro Food, Inc., Room 3801, Block A, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, P.R.C.
(3) We believe, based on a Schedule 13G filed with the SEC on January 4, 2019, that the reporting person Iliad Management, LLC is the General Partner of reporting person Iliad. Iliad has rights, under a convertible promissory note, to own an aggregate number of shares of our common stock which, except for a contractual cap on the amount of outstanding shares that Iliad may own, would exceed such a cap. Iliad's current ownership in % of common stocks is 5.47% after the equivalent of US$200,000.00 in cash and / or shares for repayments during year 2019. Thus, the number of shares of our common stock beneficially owned by Iliad as of 31st December 2019, was 2,736,292 shares, which is 5.47% of the 49,963,607shares outstanding on December 31, 2019.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2017, with respect to compensation plans under which the Company’s equity securities are authorized for issuance:
| | | (a) | | | (b) | | | (c) | |
| | | Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights | | | The weighted-average exercise
price of outstanding options,
warrants and rights | | | Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a)) | |
Equity compensation Plans approved by Security holders | | | 1,000,000 | | | | - | | | | 1,000,000 | |
| | | | | | | | | | | | | |
Equity compensation Plans not approved By security holders | | | None | | | | - | | | | None | |
| Total | | | 1,000,000 | | | | | | | | 1,000,000 | |
| ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
On December 31, 2019, the Company was indebted to Mr. Lee in the amount of $1,165,621, and on December 31, 2018 is indebted to Mr. Lee in the amount of $2,046,499. The amounts are unsecured, interest free and have no fixed term of repayment.
| ITEM 14 | PRINCIPAL ACCOUNTING FEES AND SERVICES |
(1) Principal Audit Fees
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountants Zhen Hui CPA (“ZHCPA”) for our audit of annual financial statements and review of financial statements included in our quarterly reports or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were:
| ZHCPA | | | 2018 | | | $ | 170,000 | |
| NO AUDITOR (DUE TO COVID-19) | | | 2019 (Provision) | | | $ | 180,000 | |
(2) Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported in the preceding paragraph:
| ZHCPA | | | 2018 | | | $ | 24,000 | |
| NO AUDITOR (DUE TO COVID-19) | | | 2019 (provision) | | | $ | 24,000 | |
PART IV
| ITEM 15 | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(A) Financial Statements
See index to Financial Statements on Page F-1
(B) Exhibits.
Exhibit
No. | | Exhibit Description |
| 2.1 | | Stock Purchase Agreement and Share Exchange - Volcanic Gold and Capital Award. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 2.1 thereto. |
| | | |
| 2.2 | | Acquisition Agreement - Hang Yu Tai Investment Limited. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 2.2 thereto. |
| | | |
| 2.3 | | Acquisition Agreement - Macau Eiji Company Limited. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 2.3 thereto. |
| | | |
| 2.4 | | Acquisition Agreement - Tri-way Industries Limited. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 2.4 thereto. |
| | | |
| 2.5 | | Disposition Agreement - Tri-way selling equity interest in TianQuan Science. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 2.5 thereto. |
| | | |
| 2.6 | | Acquisition Agreement - A Power Agro Agriculture Development (Macau) Limited acquired the Pretty Mountains’ 45% equity interest in Sanjiang A Power. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 2.6 thereto. |
| | | |
| 3.1 | | Articles of Incorporation of Volcanic Gold, Inc. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.1 thereto. |
| | | |
| 3.2 | | Amendment to Articles of Incorporation - Name Change: Volcanic Gold, Inc. to A Power Agro Agriculture Development, Inc. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.2 thereto. |
| | | |
| 3.3 | | Certificate of Correction. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.3 thereto. |
| | | |
| 3.4 | | Amendment to Articles of Incorporation - Name Change: A Power Agro Agriculture Development, Inc. to Sino Agro Food, Inc. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.4 thereto. |
| | | |
| 3.5 | | Bylaws of Volcanic Gold, Inc. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.5 thereto. |
| | | |
| 3.6 | | Organizational Documents: Capital Award, Inc. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.6 thereto. |
| | | |
| 3.7 | | Organizational Documents: Hang Yu Tai Investment Limited. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.7 thereto. |
| | | |
| 3.8 | | Organizational Documents: ZhongXingNongMu Co. Ltd. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.8 thereto. |
| 3.9 | | Organizational Documents: Macau Eiji Company Limited. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.9 thereto. |
| | | |
| 3.10 | | Organizational Documents: Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.10 thereto. |
| | | |
| 3.11 | | Organizational Documents: Tri-way Industries Limited. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.11 thereto. |
| | | |
| 3.12 | | Organizational Documents: A Power Agro Agriculture Development (Macau) Limited. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 3.12 thereto. |
| | | |
| 3.13 | | Bylaws. Incorporated herein by reference to the Current Report on Form 8-K filed on November 28, 2012 as Exhibit 3.1 thereto. |
| | | |
| 3.14 | | Certificate of Amendment to Articles of Incorporation. Incorporated herein by reference to the Current Report on Form 8-K filed on January 30, 2013 as Exhibit 3.1 thereto. |
| | | |
| 3.15 | | Certificate of Amendment to Articles of Incorporation. Incorporated herein by reference to the Current Report on Form 8-K filed on November 1, 2013 as Exhibit 3.1 thereto. |
| | | |
| 3.16 | | Certificate of Amendment to Articles of Incorporation. Incorporated herein by reference to the Current Report on Form 8-K filed on June 12, 2014 as Exhibit 3.1 thereto. |
| | | |
| 3.17 | | Certificate of Amendment to Articles of Incorporation. Incorporated herein by reference to the Current Report on Form 8-K filed on November 10, 2014 as Exhibit 3.1 thereto. |
| | | |
| 3.18 | | Certificate of Amendment to Articles of Incorporation. Incorporated herein by reference to the Current Report on Form 8-K filed on December 17, 2014 as Exhibit 3.1 thereto. |
| | | |
| 4.1 | | Form of common stock Certificate of Sino Agro Foods, Inc. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 4.1 thereto. |
| | | |
| 4.2 | | Form of Certificate of Series A Preferred. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 4.2 thereto. |
| | | |
| 4.3 | | Form of Certificate of Series B Preferred. Incorporated herein by reference to the Registration Statement on Form 10 filed on November 19, 2010 as Exhibit 4.3 thereto. |
| | | |
| 4.4 | | Certificate of Rights and Preferences - Series A Preferred. Incorporated herein by reference to the Registration Statement on Form 10 filed on April 25, 2011 as Exhibit 4.4 thereto. |
| | | |
| 4.5 | | Certificate of Rights and Preferences - Series B Preferred. Incorporated herein by reference to the Registration Statement on Form 10 filed on April 25, 2011 as Exhibit 4.5 thereto. |
| | | |
| 4.6 | | Certificate of Designation of the Series F Non-Convertible Preferred Stock. Incorporated herein by reference to the Current Report on Form 8-K filed on November 16, 2012 as Exhibit 3.1 thereto. |
| | | |
| 4.7 | | Amended and Restated Certificate of Designation of the Series F Non-Convertible Preferred Stock. Incorporated herein by reference to the Current Report on Form 8-K filed on June 12, 2014 as Exhibit 3.1 thereto. |
| | | |
| 4.8 | | Promissory Note dated August 29, 2014. Incorporated herein by reference to the Current Report on Form 8-K filed on September 5, 2014 as Exhibit 4.1 thereto. |
| | | |
| 4.9 | | Certificate of Amendment to Certificate of Designation of the Series B Convertible Preferred Stock. Incorporated herein by reference to the Current Report on Form 8-K filed on December 17, 2014 as Exhibit 3.2 thereto. |
* Filed herewith
** Furnished herewith
| ITEM 16. | FORM 10–K SUMMARY. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | SINO AGRO FOOD, INC. |
| | | |
| December 31, 2020 | By: | /s/ LEE YIP KUN SOLOMON |
| | Lee Yip Kun Solomon Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| December 31, 2020 | By: | /s/ LEE YIP KUN SOLOMON |
| | Lee Yip Kun Solomon Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |
| December 31, 2020 | By: | /s/ TAN POAY TEIK |
| | Tan Poay Teik Chief Officer, Marketing |
| December 31, 2020 | By: | /s/ CHEN BOR HANN |
| | Chen Bor Hann Corporate Secretary |
| December 31, 2020 | By: | /s/ MUSON CHEUNG |
| | | Muson Cheung Director |
| December 31, 2020 | By: | /s/ COLANUKUDURU RAVINDRAN |
| | | Colanukuduru Ravindran Director |
SINO AGRO FOOD, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
There is no report from any independent registered public accounting firm for this 2019 financial report due to the Covid-19 events prevented our Hong Kong based auditor to be in China to do inspection at sites and verification of our China operations.
SINO AGRO FOOD, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | December 31, | | | December 31, | |
| | | Note | | 2019 | | | 2018 | |
| | | | | (Unaudited) | | | (Audited) | |
| ASSETS | | | | | | | | | | |
| Current assets | | | | | | | | | | |
| Cash and cash equivalents | | 5 | | $ | 185,895 | | | $ | 4,950,799 | |
| Inventories | | 6 | | | - | | | | 54,582,241 | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | 18 | | | 250,828 | | | | 250,828 | |
| Deposits and prepayments | | 7 | | | 30,130,940 | | | | 52,241,190 | |
| Accounts receivable, net of allowance for doubtful accounts | | 8 | | | 98,528,589 | | | | 101,652,131 | |
| Other receivables | | 9 | | | 95,565,377 | | | | 28,307,526 | |
| Total current assets | | | | | 224,661,629 | | | | 241,984,715 | |
| Non-current assets | | | | | | | | | | |
| Plant and equipment, net of accumulated depreciation | | 10 | | | 103,064,238 | | | | 230,645,659 | |
| Construction in progress | | 11 | | | - | | | | 12,515,527 | |
| Land use rights, net of accumulated amortization | | 12 | | | 51,032,928 | | | | 53,814,281 | |
| Total non-current assets | | | | | 154,097,166 | | | | 296,975,467 | |
| Other assets | | | | | | | | | | |
| Goodwill | | 13 | | | 724,940 | | | | 724,940 | |
| Proprietary technologies, net of accumulated amortization | | 14 | | | 7,067,753 | | | | 8,937,071 | |
| Interest in unconsolidated investees | | 15 | | | 249,344,711 | | | | 207,074,626 | |
| Temporary deposits paid to entities for investments in Sino joint venture companies | | 16 | | | 17,507,626 | | | | 34,905,960 | |
| Total other assets | | | | | 274,645,030 | | | | 251,642,597 | |
| | | | | | | | | | | |
| Total assets | | | | $ | 653,403,825 | | | $ | 790,602,779 | |
| | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | |
| | | | | | | | | | | |
| Current liabilities | | | | | | | | | | |
| Accounts payable and accrued expenses | | | | $ | 2,590,637 | | | $ | 8,280,358 | |
| Billings in excess of costs and estimated earnings on uncompleted contracts | | 18 | | | 5,386,711 | | | | 5,348,293 | |
| Due to a director | | | | | 1,165,621 | | | | 2,046,499 | |
| Other payables | | 19 | | | 35,362,580 | | | | 42,523,811 | |
| Borrowings - Short term bank loan | | 20 | | | - | | | | 4,589,828 | |
| Derivative liability | | 21 | | | - | | | | 2,100 | |
| Convertible note payable | | 21 | | | - | | | | 3,894,978 | |
| | | | | | 44,505,549 | | | | 66,685,867 | |
| | | | | | | | | | | |
| Non-current liabilities | | | | | | | | | | |
| Other payables | | 19 | | | 7,151,762 | | | | 7,792,774 | |
| Borrowings - Long term debts and bank loan | | 20 | | | - | | | | 5,536,938 | |
| | | | | | 7,151,762 | | | | 13,329,712 | |
| | | | | | | | | | | |
| Commitments and contingencies | | | | | | | | | - | |
| | | | | | | | | | | |
| Stockholders’ equity | | | | | | | | | | |
| Common stock: $0.001 par value (50,000,000 shares authorized, 51,576,085 and 49,866,174 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively) | | 22 | | | 51,576 | | | | 49,866 | |
| Additional paid - in capital | | | | | 133,575,810 | | | | 181,501,056 | |
| Retained earnings | | | | | 448,469,577 | | | | 458,811,844 | |
| Accumulated other comprehensive income | | | | | (59,011,769 | ) | | | (10,415,786 | ) |
| Treasury stock | | | | | (1,250,000 | ) | | | (1,250,000 | ) |
| Total Sino Agro Food, Inc. and subsidiaries stockholders’ equity | | | | | 521,835,194 | | | | 628,696,980 | |
| Non - controlling interest | | | | | 79,911,320 | | | | 81,890,220 | |
| Total stockholders’ equity | | | | | 601,746,514 | | | | 710,587,200 | |
| Total liabilities and stockholders’ equity | | | | $ | 653,403,825 | | | $ | 790,602,779 | |
The accompanying notes are an integral part of these consolidated financial statements.
SINO AGRO FOOD, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
| | | 2019 | | | 2018 | |
| Revenue | | | | | | | | |
| - Sale of goods | | $ | 133,879,067 | | | $ | 130,543,170 | |
| - Consulting and service income from development contracts | | | 1,719,247 | | | | 11,127,393 | |
| | | | 135,598,314 | | | | 141,670,563 | |
| Cost of goods sold | | | (113,401,961 | ) | | | (110,967,348 | ) |
| Cost of services | | | (1,590,017 | ) | | | (9,051,408 | ) |
| | | | | | | | | |
| Gross profit | | | 20,606,336 | | | | 21,651,807 | |
| General and administrative expenses | | | (13,451,761 | ) | | | (15,595,032 | ) |
| Net income from operations | | | 7,154,575 | | | | 6,056,775 | |
| Other income (expenses) | | | | | | | | |
| | | | | | | | | |
| Government grant | | | 739,283 | | | | 649,095 | |
| Sharee of income from unconsolidated equity investee | | | 7,537,498 | | | | 14,251,264 | |
| Impairment losses | | | (3,834,658 | ) | | | | |
| Other income | | | - | | | | 56,672 | |
| Non-operating expenses | | | (22,598,607 | ) | | | (4,609,253 | ) |
| Interest expense | | | (403,668 | ) | | | (600,519 | ) |
| Net income (expenses) | | | (18,560,152 | ) | | | 9,747,259 | |
| | | | | | | | | |
| Net income before income taxes | | | (11,405,577 | ) | | | 15,804,034 | |
| Provision for income taxes | | | | | | | | |
| | | | | | | | | |
| Net income | | | (11,405,577 | ) | | | 15,804,034 | |
| Less: Net (income) loss attributable to non - controlling interest | | | 1,063,310 | | | | 1,519,303 | |
| Net income attributable to Sino Agro Food Inc. and subsidiaries | | | (10,342,267 | ) | | | 17,323,337 | |
| Other comprehensive income (loss) - Foreign currency translation gain (loss) | | | 3,416,381 | | | | (14,555,377 | ) |
| Comprehensive income | | | (6,925,886 | ) | | | 2,767,960 | |
| Less: Other comprehensive (income) loss attributable to non - controlling interest | | | 915,590 | | | | 1,793,417 | |
| | | | | | | | | |
| Comprehensive income attributable to the Sino Agro Food, Inc. and subsidiaries | | $ | (6,010,296 | ) | | | 4,561,377 | |
| | | | | | | | | |
| Earnings per share attributable to the Sino Agro Food, Inc. and subsidiaries common stockholders: | | | | | | | | |
| Basic | | $ | (0.21 | ) | | | 0.46 | |
| Diluted | | $ | (0.21 | ) | | | 0.46 | |
| | | | | | | | | |
| Weighted average number of shares outstanding: | | | | | | | | |
| | | | | | | | | |
| Basic | | | 49,963,607 | | | | 37,336,164 | |
| Diluted | | | 49,963,607 | | | | 37,336,164 | |
The accompanying notes are an integral part of these consolidated financial statements.
SINO AGRO FOOD, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | Common stock | | | Series A Preferred stock | | | Series B Convertible
Preferred stock | | | Series F Non Convertible
Preferred stock | |
| | Par value $0.001 | | Par value $0.001 | | | Par value $0.001 | | | Par value $0.001 | |
| | | Number of shares | | | Nominal
Amount | | | Number
of shares | | | Nominal
Amount | | | Number
of shares | | | Nominal
Amount | | | Number
of shares | | | Nominal
Amount | |
| | | | | | $ | | | | | | $ | | | | | | $ | | | | | | $ | |
| Balance as of January 1, 2018 | | 29,362,875 | | | | 29,363 | | | 100 | | | - | | | - | | | - | | | - | | | - | |
| Issue of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Employees’ and professional compensation | | 16,567,860 | | | | 16,568 | | | - | | | - | | | - | | | - | | | - | | | - | |
| - As security for finance raised | | 3,935,439 | | | | 3,935 | | | - | | | - | | | - | | | - | | | - | | | - | |
| Net income for the year | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deemed disposal of subsidiaries | | - | | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| Foreign currency translation difference | | - | | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| Balance as of December 31, 2018 | | 49,866,174 | | | | 49,866 | | | 100 | | | - | | | - | | | - | | | - | | | - | |
| Issue of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Employees’ and professional compensation | | - | | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| - As security for finance raised | | - | | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| Redemption of debts | | 1,709,911 | | | | 1,710 | | | | | | | | | | | | | | | | | | - | |
| Foreign currency translation difference | | - | | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| Balance as of December 31, 2019 | | 51,576,085 | | | | 51,576 | | | 100 | | | - | | | - | | | - | | | - | | | - | |
SINO AGRO FOOD, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | Treasury Number of
shares | | | Stock Amount | | | Additional paid - in
capital | | | Retained earnings | | | Accumulated other comprehensive income | | | Non - controlling interest | | | Total | |
| | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | |
| Balance as of January 1, 2018 | | | (101,010 | ) | | | (1,250,000 | ) | | | 169,743,640 | | | | 441,488,507 | | | | 2,346,174 | | | | 85,202,940 | | | | 697,560,624 | |
| Issue of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Employees’ and professional compensation | | | - | | | | - | | | | 10,283,322 | | | | - | | | | - | | | | - | | | | 10,299,890 | |
| - As security for finance raised | | | - | | | | - | | | | 1,474,094 | | | | - | | | | - | | | | - | | | | 1,478,029 | |
| Net loss for the year | | | | | | | | | | | | | | | 17,323,337 | | | | | | | | (1,519,303 | ) | | | 15,804,034 | |
| Foreign currency translation difference | | | - | | | | - | | | | - | | | | - | | | | (12,761,960 | ) | | | (1,793,417 | ) | | | (14,555,377 | ) |
| Balance as of December 31, 2018 | | | (101,010 | ) | | | (1,250,000 | ) | | | 181,501,056 | | | | 458,811,844 | | | | (10,415,786 | ) | | | 81,890,220 | | | | 710,587,200 | |
| Issue of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Employees’ compensation | | | - | | | | - | | | | 505,283 | | | | - | | | | - | | | | - | | | | 506,993 | |
| - Adjustment in Triway | | | | | | | - | | | | (48,430,529 | ) | | | - | | | | - | | | | - | | | | (48,430,529 | ) |
| - As security for finance raised | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0 | |
| Net income for the year | | | | | | | | | | | - | | | | (10,342,267 | ) | | | | | | | (1,063,310 | ) | | | (11,405,577 | ) |
| Foreign currency translation difference | | | - | | | | - | | | | - | | | | - | | | | (48,595,983 | ) | | | (915,590 | ) | | | (49,511,573 | ) |
| Balance as of December 31, 2019 | | | (101,010 | ) | | | (1,250,000 | ) | | | 133,575,810 | | | | 448,469,577 | | | | (59,011,769 | ) | | | 79,911,320 | | | | 601,746,514 | |
The accompanying notes are an integral part of these consolidated financial statements.
SINO AGRO FOOD, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | 2019 | | | 2018 | |
| | | | | | | |
| Cash flows from operating activities | | | | | | | | |
| Net income (loss) for the year | | $ | (11,405,577 | ) | | $ | 15,804,034 | |
| Adjustments to reconcile net income for the year to net cash from operations: | | | | | | | | |
| Depreciation | | | 5,272,630 | | | | 13,080,991 | |
| Amortization | | | 2,038,612 | | | | 2,270,012 | |
| Gain on deemed disposal of subsidiaries | | | | | | | - | |
| Loss on disposal from a variable interest entity | | | | | | | - | |
| Share based compensation costs | | | 643,457 | | | | 2,308,869 | |
| Other amortized cost arising from convertible notes and others | | | | | | | - | |
| Impairment on long outstanding receivables and prepayments | | | | | | | - | |
| Impairment on interests in unconsolidated investees | | | | | | | - | |
| Change in fair value of a derivative liability | | | | | | | - | |
| Bad debts written off | | | | | | | - | |
| Gain on disposal | | | | | | | - | |
| Loss on restructuring | | | | | | | - | |
| Share of unconsolidated equity investee | | | (7,537,498 | ) | | | (14,251,264 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Decrease in inventories | | | 54,582,241 | | | | (1,953,294 | ) |
| (Increase) decrease in cost and estimated earnings in excess of billings on uncompleted contacts | | | - | | | | 998,359 | |
| Increase in deposits and prepaid expenses | | | 22,110,250 | | | | 15,429,559 | |
| (Decrease) increase in due to a director | | | (883,135 | ) | | | 1,939,425 | |
| Increas e/(decrease) in accounts payable and accrued expenses | | | (5,689,721 | ) | | | 5,203,787 | |
| Increase in other payables | | | (7,161,231 | ) | | | 6,577,152 | |
| Decrease (increase) in accounts receivable | | | 3,123,542 | | | | (18,680,713 | ) |
| (Decrease) increase in tax payable | | | - | | | | - | |
| Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts | | | 38,418 | | | | (391,772 | ) |
| Decrease in other receivables | | | (67,257,850 | ) | | | (7,627,048 | ) |
| Increase in interests in unconsolidated investees | | | 18,912,494 | | | | (532,821 | ) |
| Net cash provided by operating activities | | | 6,786,6320 | | | | 20,175,276 | |
| Cash flows from investing activities | | | | | | | | |
| Acquisition of plant, property and equipment | | | (351,204 | ) | | | (7,072,692 | ) |
| Payment for construction in progress | | | (11,155,410 | ) | | | (6,755,327 | ) |
| Proceed from disposal of a long term investee | | | - | | | | - | |
| Proceed from disposal of plant, property and equipment | | | - | | | | - | |
| Net cash used in investing activities | | | (11,506,614 | ) | | | (13,828,019 | ) |
| Cash flows from financing activities | | | | | | | | |
| -Proceeds from convertible bond payable | | | - | | | | - | |
| Capital contribution from non-controlEng interest | | | - | | | | - | |
| Proceeds from short term debts | | | - | | | | 4,533,777 | |
| Long term debts repaid | | | (73,741 | ) | | | (75,563 | ) |
| Short term bank loan repaid | | | - | | | | (4,533,777 | ) |
| Net cash provided by financing activities | | | (73,741 | ) | | | (75,563 | ) |
| Effects on exchange rate changes on cash | | | 28,819 | | | | (1,880,938 | ) |
| | | | | | | | | |
| (Decrease)/increase in cash and cash equivalents | | | (4,764,904 | ) | | | 4,390,756 | |
| Cash and cash equivalents, beginning of year | | | 4,950,799 | | | | 560,043 | |
| Cash and cash equivalents, end of year | | | 185,895 | | | $ | 4,950,799 | |
| | | | | | | | | |
| Supplementary disclosures of cash flow inforniation: | | | | | | | | |
| Cash paid for interest | | | 388,306 | | | $ | 561,176 | |
| Cash paid for income taxes | | | - | | | $ | - | |
| Non - cash transactions | | | | | | | | |
| Common stock issued as security for finance raised | | | - | | | $ | 1,478,029 | |
| Common stock issued for services and compensation | | | 32,973 | | | $ | 10,299,890 | |
| Transfer construction in progress to property and equipment | | | 12,885,923 | | | $ | - | |
The accompanying notes are an integral part of these consolidated financial statements.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sino Agro Food, Inc. (the “ Company” or “SIAF”) (formerly known as Volcanic Gold, Inc. and A Power Agro Agriculture Development, Inc.) was incorporated on October 1, 1974 in the State of Nevada, United States of America.
The Company was engaged in the mining and exploration business but ceased its mining and exploring business on October 14, 2005. On August 24, 2007, the Company entered into a Merger and Acquisition Agreement with Capital Award Inc., a Belize corporation (“CA”) and its subsidiaries Capital Stage Inc. (“CS”) and Capital Hero Inc. (“CH”). Effective the same date, CA completed a reverse merger transaction with SIAF. SIAF acquired all the outstanding common stock of CA from Capital Adventure, a shareholder of CA, for 3,232,323 shares of the Company’s common stock.
On August 24, 2007 the Company changed its name from Volcanic Gold, Inc. to A Power Agro Agriculture Development, Inc. On December 8, 2007, the Company changed its name to Sino Agro Food, Inc.
On September 5, 2007, the Company acquired three existing businesses in the People’s Republic of China (the “P.R.C.”):
| (a) | Hang Yu Tai Investment Limited (“HYT”), a company incorporated in Macau, the owner of 78% equity interest in ZhongXingNongMu Ltd (“ZX”), a company incorporated in the P.R.C.; |
| (b) | Tri-Way Industries Limited (“TRW”), a company incorporated in Hong Kong; and |
| (c) | Macau Eiji Company Limited (“MEIJI”), a company incorporated in Macau, the owner of 75% equity interest in Enping City Juntang Town Hang Sing Tai Agriculture Co. Ltd. (“HST”), a P.R.C. corporate Sino-Foreign joint venture. HST was dissolved in 2010. |
On November 27, 2007, MEIJI and HST established a corporate Sino - Foreign joint venture, Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd. (“JHST”), a company incorporated in the P.R.C. with MEIJI owning a 75% interest and HST owning a 25% interest.
On November 26, 2008, SIAF established Pretty Mountain Holdings Limited (“PMH”), a company incorporated in Hong Kong with an 80% equity interest. On May 25, 2009, PMH formed a corporate Sino-Foreign joint venture, Qinghai Sanjiang A Power Agriculture Co. Ltd. (“SJAP”), incorporated in the P.R.C., of which PMH owns a 45% equity interest. At the time, the remaining 55% equity interest in SJAP was owned by the following entities:
| • | Qinghai Province Sanjiang Group Company Limited (English translation) (“Qinghai Sanjiang”), a company incorporated in the P.R.C with major business activities in the agriculture industry; and |
| • | Guangzhou City Garwor Company Limited (English translation) (“Garwor”), a company incorporated in the P.R.C., specializing in sales and marketing. |
SJAP is engaged in the business of manufacturing bio-organic fertilizer, livestock feed and development of other agriculture projects in the County of Huangyuan, in the vicinity of the Xining City, Qinghai Province, P.R.C.
In September 2009, the Company carried out an internal reorganization of its corporate structure and business, and formed a 100% owned subsidiary, A Power Agro Agriculture Development (Macau) Limited (“APWAM”), which was formed in Macau. APWAM then acquired PMH’s 45% equity interest in SJAP. By virtue of the acquisition, APWAM assumed all obligations and liabilities of PMH under the Sino Foreign Joint Venture Agreement. On May 7, 2010, Qinghai Sanjiang sold and transferred its equity interest in SJAP to Garwor. The State Administration for Industry and Commerce of Xining City Government of the PRC approved the sale and transfer. As a result, APWAM owned 45% of SJAP and Garwor owned the remaining 55%.
On September 9, 2010, an application was submitted by the Company to the Companies Registry of Hong Kong for deregistration of PMH under Section 291AA of the Hong Kong Companies Ordinance. On January 28, 2011, PMH was dissolved
On March 23, 2018, Qinghai Quanwang Investment Management Company Limited (“Quanwang”) acquired 8.3% equity interest in SJAP for total cash consideration of $459,137. As of December 31, 2019, APWAM owned 41.25% of SJAP, Garwor owned 50.45% and Quanwang owned the remaining 8.3%.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | CORPORATE INFORMATION (CONTINUED) |
On February 15, 2011 and March 29, 2011, the Company entered into an agreement and a memorandum of understanding (an “MOU”), respectively, to sell 100% equity interest in HYT group (including HYT and ZX) to Mr. Xin Ming Sun, a director of ZhongXingNong Nu Co., Ltd for $45,000,000, with effective date of January 1, 2011.
On February 28, 2011, the Company applied to form Enping City Bi Tao A Power Prawn Culture Development Co Limited (“EBAPCD”) , and the Company would indirectly own a 25% equity interest in future Sino Joint Venture Company (pending approval).
On February 28, 2011, TRW applied to form a corporate joint venture, Enping City Bi Tao A Power Fishery Development Co., Limited (“EBAPFD”), incorporated in the PRC. TRW owned a 25% equity interest in EBAPFD. On November 17, 2011, TRW formed Jiang Men City A Power Fishery Development Co., Limited (“JFD”) in which it acquired a 25% equity interest, while withdrawing its 25% equity interest in EBAPFD. As of December 31, 2011, the Company had invested for total cash consideration of $1,258,607 in JFD. JFD operates an indoor fish farm. On January 1, 2012, the Company acquired an additional 25% equity interest in JFD for total cash consideration of $1,662,365. As of January 1, 2012, the Company had consolidated the assets and operations of JFD. On April 1, 2012, the Company acquired an additional 25% equity interest in JFD for the total cash consideration of $1,702,580. These acquisitions were at our option according the terms of the original development agreement. The Company owned a 75% equity interest in JFD, representing majority of voting rights and controls its board of directors. On August 15, 2016, the acquisition agreement was executed by TRW for acquiring the other 25% equity in JFD which was a Sino Foreign Joint Venture Co. that TRW had 100% equity interest with effect on October 5, 2016. Upon the acquisitions of 3 additional prawn farms assets at fair value of $238.32 million from respective third parties and the master technology license at fair value of $30 million from Capital Award, Inc. by JFD, and the consideration of the above acquisitions were planned to be settled by the new issue shares of 99,990,000 TRW shares at $3.41 amounting to $340.53 million on or before March 31, 2018. As a result, SIAF’s equity interest in TRW was diluted from 100% to 23.89% with effective on October 5, 2016. The above transactions leaded the Company loss of control over TRW group, the Company’s investments in TRW and JFD were reclassified from a subsidiary to investments in unconsolidated equity investees as of October 5, 2016. The dilution of the Company’s investments in TRW group constituted a deemed disposal of the subsidiaries. The deemed gain on disposal of $56,947,005 was recorded in net income from discontinued operations of the consolidated statements of income and other comprehensive income of the Company for the year ended 31 December 2016. On October 1, 2016, the Company took up all assets and all liabilities of TRW and JFD except plant and equipment - fish farm. The Company converted the amount due from unconsolidated equity investee into equity interest during the fourth quarter of 2018, 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 Cattle Farm Co., Limited (“ECF”), all of which the Company would indirectly own a 25% equity interest on November 17, 2011. On January 1, 2012, the Company had invested $1,076,489 in ECF and the amount was settled in contra against accounts receivable due from ECF. On September 17, 2012 MEIJI formed Jiang Men City Hang Mei Cattle Farm Development Co., Limited (“JHMC”) and acquired additional 50% equity interest for the total cash consideration of $2,944,176 on September 30, 2012 while withdrawing its 25% equity interest in ECF. This acquisition was at our option according to the terms of the original development agreement. The Company presently owns 75% equity interest in JHMC, representing majority of voting right and controls its board of directors. As of September 30, 2012, the Company had consolidated the assets and operations of JHMC. As of December 31, 2018, MEIJI total investment in JHMC was $4,385,101.
On July 18, 2011, the Company formed Hunan Shenghua A Power Agriculture Co., Limited (“HSA”), in which the Company owns a 26% equity interest, and SJAP owns a 50% equity interest with the Chinese partner owning the remaining 24%. On April 5, 2018, SJAP transfer all of its equity interest to MEIJI. As of December 31, 2018, MEIJI total investment in HSA was $1,651,774.
On November 12, 2013, the Company acquired a shell company, Goldcup9203 AB, incorporated in Sweden, in which the Company owns a 100% equity interest. Goldcup 9203 AB changed its name to Sino Agro Food Sweden AB (publ) (“SAFS”). During the year ended December 31, 2016, SAFS changed to a private company. As of December 31, 2018, the Company invested $77,664 in SAFS. The Company delisted from Merkur Market on 10th September 2019, and subsequently by 31st December 2019 SAFS was dissolved.
SJAP formed Qinghai Zhong He Meat Products Co., Limited (“QZH”) , with SJAP would owning 100% equity interest. SJAP formed Qinghai Zhong He Meat Products Co., Limited (“QZH”), with SJAP would owning 100% equity interest. On October 25, 2015, both QZH and new stockholder, Qinghai Quanwang Investment Management Co., Ltd (“QQI”) contributed additional capital of $4,157,682 and $769,941, respectively. As a result, SJAP decreased its equity interest from 100% to 85% and QQI owned a 14% equity interest. In addition, according to investment agreement between QZH and QQI, (i) QQI only enjoy interest 6% annually on its capital contribution and did not enjoy profit distribution; (ii) investment period was 3 years only, and (iii) SJAP shared 100% on profit or loss after deduction 6% interest to QQI and enjoyed 100% voting rights of QZH’s board and stockholders meetings. SJAP disposed its 85% equity interest in QZH for RMB2 (equivalent to $0) for cash and completed on December 30, 2018. As a result, QZH was derecognized as variable interest entity of the company. On September 30th 2019, Mr. Solomon Lee resigned as the Chairman of SJAP resulting in categorization of SJAP as an Investor in Associate from a subsidiary status.
Up until September 30th 2019, revenues have been generated from activities that the Company divided into five stand-alone business divisions or units: (1) Fishery development (in consulting and services), (2) Cattle & Beef (fully integrated activity), (3) Organic Fertilizer, (4) HU Plantation, and (5) Marketing and Trading.
The fully integrated Cattle and Beef business was gradually being scaled down from year 2016 onward after the China Government relaxed its importation policies to allow many countries (i.e. Australia, NZ, Countries of South America and Canada etc.) to import beef into China affecting its domestic cattle rearing and beef industry. SJAP lost in excessive of US$30 million by year ended December 31st 2017 and by June 30th 2019, it reduced its large fully integrated activity into a small operation keeping and maintaining the production of fertilizer at less than 8,000 MT per year comparing to over 35,000 MT per year in 2015 and the production of concentrated live-stock feed at less than 3000 MT per year compares to over 15,000 MT in 2016 and fattening less than 1500 heads of live cattle at its own farm compares to 2015’s around 25,000 heads of live cattle reared and fattening by 20 corporative farms that consisted over 2,000 individual farmers collectively. From 1st October 2019 onward, SJAP contracted the said small maintaining operation to its existing management.
The Company currently maintains operations of its services in engineering consulting and specializing in the development of agriculture and aquaculture projects whereas operations of its HU Plantation, Asian “Yellow cattle” demonstration farm, and HSA’s manufacturing of fertilizer were contracted out to their respective farm’s management since 30th September 2019.
The Company is now the investor in two Associates originated from subsidiary status namely SJAP and Tri-way; whereas Tri-way is in the aquaculture segment contracting out it’s aqua-farms’ operations (inclusive Aqua-farm 1, 2 and 3 & b) to respective farm’s managements and JFD, it’s fully owned subsidiary in China, has the sole right to market and distribute the said Aqua-farms’ productions by buying from and selling all fishery productions of the said contracted aqua-farms. Operation of Aqua-farm 4 and 5 of the Zhongshen Mega Farm Development ceased since September 30th 2019 failing the Company’s original ambition to become one of the biggest prawn producers in the world by year end of 2024.
Therefore from 1st October 2019 onward, Revenues of the Company are generated from (i). Incomes derived from CA’s Engineering Consulting and services, (ii). Incomes derived from the contractual agreements of JHST, MEIJI and HSA, (iii). CA’s (or the Corporate) marketing and Trading business and (iv). Incomes generated from its investments in SJAP and Tri-way.
The Company’s principal executive office is located at Room 3801, Block A, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, Guangdong Province, P.R.C., 510610.
The nature of the operations and principal activities of the Company and its subsidiaries are described in Note 2.2.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company has adopted December 31 as its fiscal year end.
| Name of subsidiaries | | Place of incorporation | | Percentage of interest* | | Principal activities |
| Capital Award Inc. (“CA”) | | Belize | | 100% (2019: 100%) directly | | Fishery development and holder of A-Power Technology master license. |
| | | | | | | |
| Capital Hero Inc. (“CS”) | | Belize | | 100%(2019:100%)indirectly | | Dormant Capital HeroInc. |
| | | | | | | |
| (“CH”)Capital Stage Inc. (CH) | | Belize | | 100% (2019: 100%) indirectly | | Dormant Capital Stage Inc.(CS) |
| | | | | | | |
| Macau Eiji Company Limited (“MEIJI”) | | Macau, P.R.C. | | 100% (2019: 100%) directly | | Investment holding, cattle farm development, beef cattle and beef trading |
| | | | | | | |
| Sino Agro Food Sweden AB (“SAFS”). | | Sweden | | 100% (2019 : 100%) directly | | Dormant: Dissolved 31st December |
| | | | | | | |
| A Power Agro Agriculture Development (Macau) Limited (“APWAM”) | | Macau, P.R.C. | | 100% (2019: 100%) directly | | Investment holding |
| | | | | | | |
| Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd (“JHST”) | | P.R.C. | | 75% (2019: 75%) Indirectly | | HylocereusUndatus Plantation (“HU Plantation”). |
| | | | | | | |
| Jiang Men City Hang Mei Cattle Farm Development Co., Limited (“JHMC”) | | P.R.C. | | 75% (2019:75%) indirectly | | Beef cattle cultivation |
| | | | | | | |
| Hunan Shenghua A Power Agriculture Co., Limited (“HSA”) | | P.R.C. | | 76% (2019:76%) indirectly | | Manufacturing of organic fertilizer, livestock feed, and beef cattle and sheep cultivation, and plantation of crops and pastures |
| Name of associate (investee) | | Place of incorporation | | Percentage of interest* | | Principal activities |
| Qinghai Sanjiang A Power Agriculture Co., Ltd (“SJAP”) | | P.R.C. | | 41.25% (2019: 41.25%) indirectly | | Manufacturing of organic fertilizer, livestock feed, and beef cattle |
| | | | | | | |
| Tri-way Industries Limited | | Hong Kong, P.R.C. | | 36.6% (2019: 36.6%) directly | | A-Power Technology license (P.R.C.) |
| | | | | | | Sales and marketing of fishery production& products. |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
| 2.4 | BASIS OF CONSOLIDATION |
The consolidated financial statements include the financial statements of the Company, its subsidiaries CA, CS, CH, MEIJI, JHST, JHMC, HSA, APWAM, SAFS and its variable interest entity SJAP. All material inter-company transactions and balances have been eliminated in consolidation.
SIAF, CA, CS, CH, MEIJI, JHST, JHMC, HSA, APWAM, SAFS, and SJAP are hereafter referred to as (the “Company”).
The Company adopted the accounting pronouncements relating to business combination (primarily contained in ASC Topic 805 “Business Combinations”), including assets acquired and liabilities assumed on arising from contingencies. These pronouncements established principles and requirement for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquisition as well as provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, these pronouncements eliminate the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria and require an acquirer to develop a systematic and rational basis for subsequently measuring and accounting for acquired contingencies depending on their nature. The Company’s adoption of these pronouncements will have an impact on the manner in which it accounts for any future acquisitions.
| 2.6 | NON - CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS |
The Company adopted the accounting pronouncement on non-controlling interests in consolidated financial statements, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance is primarily contained in ASC Topic “Consolidation.” It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated financial statements. The adoption of this standard has not had material impact on the Company’s consolidated financial statements.
The preparation of consolidated financial statements in conformity with US GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods covered thereby. Actual results could differ from these estimates. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. The following are some of the areas requiring significant judgments and estimates: determinations of the useful lives of assets, estimates of allowances for doubtful accounts, cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, estimates of the realization of deferred tax assets and inventory reserves.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces numerous requirements in U.S. GAAP, including industry specific requirements, and provides a single revenue recognition model for recognizing revenue from contracts with customers. The Company adopted this standard effective January 1, 2018.
The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenues generated mainly from trading of frozen food and sales of agricultural products are recognized at a point in time.
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenues.
Multiple-Element Arrangements
To qualify as a separate unit of accounting under ASC 605-25 “Multiple Element Arrangements”, the delivered item must have value to the customer on a standalone basis. The significant deliverables under the Company’s multiple-element arrangements are consulting and service under development contract, commission and management service.
Revenues from the Company’s consulting and services under development contracts are performed under fixed-price contracts. Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (“ASC 605”). Under the percentage-of- completion method, the Company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the contract term. The percentage of costs incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the installation contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as either costs or estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines a customer’s credit worthiness at the time an order is accepted. Sudden and unexpected changes in a customer’s financial condition could put recoverability at risk.
The percentage of completion method requires the ability to estimate several factors, including the ability of the customer to meet its obligations under the contract, including the payment of amounts when due. If the Company determines that collectability is not assured, the Company will defer revenue recognition and use methods of accounting for the contract such as the completed contract method until such time as the Company determines that collectability is reasonably assured or through the completion of the project.
For fixed-price contracts, the Company uses the ratio of costs incurred to date on the contract to management’s estimate of the contract’s total costs, to determine the percentage of completion on each contract. This method is used as management considers expended costs to be the best available measure of progression of these contracts. Contract costs include all direct material, subcontract and labor costs and those indirect costs related to contract performance, such as supplies, tool repairs and depreciation. The Company accounts for maintenance and repair services under the guidance of ASC 605 as the services provided relate to construction work. Contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract. Changes in job performance, job conditions, and estimated profitability arising from contract penalty, change orders and final contract settlements may result in revisions to the estimated profit ability during the contract. These changes, which include contracts with estimated costs in excess of estimated revenues, are recognized as contract costs in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. At the point the Company anticipates a loss on a contract, the Company estimates the ultimate loss through completion and recognizes that loss in the period in which the loss was identified.
The Company does not provide warranties to customers on a basis customary to the industry, however, customers can claim warranty directly from product manufacturers for defects in equipment or products. Historically, the Company has experienced no warranty claims.
The Company provides various management services to its customers in the P.R.C. based on a negotiated fixed-price contract. The clients usually pay the fees when the services contract is signed and services are rendered. The Company recognizes these services-based revenues from contracts when (i) management services are rendered; (ii) clients recognize the completion of services; and (iii) collectability is reasonably assured. Fees received in advance are recorded as deferred revenue under current liabilities.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| 2.9 | COST OF GOODS SOLD AND COST OF SERVICES |
Cost of goods sold consists primarily of direct purchase cost of merchandise goods, and related levies. Cost of services consist primarily direct cost and indirect cost incurred to date for development contracts and provision for anticipated losses for development contracts.
| 2.10 | SHIPPING AND HANDLING |
Shipping and handling costs related to cost of goods sold are included in general and administrative expenses, which totaled $156,103 and $26,129 for the years ended December 31, 2019 and 2018, respectively.
Advertising costs are included in general and administrative expenses, which totaled $956,056, and $1,541,484 for the years ended December 31, 2019 and 2018, respectively.
| 2.12 | RESEARCH AND DEVELOPMENT EXPENSES |
Research and development expenses are included in general and administrative expenses, which totaled $855,167 and $453, 378 for the years ended December 31, 2019 and 2018, respectively.
| 2.13 | FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME |
The reporting currency of the Company is the U.S. dollars. The functional currency of the Company is the Chinese Renminbi (RMB).
For those entities whose functional currency is other than the U.S. dollars, all assets and liabilities are translated into U.S. dollars at the exchange rate on the balance sheet date; shareholders’ equity is translated at historical rates and items in the statements of income and of cash flows are translated at the average rate for the period. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported in the statements of cash flows will not necessarily agree with changes in the corresponding balances in the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of income and comprehensive income, as incurred.
Accumulated other comprehensive income in the consolidated statement of shareholders’ equity amounted to $ 14,747,757 as of December 31, 2019 and $10,415,786 as of December 31, 2019. The balance sheet amounts with the exception of equity as of December 31, 2019 and December 31, 2019 were translated using an exchange rate of RMB 6.98 to $1.00 and RMB RMB 6.86 to $1.00, respectively. The average translation rates applied to the statements of income and other comprehensive income and of cash flows for the years ended December 31, 2019 and 2018 were RMB 6.87 to $1.00 and RMB 6.61to $1.00, respectively.
| 2.14 | CASH AND CASH EQUIVALENTS |
The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents kept with financial institutions in the P.R.C. are not insured or otherwise protected. Should any of those institutions holding the Company’s cash become insolvent, or should the Company become unable to withdraw funds for any reason, the Company could lose the cash on deposit with that institution.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
The standard credit period for most of the Company’s clients is three months. The collection period over 1 year is classified as long-term accounts receivable. Management evaluates the collectability of the receivables at least quarterly.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Inventories are valued at the lower of cost (determined on a weighted average basis) and net realizable value. Costs incurred in bringing each product to its location and conditions are accounted for as follows:
| (a) | raw materials - purchase cost on a weighted average basis; |
| (b) | manufactured finished goods and work-in-progress - cost of direct materials and labor and a proportion of manufacturing overhead based on normal operation capacity but excluding borrowing costs; and |
| (c) | retail and wholesale merchandise finished goods - purchase cost on a weighted average basis. |
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs for completion and the estimated costs necessary to make the sale.
Plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Such costs include the cost of replacing parts that are eligible for capitalization when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalization. The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each financial year end.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.
| Plant and machinery | | | 5 - 10 years | |
| Structure and leasehold improvements | | | 10 - 30 years | |
| Mature seeds and herbage cultivation | | | 20 years | |
| Furniture and equipment | | | 2.5 - 10 years | |
| Motor vehicles | | | 4 - 10 years | |
An item of plant and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statements of income in the period the item is disposed.
Goodwill is an asset representing the fair economic benefits arising from other assets acquired in a business combination that are not individually identified or separately recognized. Goodwill is tested for impairment on an annual basis at the end of the Company’s fiscal year, or when impairment indicators arise. The Company uses a fair-value-based approach to test for impairment at the level of each reporting unit. The Company directly acquired MEIJI, which is the holding company of JHST that operates the Hu Plantation. As a result of this acquisition, the Company recorded goodwill in the amount of $724,940. This goodwill represents the fair value of the assets acquired in these acquisitions over the cost of the assets acquired.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| 2.19 | PROPRIETARY TECHNOLOGIES |
A master license of stock feed manufacturing technology was acquired and the costs of acquisition are capitalized as proprietary technologies when technological feasibility has been established. Cost of acquisition of stock feed manufacturing technology master license is amortized using the straight-line method over its estimated life of 25 years.
An aromatic cattle-feeding formula was acquired and the costs of acquisition are capitalized as proprietary technologies when technological feasibility has been established. Cost of acquisition on aromatic cattle-feeding formula is amortized using the straight-line method over its estimated life of 20 years.
The cost of sleepy cods breeding technology license is capitalized as proprietary technologies when technological feasibility has been established. Cost of granting sleepy cods breeding technology license is amortized using the straight-line method over its estimated life of 25 years.
Bacterial cellulose technology license and related trade mark are capitalized as proprietary technologies when technological feasibility has been established. Cost of license and related trade mark is amortized using the straight-line method over its estimated life of 20 years.
The Company has determined that technological feasibility is established at the time a working model of products is completed. Proprietary technologies are intangible assets of finite lives. Management evaluates the recoverability of proprietary technologies on an annual basis at the end of the Company’s fiscal year, or when impairment indicators arise. As required by ASC Topic 350 “Intangible - Goodwill and Other”, the Company uses a fair-value-based approach to test for impairment.
| 2.20 | CONSTRUCTION IN PROGRESS |
Construction in progress represents direct costs of construction as well as acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use.
Land use rights represent acquisition of rights to agricultural land from farmers and are amortized on the straight-line basis over their respective lease periods. The lease period of agricultural land is in the range from 10 to 60 years. Land use rights purchase prices were determined in accordance with the P.R.C. Government’s minimum lease payments on agricultural land and mutually agreed to terms between the Company and the vendors.
| 2.22 | EQUITY METHOD INVESTMENTS |
Investee entities in which the company can exercise significant influence, but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the company’s share of the earnings or losses of these companies is included in net income. A loss in value of an investment that is other than a temporary decline is recognized as a charge to operations. Evidence of a loss in value might include, but would not necessarily be limited to absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.
| 2.23 | CORPORATE JOINT VENTURE |
A corporation formed, owned, and operated by two or more businesses as a separate and discrete business or project (venture) for their mutual benefit is considered to be a corporate joint venture. Investee entities, in which the Company can exercise significant influence, but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the Company’s share of the earnings or losses of these companies is included in net income.
A loss in value of an investment that is other than a temporary decline is recognized as a charge to operations. Evidence of a loss in value might include, but would not necessarily be limited to, the absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| 2.24 | VARIABLE INTEREST ENTITY |
A variable interest entity (“VIE”) is an entity (investee) in which the investor has obtained less than a majority interest, according to the Financial Accounting Standards Board (FASB). A VIE is subject to consolidation if a VIE meets one of the following three criteria as elaborated in ASC Topic 810-10, Consolidation:
| (a) | equity-at-risk is not sufficient to support the entity’s activities; |
| (b) | as a group, the equity-at-risk holders cannot control the entity; or |
| (c) | the economics do not coincide with the voting interest. |
If a firm is the primary beneficiary of a VIE, the holdings must be disclosed on the balance sheet. The primary beneficiary is defined as the person or company with the majority of variable interests. A corporation formed, owned, and operated by two or more businesses (ventures) as a separate and discrete business or project (venture) for their mutual benefit is defined as a joint venture.
Treasury stock means shares of a corporation’s own stock that have been issued and subsequently reacquired by the corporation. Converting outstanding shares to treasury shares does not reduce the number of shares issued but does reduce the number of shares outstanding. These shares are not eligible to receive dividends. Accounting for excesses and deficiencies on treasury stock transactions is governed by ASC 505-30-30.
State laws and federal agencies closely regulate transactions involving a company’s own capital stock, so the purchase of outstanding shares must have a legitimate purpose. Some of the most common reasons for purchasing outstanding shares are as follows:
| (a) | to meet additional stock needs for various reasons, including newly implemented stock option plans, stock for convertible bonds or convertible preferred stock, or a stock dividend. |
| (b) | to make more shares available for acquisitions of other entities. |
The cost method of accounting for treasury shares has been adopted by the Company. The purchase of outstanding shares and thus converting them into treasury shares is treated as a temporary reduction in shareholders’ equity in view of the expectation to reissue the shares instead of retiring them. When the Company reissues the treasury shares, the temporary account is eliminated. The cost of acquiring outstanding shares for converting into treasury shares is charged to a contra account, in this case a contra equity account that reduces the stockholder equity balance.
The Company accounts for income taxes under the provisions of ASC Topic 740 “Accounting for Income Taxes.” Under ASC Topic 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
ASC Topic 740 also prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or for one expected to be taken, in a tax return. ASC Topic 740 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded as tax expense.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| 2.27 | POLITICAL AND BUSINESS RISK |
The Company’s operations are carried out in the P.R.C. Accordingly, the political, economic and legal environment in the P.R.C. may influence the Company’s business, financial condition and results of operations by the general state of the P.R.C.’s economy. The Company’s operations in the P.R.C. are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti- inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
| 2.28 | CONCENTRATION OF CREDIT RISK |
Cash includes cash at banks and demand deposits in accounts maintained with banks within the P.R.C. Total cash in these banks as of December 31, 2019 and 2018 amounted to $185,895 and $4,950,799, respectively, none of which is covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks to its cash in bank accounts.
The Company had 5 major customers (A, B, C, D and E) whose business individually represented the following percentages of the Company’s total revenue for the period indicated:
| | | 2019 | | | 2018 | |
| Customer A | | | 32.30 | % | | | 31.65 | % |
| Customer B | | | 25.17 | % | | | 21.33 | % |
| Customer C | | | 16.54 | % | | | 16.68 | % |
| Customer D | | | 6.08 | % | | | | |
| Customer E | | | - | | | | 7.85 | % |
| Customer F | | | 3.62 | % | | | 5.68 | % |
| | | | 83.71 | % | | | 83.19 | % |
| | | | | Percentage
of revenue | | | Amount | |
| Customer A | | Corporate Division | | | 32.30 | % | | $ | 43,798,678 | |
| Customer B | | Cattle Farm Development and HU Plantation Division | | | 25.17 | % | | $ | 34,062,095 | |
| Customer C | | Corporate Division | | | 16.54 | % | | $ | 22,433,555 | |
Accounts receivable are derived from revenue earned from customers located primarily in the P.R.C. The Company performs ongoing credit evaluations of customers and has not experienced any material losses to date.
The Company had 5 major customers whose accounts receivable balance individually represented the following percentages of the Company’s total accounts receivable:
| | | 2019 | | | 2018 | |
| Customer A | | | 39.91 | % | | | 12.76 | % |
| Customer B | | | 16.11 | % | | | 9.67 | % |
| Customer C | | | 14.66 | % | | | 10.05 | % |
| Customer D | | | 11.66 | % | | | 59.81 | % |
| Customer E | | | 8.43 | % | | | 1.8 | % |
| Customer F | | | | | | | - | % |
| | | | 90.77 | % | | | 94.09 | % |
As of December 31, 2019, amounts due from customers A, B and C are $39,321,639, $15,871,509 and $14,446, 680 respectively. The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties of its major customers.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| 2.29 | IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS |
In accordance with ASC Topic 360, “Property, Plant and Equipment,” long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, during each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of December 31, 2019 and 2018, the Company determined no impairment losses were necessary.
As prescribed in ASC Topic 260 “Earnings per Share,” Basic Earnings per Share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common stock shares outstanding during the year plus potential dilutive instruments such as stock options and warrants. The effect of stock options on diluted EPS is determined through the application of the treasury stock method, whereby proceeds received by the Company based on assumed exercises are hypothetically used to repurchase the Company’s common stock at the average market price during the period.
ASC 260-10-55 requires that stock dividends or stock splits be accounted for retroactively if the stock dividends or stock splits occur during the year, or retroactively if the stock dividends or stock splits occur after the end of the period but before the release of the financial statements, by considering it outstanding of the entirety of each period presented. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the year.
For the years ended December 31, 2019 and 2018, basic earnings (loss) per share attributable to Sino Agro Food, Inc. and subsidiaries common stockholders amounted to $(0.21), and $0.46, respectively. For the years ended December 31, 2019 and 2018, diluted earnings (loss) per share attributable to Sino Agro Food, Inc. and its subsidiaries’ common stockholders amounted to $(0.21), and $0.46, respectively.
| 2.31 | ACCUMULATED OTHER COMPREHENSIVE INCOME |
ASC Topic 220 “Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments.
| 2.32 | RETIREMENT BENEFIT COSTS |
P.R.C. state managed retirement benefit programs are defined contribution plans and the payments to the plans are charged as expenses when employees have rendered service entitling them to the contribution made by the employer.
| 2.33 | STOCK-BASED COMPENSATION |
The Company has adopted both ASC Topic 718, “Compensation - Stock Compensation” and ASC Topic 505-50, “Equity-Based Payments to Non - Employees” using the fair value method in which an entity issues its equity instruments to acquire goods and services from employees and non- employees. Stock compensation for stock granted to non-employees has been determined in accordance with this accounting standard and the accounting standard regarding accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling goods or services, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured. This accounting standard allows the “simplified” method to determine the term of employee options when other information is not available. Under ASC Topic 718 and ASC Topic 505-50, stock compensation expenses is measured at the grant date on the value of the option or restricted stock and is recognized as expenses, less expected forfeitures, over the requisite service period, which is generally the vesting period.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| 2.34 | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10- 35-37 establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 Pricing inputs that are generally observable inputs and not corroborated by market data.
Financial instruments consist principally of cash, accounts receivable, Deposits and prepayments, accounts payable and accrued expenses, other payables, due to a director and income tax payables. The carrying amounts of such financial instruments in the accompanying condensed consolidated balance sheet approximate their fair values due to their relatively short-term nature. The Company’s long-term borrowing, promissory notes and convertible notes payable approximates the fair value of such instrument based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangement at December 31, 2019. It is management's opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
The Company revalues its derivative liability at every reporting period and recognizes gains or losses in the consolidated statement of income and other comprehensive income that are attributable to the change in the fair value of the derivative liability. The Company has no other assets or liabilities measured at fair value on a recurring basis.
| 2.35 | RECENT ACCOUNTING PRONOUNCEMENTS |
In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07—Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements and related disclosures.
Certain balances have been reclassified in the December 31, 2018 consolidated balance sheet and the consolidated statement of cash flows on a basis consistent with the financial statements as of and for the year ended December 31, 2019.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as business segments and major customers in consolidated financial statements. The Company operates in five principal reportable segments: Fishery Development Division, HU Plantation Division, Organic Fertilizer and Bread Grass Division, Cattle Farm Development Division and Corporate and Others Division.
| | | 2019 | |
| | | | | | | | | Organic
Fertilizer | | | | | | | | | | |
| | | Fishery
Development | | | HU
Plantation | | | and Bread
Grass | | | Cattle Farm
Development | | | Corporate and | | | | |
| | | Division(1) | | | Division (2) | | | Division (3) | | | Division (4) | | | others (5) | | | Total | |
| Revenue | | $ | 1,719,247 | | | | 4,585,603 | | | | 26,870,196 | | | | 36,191,035 | | | | 66,232,233 | | | $ | 135,598,314 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (15,636,840 | ) | | | (1,963,012 | ) | | | (3,630,581 | ) | | | (2,276,309 | ) | | | 13,164,475 | | | $ | (10,342,267 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 62,172,772 | | | | 47,355,810 | | | | 103,086,572 | | | | 84,962,290 | | | | 355,826,381 | | | $ | 653,403,825 | |
| | | 2018 | |
| | | | | | | | | Organic
Fertilizer | | | | | | | | | | |
| | | Fishery
Development | | | HU
Plantation | | | and Bread
Grass | | | Cattle Farm
Development | | | Corporate and | | | | |
| | | Division(1) | | | Division (2) | | | Division (3) | | | Division (4) | | | others (5) | | | Total | |
| Revenue | | $ | 11,127,393 | | | $ | 3,617,249 | | | $ | 28,909,768 | | | $ | 29,558,983 | | | $ | 68,457,170 | | | $ | 141,670,563 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 1,567,429 | | | $ | (3,3037,306 | ) | | $ | (280,356 | ) | | $ | 3,491,893 | | | $ | 15,581,677 | | | $ | 17,323,337 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 87,129117 | | | $ | 43,484,157 | | | $ | 327,374,461 | | | $ | 42,288,332 | | | $ | 290,326,712 | | | $ | 790,602,779 | |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 3. | SEGMENT INFORMATION (CONTINUED) |
Note
| (1) | Operated by Capital Award, Inc. (“CA”). |
| (2) | Operated by Jiang Men City Heng Sheng Tai Agriculture Development Co., Limited (“JHST”). |
| (3) | Operated by Qinghai Sanjiang A Power Agriculture Co., Limited (“SJAP”), A Power Agro Agriculture Development (Macau) Limited (“APWAM”), and Hunan Shenghua A Power Agriculture Co., Limited (“HSA”). On December 30, 2018 QZH was disposed to third party and derecognized as variable interest entity on the same date. |
| (4) | Operated by Jiang Men City Hang Mei Cattle Farm Development Co. Limited (“JHMC”) and Macau Eiji Company Limited (“MEIJI”). |
| (5) | Operated by Sino Agro Food, Inc. (“SIAF”) and Sino Agro Food Sweden AB (“SAFS”). |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 3. | SEGMENT INFORMATION (CONTINUED) |
Further analysis of revenue:-
| | | 2019 | |
| | Fishery
Development
Division | | | HU
Plantation
Division | | | Organic
Fertilizer
and Bread
Grass
Division | | | Cattle Farm
Development
Division | | | Corporate and
others | | | Total | |
Name of entity
Sale of goods
Capital Award, Inc. (CA) | | | | | | | | | | | | | | | | | | | | | | | - | |
Jiang Men City Heng Sheng Tai Agriculture
Development Co. Ltd ("JHST") | | | | | | | 4,585,603 | | | | | | | | | | | | | | | | 4,585,603 | |
| Qinghai Sanjiang A Power Agriculture Co., Ltd ("SJAP") | | | | | | | | | | | 11,286,153 | | | | | | | | | | | | 11,286,153 | |
| Hunan Shenghua A Power Agriculture Co., Limited ("HSA") | | | | | | | | | | | 15,584,043 | | | | | | | | | | | | 15,584,043 | |
| Macau Eiji Company Limited ("MEIJI") | | | | | | | | | | | | | | | 36,191,035 | | | | | | | | 36,191,035 | |
| Sino Agro Food, Inc. ("SIAF") | | | | | | | | | | | | | | | | | | | 66,232,233 | | | | 66,232,233 | |
| Consulting and service income for development contracts Capital Award, Inc. (CA”) | | | 1,719,247 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | - | |
| | | | 1,719,247 | | | | 4,585,603 | | | | 26,870,196 | | | | 36,191,035 | | | | 66,232,233 | | | | 135,598,314 | |
Further analysis of revenue:-
| | | 2018 | |
| | Fishery
Development
Division (1) | | | HU
Plantation
Division (2) | | | Organic
Fertilizer
and Bread
Grass
Division (3) | | | Cattle Farm
Development
Division(4) | | | Corporate and
others(5) | | | Total | |
Name of entity
Sale of goods
Capital Award, Inc. (CA) | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Jiang Men City Heng Sheng Tai Agriculture
Development Co., Limited ("JHST") | | | - | | | | 3,617,249 | | | | - | | | | - | | | | - | | | | 3,617,249 | |
| Hunan Shenghua A Power Agriculture Co., Limited ("HSA") | | | - | | | | - | | | | 9,671,330 | | | | - | | | | - | | | | 9,671,330 | |
| Qinghai Sanjiang A Power Agriculture Co., Ltd ("SJAP") | | | - | | | | - | | | | 19,238,438 | | | | - | | | | - | | | | 19,238,4383 | |
| Macau Eiji Company Limited ("MEIJI") | | | - | | | | - | | | | - | | | | 29,558,983 | | | | - | | | | 29,558,983 | |
| Sino Agro Food, Inc. (SIAF) | | | - | | | | - | | | | - | | | | - | | | | 68,457,170 | | | | 68,457,170 | |
| Consulting and service income for development contracts Capital Award, Inc. (“CA”) | | | 11,127,393 | | | | - | | | | - | | | | - | | | | - | | | | 11,127,393 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 11,127,393 | | | $ | 3,617,249 | | | $ | 28,909,768 | | | $ | 29,558,983 | | | $ | 68,457,170 | | | $ | 141,670,563 | |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further analysis of cost of goods sold and cost of services:- COST
| | | 2019 |
| | | Fishery
Development
Division | | | | HU
Plantation
Division | | | | Organic
Fertilizer
and Bread
Grass
Division | | | | Cattle Farm
Development
Division | | | | Corporate and
others | | | | Total | |
Name of entity
Sale of goods | | | | | | | | | | | | | | | | | | | | | | | | |
| Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd ("JHST") | | | | | | | 3,718,225 | | | | | | | | | | | | | | | | 3,718,225 | |
| Qinghai Sanjiang A Power Agriculture Co., Ltd ("SJAP") | | | | | | | | | | | 8,262,804 | | | | | | | | | | | | 8,262,804 | |
| Hunan Shenghua A Power Agriculture Co., Limited ("HSA") | | | | | | | | | | | 13,271,460 | | | | | | | | | | | | 13,271,460 | |
| Macau Eiji Company Limited ("MEIJI") | | | | | | | | | | | | | | | 29,284,786 | | | | | | | | 29,284,786 | |
| Sino Agro Food, Inc. (SIAF) | | | | | | | | | | | | | | | | | | | 58,864,686 | | | | 58,864,686 | |
| Consulting and service income for development contracts Capital Award, Inc. (“CA”) | | | 1,590,017 | | | | | | | | | | | | | | | | | | | | | |
| | | | 1,590,017 | | | | 3,718,225 | | | | 21,534,264 | | | | 29,284,786 | | | | 58,864,686 | | | | 113,401,961 | |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 4. | SEGMENT INFORMATION (CONTINUED) |
Further analysis of cost of goods sold and cost of services (Continued):-
COST OF GOODS SOLD
| | | 2018 | | | | |
| | | | | | | | | Organic | | | | | | | | | | |
| | | Fishery | | | HU | | | Fertilizer and | | | Cattle Farm | | | Corporate | | | | |
| | | Development | | | Plantation | | | Bread Grass | | | Development | | | and others | | | | |
| | | Division (1) | | | Division (2) | | | Division (3) | | | Division (4) | | | (5) | | | Total | |
Name of entity
Sale of goods
Capital Award, Inc. (“CA”) | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Jiang Men City Heng Sheng Tai Agriculture Development Co., Limited (“JHST”) | | | - | | | | 3,098,390 | | | | - | | | | - | | | | - | | | | 3,098,390 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Hunan Shenghua A Power Agriculture Co., Limited (“HSA”) | | | - | | | | - | | | | 6,894,335 | | | | - | | | | - | | | | 6,894,335 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Qinghai Sanjiang A Power Agriculture Co., Limited (“SJAP”) | | | - | | | | - | | | | 14,937,535 | | | | - | | | | - | | | | 14,937,535 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Macau Eiji Company Limited (“MEIJI”) | | | - | | | | - | | | | - | | | | 24,761,345 | | | | - | | | | 24,761,345 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Sino Agro Food, Inc. (“SIAF”) | | | - | | | | - | | | | - | | | | - | | | | 61,275,743 | | | | 61,275,743 | |
| | | $ | - | | | $ | 3,098,390 | | | $ | 21,831,870 | | | $ | 24,761,345 | | | $ | 61,275,743 | | | $ | 110,967,348 | |
COST OF SERVICES
| | | 2018 | | | | |
| | | | | | | | | Organic | | | | | | | | | | |
| | | Fishery | | | | | | Fertilizer and | | | Cattle Farm | | | Corporate | | | | |
| | | Development | | | HU Plantation | | | Bread Grass | | | Development | | | and others | | | | |
| | | Division (1) | | | Division (2) | | | Division (3) | | | Division (4) | | | (5) | | | Total | |
| Name of entity | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Consulting and service income for development contracts | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital Award, Inc. (“CA”) | | $ | 9,051,408 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 9,051,408 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 9,051,408 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 9,051,408 | |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United States of America
The Company was incorporated in the State of Nevada, in the United States of America. The Company has no trading operations in United States of America and no U.S. corporate tax has been provided for in the consolidated financial statements of the Company.
Undistributed Earnings of Foreign Subsidiaries
The Company intends to use the remaining accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and accordingly, undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States and no provision for
U.S. Federal and State income tax or applicable dividend distribution tax has been provided thereon.
As of December 31, 2019, the Company reviewed its tax position with the assistance US tax professionals and believed that there would be no taxes and no penalties assessed by the IRS in the United States of America.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 5. | INCOME TAXES (CONTINUED) |
China
The Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic Enterprises (“DE’s ”) and Foreign Invested Enterprises (“FIE’s”). The new standard EIT rate of 25% replaced the 33% rate currently applicable to both DE’s and FIE’s. The Company is currently evaluating the impact that the new EIT will have on its financial condition. Beginning January 1, 2008, China unified the corporate income tax rule on foreign invested enterprises and domestic enterprises. The unified corporate income tax rate is 25%.
Under new tax legislation in China beginning in January 2008, the agriculture, dairy and fishery sectors are exempt from enterprise income taxes.
No EIT has been provided in the financial statements of SIAF, JHST, JHMC, HSA, and SJAP since they are exempt from EIT for the years ended December 31, 2019 and 2018 as they are within the agriculture, and cattle sectors.
No EIT has been provided in the financial statements of QZH since they are exempt from EIT for the period ended December 30, 2018 (date of de- recognition QZH as subsidiary) and as it is within the cattle sectors.
Belize
CA, CS and CH are international business companies incorporated in Belize, and are exempt from corporate tax in Belize.
Macau
No Macau Corporate income tax has been provided in the consolidated financial statements of APWAM and MEIJI since these entities did not earn any assessable profits for the years ended December 31, 2019 and 2018.
Sweden
Sweden Corporate income tax has been provided at 22% on reported profit for the year ended December 31, 2019 and 2018 in the consolidated financial statements of SAFS.
No deferred tax assets and liabilities are of December 31, 2019 and 2018 since there was no difference between the financial statements carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the period in which the differences are expected to reverse.
Provision for income taxes is as follows:
| | | 2019 | | | 2018 | |
| SIAF | | $ | - | | | $ | - | |
| SAFS | | | | | | | | |
| CA, CH and CS | | | | | | | | |
| MEIJI and APWAM | | | | | | | | |
| JHST, JHMC, SJAP, QZH and HSA | | | | | | | | |
| | | $ | | | | | | |
The Company did not recognize any interest or penalties related to unrecognized tax benefits in the years ended December 31, 2019 and 2018. The Company had no uncertain positions that would necessitate recording of tax related liability. The Company is subject to examination by the respective tax authorities.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 6. | NET LOSS FROM DISPOSAL OF A VARIABLE INTEREST ENTITY |
As of December 31, 2016, the SJAP’s total investment in QZH was $4,645,489. During the period ended December 30, 2018, QZH incurred a loss of $30,682,576. SJAP disposed its entire 85% equity interest in QZH for RMB2 (equivalent to $0) for cash and completed on December 30, 2018. As a result, QZH was derecognized as VIE of the company.
| (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, 2018 | | $ | 9,365,643 | |
| | | | | |
| Satisfied by: | | | | |
| Cash consideration | | $ | - | |
| (b) | Net cash outflow from disposal of a variable interest entity, QZH |
| | | 2018 | |
| Cash and cash equivalents disposed of | | $ | (17,060 | ) |
| Net cash outflow disposal of a variable interest entity, QZH | | $ | (17,060 | ) |
| 7. | CASH AND CASH EQUIVALENTS |
| | | 2019 | | | 2018 | |
| Cash and bank balances | | $ | 185,895 | | | $ | 4,950,799 | |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019, inventories are as follows:
| | | 2019 | | | 2018 | |
| Bread grass | | | | | | $ | 744,378 | |
| Beef cattle | | | | | | | 11,561,117 | |
| Organic fertilizer | | | | | | | 14,266,923 | |
| Forage for cattle and consumable | | | | | | | 7,252,280 | |
| Raw materials for bread grass and organic fertilizer | | | | | | | 18,885,258 | |
| Immature seeds | | | | | | | 1,872,285 | |
| | | | - | | | $ | 54,582,241 | |
| 9. | DEPOSITS AND PREPAYMENTS |
| | | 2019 | | | 2018 | |
| Deposits for | | | | | | | | |
| - purchases of equipment | | | 2,037,425 | | | $ | 2,158,867 | |
| - acquisition of land use rights | | | - | | | | 174,851 | |
| - inventories purchases | | | 1,059,543 | | | | 16,921,188 | |
| - construction in progress | | | - | | | | 4,789,035 | |
| - issue of shares as collateral | | | 24,402,175 | | | | 24,928,324 | |
| Shares issued for employee compensation and overseas professional and bond interest | | | - | | | | 643,457 | |
| Others | | | 2,631,797 | | | | 2,625,468 | |
| | | | 30,130,940 | | | $ | 52,241,190 | |
All accounts receivable are reflected as a current asset and no allowance for bad debt of December 31, 2019 and 2018, respectively.
Aging analysis of accounts receivable is as follows:
| | | 2019 | | | 2018 | |
| 0 - 30 days | | | 9,746,096 | | | $ | 7,447,269 | |
| 31 - 90 days | | | 40,452,553 | | | | 22,684,605 | |
| 91 - 120 days | | | 3,938,695 | | | | 16,456,895 | |
| over 120 days and less than 1 year | | | 5,777,425 | | | | 11,773,454 | |
| over 1 year | | | 38,613,820 | | | | 43,289,908 | |
| | | | 98,528,589 | | | $ | 101,652,131 | |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | 2019 | | | 2018 | |
| Advanced to employees | $ | 255,174 | | | $ | 561,330 | |
| Advanced to suppliers | | 2,543,541 | | | | 3,831,926 | |
| Advanced to customers | | 14,131,956 | | | | 14,114,249 | |
| Advanced to developers | | - | | | | 453,155 | |
| Advanced to SJAP | | 76,404,954 | | | | - | |
| Others | | 2,229,752 | | | | 9,346,866 | |
| | $ | 95,565,377 | | | $ | 28,307,526 | |
Advanced to employees, suppliers, customers and developers are unsecured, interest free and with no fixed terms of repayment.
| | | 2019 | | | 2018 | |
| Plant and machinery | | $ | 9,652,132.00 | | | $ | 5,299,631.00 | |
| Structure and leasehold improvements | | | 90,615,323.00 | | | | 200,734,812.00 | |
| Mature seeds and herbage cultivation | | | 17,752,012.00 | | | | 54,643,255.00 | |
| Furniture and equipment | | | 2,613,172.00 | | | | 695,461.00 | |
| Motor vehicles | | | 3,241,556.00 | | | | 590,416.00 | |
| | | | 123,874,195.00 | | | | 261,963,575.00 | |
| | | | | | | | | |
| Less: Accumulated depreciation | | | 20,809,957.00 | | | | 31,317,916.00 | |
| Net carrying amount | | $ | 103,064,238.00 | | | $ | 230,645,659.00 | |
Depreciation expenses were $5, 272, 630, $13,080,991 for the years ended December 31, 2019, and 2018, respectively
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 13. | CONSTRUCTION IN PROGRESS |
| | 2019 | | | 2018 | |
| Construction in progress | | | | | |
| - Office, warehouse and organic fertilizer plant in HSA | $ | - | | | $ | 7,285 | |
| - Oven room, road for production of dried flowers | | - | | | - | |
| - Organic fertilizer and bread grass production plant and office building | | - | | | 6,484,045 | |
| - Rangeland for beef cattle and office building | | - | | | 6,024,197 | |
| - Fish pond and breeding factory | | - | | | | - | |
| | $ | | | $ | 12,515,527 | |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | 2019 | | | 2018 | |
| Cost | | $ | 64,392,689 | | | $ | 65,779,178 | |
| Less: Accumulated amortization | | | (13,359,761 | ) | | | (11,964,897 | ) |
| Net carrying amount | | $ | 51,032,928 | | | $ | 53,814,281 | |
Land use rights are amortized on the straight-line basis over their respective lease periods. The lease period of agriculture land is 10 to 60 years. Amortization of land use rights were $1,553,073 and $1,686,879 for the years ended December 31, 2019 and 2018, respectively. No impairment of land use right has been identified for the years ended December 31, 2019 and 2018.
Goodwill represents the fair value of the assets acquired the acquisitions over the cost of the assets acquired. It is stated at cost less accumulated impairment losses. Management tests goodwill for impairment on an annual basis or when impairment indicators arise. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the assets. To date, no such impairment loss has been recorded.
| | | 2019 | | | 2018 | |
| Goodwill from acquisition | | $ | 729,940 | | | $ | 724,940 | |
| Less: Accumulated impairment losses | | | - | | | | - | |
| Net carrying amount | | $ | 724,940 | | | $ | 724,940 | |
| 16. | PROPRIETARY TECHNOLOGIES |
By an agreement dated November 12, 2008, CA acquired an enzyme technology master license, registered under a Chinese patent, for the manufacturing of livestock feed and bioorganic fertilizer and its related labels for $8,000,000. On October 1, 2015, the Company took up such assets at $5,473,720.
On March 6, 2012, MEIJI acquired an aromatic-feed formula technology for the production of aromatic cattle for $1,500,000. On October 1, 2013, SIAF was granted a license to exploit sleepy cods breeding technology to grow out of sleepy cods for $2,270,000 for 50 years. SJAP booked bacterial cellulose technology license and related trademark for $2,119,075 and amortized expenditures for 20 years starting from January 1, 2014.
| | | 2019 | | 2018 | |
| Cost | | | 9,232,228 | | | $ | 11,113,267 | |
| Less: Accumulated amortization | | | (2,164,475 | ) | | | (2,176,196 | ) |
| Net carrying amount | | | 7,067,753 | | | $ | 8,937,071 | |
Amortization of proprietary technologies was $485,539 and $583,133 for the years ended December 31, 2019 and 2018 respectively. No impairments of proprietary technologies have been identified for the years ended December 31, 2019 and 2018
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 17. | INTERESTS IN UNCONSOLIDATED EQUITY INTERESTS |
On February 28, 2011, TRW applied to form a corporate joint venture, Enping City Bi Tao A Power Fishery Development Co., Limited (“EBAPFD”), incorporated in the PRC. TRW owned a 25% equity interest in EBAPFD. On November 17, 2011, TRW formed Jiang Men City A Power Fishery Development Co., Limited (“JFD”) in which it acquired a 25% equity interest, while withdrawing its 25% equity interest in EBAPFD. As of December 31, 2011, the Company had invested for total cash consideration of $1,258,607 in JFD. JFD operates an indoor fish farm. On January 1, 2012, the Company acquired an additional 25% equity interest in JFD for total cash consideration of $1,662,365. As of January 1, 2012, the Company had consolidated the assets and operations of JFD. On April 1, 2012, the Company acquired an additional 25% equity interest in JFD for the total cash consideration of $1,702,580. These acquisitions were at our option according the terms of the original development agreement. The Company owned a 75% equity interest in JFD, representing majority of voting rights and controls its board of directors.
On August 15, 2016, the acquisition agreement was executed by TRW for acquiring the other 25% equity in JFD which was a Sino Foreign Joint Venture Co. that TRW had 100% equity interest with effect on October 5, 2016. Upon the acquisitions of 3 additional prawn farms assets at fair value of $238.32 million from respective third parties and the master technology license at fair value of $30 million from Capital Award, Inc. by JFD, and the consideration of the above acquisitions were planned to be settled by the new issue shares of 99,990,000 TRW shares at $3.41 amounting to $340.53 million on or before March 31, 2018. As a result, SIAF’s equity interest in TRW was diluted from 100% to 23.89% with effective on October 5, 2016. The above transactions leaded the Company loss of control over TRW group, the Company’s investments in TRW and JFD were reclassified from a subsidiary to investments in unconsolidated equity investees as of October 5, 2016. The dilution of the Company’s investments in TRW group constituted a deemed disposal of the subsidiaries. The deemed gain on disposal of $56,947,005 was recorded in net income from discontinued operations of the consolidated statements of income and other comprehensive income of the Company for the year ended December 31, 2016. The Company converted the amount due from unconsolidated equity investee into equity interest during the fourth quarter of 2018, which resulted in equity interest in TRW from 23.89% to 36.60%
On May 6, 2016, SJAP invested in 30% equity interest in Guangzhou Horan Taita Information Technology Co., Limited (“HTIT”), a company incorporated in P.R.C. for RMB1,000,000. Impairment were $nil and $153,046 for the years ended December 31, 2019 and 2018, respectively.
| | | 2019 | | | 2018 | |
| Investments at cost | $ | | | | $ | |
| - TRW | | | 149,720,418 | | | | 149,720,418 | |
| - SJAP | | | 40,211,202 | | | | - | |
| Amount due from a consolidated equity investee - TRW | | | 59,413,091 | | | | 57,354,208 | |
| | | | 249,344,711 | | | $ | 207,074,626 | |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 18. | TEMPORARY DEPOSITS PAID TO ENTITIES FOR EQUITY INVESTMENTS IN FUTURE SINO JOINT VENTURE COMPANIES |
Intended
unincorporated | | Projects | | | | |
| Investee | | Engaged | | | 2019 | | 2018 | |
| A | | Trade center | | | | *12,000,000 | | $ | 12,000,000 | |
| B | | Fish and prawn Farm 2 GaoQiqiang Aquaculture | | | | * | | | 17,403,959 |
| C | | Cattle farm 2 | | | | *5,507,626 | | | 5,502,001 | |
| | | | | | $ | 17,507,626 | | $ | 34,905,960 | |
The Company made temporary deposits paid to entities for equity investments in future Sino Joint Venture companies (“SJVCs”) engaged in projects development of trade and seafood centers, fish, prawns and cattle farms. Such temporary deposits represented as deposits of the respective consideration required for the purchase of equity stakes of respective future SJVCs. The amounts were classified as temporary because legal procedures of formation of SJVCs have not yet been completed. As of December 31, 2019, the percentages of equity stakes of A (trade and seafood centers), B (fish farm 2 GaoQiqiang Aquaculture Farm) and C (cattle farm 2) are 31%, 23% and 35% respectively.
| * | The above amounts were subject to conversion to an additional equity investment in the investees upon the completion of legal procedures of formation of SJVCs. |
| 19. | VARIABLE INTEREST ENTITY TO AN INVESTOR IN ASSOCIATE |
On September 28, 2009, APWAM acquired the PMH’s 45% equity interest in the Sino-Foreign joint venture company, Qinghai Sanjiang A Power Agriculture Co. Limited (“SJAP”), which was incorporated in the P.R.C. As of December 31, 2019, the Company has invested $2,251,359 in this joint venture. SJAP is engaged in its business of the manufacturing of organic fertilizer, livestock feed, and beef cattle and plantation of crops and pastures.
Continuous assessment of the VIE relationship with SJAP
The Company may also have a controlling financial interest in an entity through an arrangement that does not involve voting interests, such as a VIE. The Company evaluates entities deemed to be VIE’s using a risk and reward model to determine whether to consolidate. A VIE is an entity (1) that has total equity at risk that is not sufficient to finance its activities without additional subordinated financial support from other entities, (2) where the group of equity holders does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual returns, or both, or (3) where the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately fewer voting rights.
The Company also quantitatively and qualitatively examined if SJAP is considered a VIE. Qualitative analyses considered the extent to which the nature of its variable interest exposed the Company to losses. For quantitative analyses, the Company also used internal cash flow models to determine if SJAP was a VIE and, if so, whether the Company was the primary beneficiary. The projection of these cash flows and probabilities thereof requires significant managerial judgment because of the inherent limitations that relate to the use of historical data for the projection of future events. On December 31, 2019, the Company evaluated the above VIE testing results and concluded that the Company is the primary beneficiary of SJAP’s expected losses or residual returns and that SJAP qualifies as a VIE of the Company. As result, the Company has consolidated SJAP as a VIE.
The reasons for the changes are as follows:
| • | Originally, the board of directors of SJAP consisted of 7 members; 3 appointees from Qinghai Sanjiang (one stockholder), 1 from Garwor (one stockholder), and 3 from the Company, such that the Company did not have majority interest represented on the board of directors of SJAP. |
| • | On May 7, 2010, Qinghai Sanjiang sold and transferred its equity interest in SJAP to Garwor. The State Administration for Industry and Commerce of Xining City Government of the P.R.C. approved the sale and transfer. |
Consequently Garwor and the Company agreed that the new board of directors of SJAP would consist of 3 members; 1 appointee from Garwor and 2 appointees from the Company, such that the Company now had a majority interest in the board of directors of SJAP. Also, and in accordance with the Company’s Sino Joint Venture Agreement, the Company’s management appointed the chief financial officer of SJAP. As a result, the financial statements of SJAP were included in the consolidated financial statements of the Company.
On September 30th 2019, Mr. Solomon Lee resigned as the Chairman of SJAP resulting in categorization of SJAP as an Investor in Associate from a subsidiary status.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 20. | VARIABLE INTEREST ENTITY (CONTINUED) |
Continuous assessment of the VIE relationship with QZH
The Company may also have a controlling financial interest in an entity through an arrangement that does not involve voting interests, such as a VIE. The Company evaluates entities deemed to be VIE’s using a risk and reward model to determine whether to consolidate. A VIE is an entity (1) that has total equity at risk that is not sufficient to finance its activities without additional subordinated financial support from other entities, (2) where the group of equity holders does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual returns, or both, or (3) where the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately fewer voting rights.
The Company also quantitatively and qualitatively examined if QZH is considered a VIE. Qualitative analyses considered the extent to which the nature of its variable interest exposed the Company to losses. For quantitative analyses, the Company also used internal cash flow models to determine if QZH was a VIE and, if so, whether the Company was the primary beneficiary. The projection of these cash flows and probabilities thereof requires significant managerial judgment because of the inherent limitations that relate to the use of historical data for the projection of future events. Before December 30, 2018, the Company evaluated the above VIE testing results and concluded that the Company is the primary beneficiary of QZH’s expected losses or residual returns and that QZH qualifies as a VIE of the Company. As result, the Company has consolidated QZH as a VIE.
The reasons for the QZH qualified as a VIE are as follows:
| • | Originally, SJAP was sole stockholder of QZH, owned 100% equity interest in QZH and controlled directorship of QZH. |
| • | On October 25, 2015, both QZH and new stockholder, Qinghai Quanwang Investment Management Co., Ltd (“QQI”) contributed additional capital of $4,157,682 and $769,941, respectively. As of result, SJAP decreased its equity interest from 100% to 86% and QQI owned 14% equity interest. In addition, according to investment agreement between QZH and QQI, (i) QQI only enjoyed interest 6% annually on its capital contribution and did not enjoy any profit distribution; (ii) investment period was 3 years only, and (iii) SJAP shared 100% on profit or loss after deduction 6% interest to QQI and enjoyed 100% voting rights of QZH’s board and stockholders meetings. |
| • | Consequently, the Company still indirectly control directorship of QZH, such that the Company now had a majority interest in the directorship of QZH. Also, and in accordance with the Company’s Sino Joint Venture Agreement, the Company’s controlled QZH’s chief financial officer appointment. As a result, the financial statements of QZH were included in the consolidated financial statements of the Company. |
On December 30, 2017 the Company sold its (35.36%) equity in QZH to a third party for RMB 2 and effectively resigned from the board of directors of QZH as 31st December 2018 as such the Company has no further equity and financial interest in QZH for year ended 31st December 2019.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | (i) | Costs and estimated earnings in excess of billings on uncompleted contracts |
| | | 2019 | | | 2018 | |
| Costs | | | 6,186,261 | | | $ | 6,186,261 | |
| Estimated earnings | | | 4,777,300 | | | | 4,777,300 | |
| Less: Billings | | | (10,712,733 | ) | | | (10,712,733 | ) |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | | 250,828 | | | $ | 250,828 | |
| | (ii) | Billings in excess of costs and estimated earnings on uncompleted contracts |
| | | 2019 | | | 2018 | |
| Billings | | | 49,175,412 | | | $ | 47,929,092 | |
| Less: Costs | | | (30,098,638 | ) | | | (29,094,568 | ) |
| Estimated earnings | | | (13,690,063 | ) | | | (13,486,231 | ) |
| Billing in excess of costs and estimated earnings on uncompleted contracts | | | 5,386,711 | | | $ | 5,348,293 | |
| | | 2019 | | | 2018 | |
| Due to third parties | | | 5,994,581 | | | $ | 13,068,387 | |
| Straight note payable (note 23(i)) | | | 29,367,999 | | | | 29,367,999 | |
| Promissory notes issued to third parties | | | 7,151,762 | | | | 7,792,774 | |
| Due to local government | | | - | | | | 87,425 | |
| | | | 42,514,342 | | | $ | 50,316,585 | |
| | | | | | | | | |
| Less: Amount classified as non-current liabilities | | | | | | | | |
| Promissory notes issued to third parties | | | (7,151,762 | ) | | | (7,792,774 | ) |
| Amount classified as current liabilities | | | 35,362,580 | | | $ | 42,523,811 | |
Due to third parties are unsecured, interest free and have no fixed terms of repayment. |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There are no provisions in the Company’s bank borrowings and long term debts that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business. Under certain agreements, the Company has the option to retire debt prior to maturity, either at par or at a premium over par.
| Name of lender | | Interest
rate | | | Term | | | 2019 | | | 2018 | |
China Development Bank
Qinghai Province, the P.R.C. | | | 5.2835 | % | | | November 29, 2018 - November 28, 2018 | | | | - | | | | | |
| | | | | | | | | | | | | | | | | |
China Development Bank
Qinghai Province, the P.R.C. | | | 5.2835 | % | | | December 14, 2018 - December 13, 2018 | | | | - | | | | | |
| | | | | | | | | | | | | | | | | |
China Development Bank
Qinghai Province, the P.R.C | | | 4.7306 | % | | | December 27, 2018 - December 27, 2019 | | | | | | | | 4,371,265 | |
| | | | | | | | | | | | | | | | | |
| Add: current portion of a long term bank loan | | | | | | | | | | | | | | | 218,563 | |
| | | | | | | | | | | | | | | | | |
| Short term bank loans | | | | | | | | | | | | | | | 4,589,828 | |
| | | | | | | | | | | | | | | | | |
China Development Bank
Qinghai Province, the P.R.C. | | | 5.39 | % | | | December 16, 2016 - December 15, 2026 | | | | | | | | 5,755,501 | |
| | | | | | | | | | | | | | | | | |
| Less: current portion of long term bank loan | | | | | | | | | | | 0 | | | | (218,563 | ) |
| | | | | | | | | | | | | | | | | |
| Long term bank loans | | | | | | | | | | $ | 0 | | | $ | 5,536,938 | |
On November 29, 2018 and December 14, 2018, the Company obtained two 1-year short term loans of RMB20 million (approximately $3.06million) and RMB10 million (approximately $1.53million) respectively from China Development Bank for the period from November 29, 2018 to November 28, 2018 and December 14, 2018 to December 13, 2018 respectively, bearing fixed interest at 5.2835% per annum. Both loans were guaranteed by Xining City SME Guarantee Corporation and have been repaid on November 28, 2018 and December 13, 2018, respectively.
On December 16, 2016, the Company obtained a 10-year long term loan of RMB40million (approximately $6.05million) from China Development Bank for the period from December 16, 2016 to December 15, 2026, bearing an annual interest rate at 110% of the benchmark rate of PBOC on the date of the loan agreement and will be adjusted in line with any adjustment of the benchmark rate which is 5.39% (2018: 5.39%). The loan was guaranteed by Mr. Zhao Yilin and Ms. Song Haixian, Mr. Zhao Yilin’s wife. The loan was also secured by land use right with net carrying amount of $397,269 as of December 31, 2019 (2018: 429,982) and a batch of plant, machinery and equipment with net carrying amount of $5,326,385 (2018: 5,954,915). On December 14, 2018, RMB500,000 (approximately $75,563) was repaid to the bank. According to the loan agreement, RMB1,500,000 (approximately $218,563) was schedule to be repaid by November 20, 2019 in two partial repayments.
On December 27, 2018, the Company obtained a 1-year short term loan of RMB30 million (approximately $4.37 million) from China Development Bank for the period from December 27, 2018 to December 27, 2019, bearing fixed interest at 4.7306% per annum. This loan was guaranteed by Xining City SME Guarantee Corporation.
The above note agreements contained regular provisions requiring timely repayment of principals and accrued interests, payment of default interest in the event of default, and without specific financial covenants. Management of the Company believes the Company is in material compliance with the terms of the loan agreements.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 23. | CONVERTIBLE NOTE PAYABLES |
| (i) | On August 29, 2014, the Company completed the closing of a private placement financing transaction with an accredited investor, which purchased a 10.5% Convertible Note (the “Note 1”) in the aggregate principal amount of up to $33,300,000. The Company received the total advance of $11,632,450. The Company shall offer investor a discount equal to 25% of the amount of the principal advanced by the investor. |
Interest on the note shall accrue on the outstanding principal balance of this Note from August 29, 2014. Interest shall be payable quarterly on the last day of each of March, June, September and December commencing September 30, 2014 provided, however, that note holder may elect to require the Company to issue to the note holder a promissory note in lieu of cash in satisfaction of any interest due and payable at such time. Any interest payment note shall be subject to the same terms as the note. The note has a maturity date of February 28, 2020.
The note is convertible, at the discretion of the note holder, into shares of the Company’s common stock (i) at any time following an Event of Default, or (ii) for a period of thirty (30) calendar days following October 31, 2015 and each anniversary thereof, at an initial conversion price per share of $1.00, subject to adjustment for stock splits, reverse stock splits, stock dividends and other similar transactions and subject to the terms of the note. As long as the note is outstanding, the investor shall have a right of first refusal, exercisable for thirty (30) calendar days after notice to the note holder, to purchase securities proposed to be offered and sold by the Company.
The Company and the note holder entered into a restructuring agreement regarding the settlement of the Note 1. Both parties have agreed to restructure the indebtedness represented by Note 1 as follows: (a) SIAF issues 5,196,333 shares of its common stock and transfer 400,000 shares of TRW to the note holder; and (b) SIAF executes a new promissory note in the principal amount of $15,589,000 to the note holder to be paid in installments over a period of time. However, both parties remain open to negotiate an all-cash settlement of the Note 1.
As of December 31, 2019, as a result, the amount outstanding under Note 1 was reclassified as other payables – straight note payable of $29,367,999 (see Note 21) and a loss on restructuring of $6,225,204 which representing the non-amortized part of the discount upon the issuing of the convertible bond incurred during the year.
Subsequently, Note 1 matured on February 28, 2020, the Company intends to offer the settlement of the note to the accredited investors based on the following understanding, terms and conditions:
(i). The earlier understanding of the restructured indebtedness is to be carried as follows: (a) SIAF issues 5,196,333 shares of its common stock and transfer 400,000 shares of TRW to the note holder; and (b) SIAF is to pay the revised promissory note in the principal amount of $15,589,000 to the note holder.
(ii). It is the Company’s intension for the said 5,196,333 shares of its common stocks to be converted into the G Series Preferred Stocks at conversion ratio of the offer of the Initial Public Offer stated in the registration statement filed with SEC targeting on or before June 30, 2021.
(iii). There were 500,050 Common Shares of the Company loaned to the said accredited investor on (Date: July 22, 2014) valued at US$18.10 / share as security for the accredited investors to secure their investors to invest on the Bond prior to the completion of a registration statement filed with SEC on June 2014 to allow the official issuing of additional common stocks to ECAB’s BOND investors, and that ECAB would return back the loaned stocks back to the Company upon the time the said accredited investor invested the balance of the Note 1 proceed of (US$ 13,362,550) needed to complete the disbursement of the total loan proceed of US$25,000,000 on or before (Date: February 28th 2015). However the said investor sold the said loaned 500,050 common stocks of the Company in between the period (Date: February to March 2015) and invested part or the full sum from the sales proceeds of said 500,050 common stock of the Company (of US$10,500,000) back to the Company as part of the Note 1’s disbursement to the Company making total disbursement sum of US$22,137,450.00 being advanced to the Company on or before 30th June 2015, and in turn, the investor did not return the said 500,050 common stocks of the Company to the Company and didn’t help the Company to complete the said registration statement by not giving the Company the Debenture Agreement needed to complete said registration statement with the SEC.
(iv). In order that the principal amount of $15,589,000 of the cash settlement sum mentioned above may be settled amicably between the accredited investor and the Company, the sales proceeds (of US$13,362,550.00) from the sales of the 500,050 shares loaned in good faith to ECAB must be taken into consideration and be deduced from the said principal amount before this bond arrangements can be settled.
| (ii) | On October 20, 2018, the Company issued another Convertible Note (the "Note 2") with a principal amount of $4,000,000 due on February 28, 2018. The note holder had the option to convert all or any part of the outstanding note into the common stock of the Company (the "Primary Optional Conversion") or TRW (the "Secondary Optional Conversion") at any time for a period of eight months from the note's maturity date. The conversion price for Primary Optional Conversion is lesser of $1.5 per share or at 65% of the market share price of the Company. While the conversion price for Secondary Optional Conversion is $3.41 per share subject to equitable adjustment for stock split, stock dividend or right offerings. |
Under the agreement, the Company shall pay the note holder 120,000 common shares of SIAF or 32,000 common shares of TRW as an origination fee. The note bears a flat interest payment which shall be settled by 200,000 common shares of SIAF or 55,000 common shares of TRW. As of December 31, 2019, no settlement for both origination fee and interest payment. The supplemental agreement to the Bond Subscription Agreement with the Subscriber to extend the Bond Issue by a year to December 31, 2019 was signed. All other terms and conditions of the Bond Subscription Agreement and the Conditions continue in full force and effect.
| | | 2019 | | | 2018 | |
| (i) 10.50% convertible note due February 28, 2020 | | $ | - | | | $ | - | |
| (ii) Convertible note due December 31, 2019 | | | | | | | 3,894,978 | |
| | | | | | | | 3,894,978 | |
| Less: classified as current liabilities | | | | | | | (3,894,978 | ) |
| Non-current Liabilities | | | - | | | | - | |
The fair value of the conversion option was approximately $211,320, the Company discounted the note and created a derivative liability, which will be evaluated each quarter and adjusted for any change in value. For the year ended December 31, 2019 and 2018, the Company recognized the amortization of the discount of approximately $nil and $106,297, respectively.
The Company estimated the fair value of the derivative liabilities using the Binomial Option Pricing Model and the following key assumptions during 2018
| | | 2018 | |
| Expected dividends | | | - | |
| Expected term (years) | | | 0.34 | |
| Volatility | | | 52.09% - 54.32% | |
| Risk-free rate | | | 1.65% - 1.9% | |
The following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value as of December 31, 2019 and 2018
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | $ | | | $ | | | $ | | | $ | |
| LIABILITIES: | | | | | | | | | | | | | | | | |
| Derivative liabilities as of December 31, 2019 | | | - | | | | - | | | | 0 | | | | 0 | |
| Derivative liabilities as of December 31, 2018 | | | - | | | | - | | | | 2,100 | | | | 2,100 | |
The following table represents the change in the fair value of the derivative liabilities during the year ended December 31, 2019
| | | $ | |
| Fair value of derivative liabilities as of December 31, 2018 | | | 2,100 | |
| Change in fair value of derivative liabilities | | | - | |
| Fair value of derivative liabilities as of December 31, 2019 | | | 0 | |
The above note agreement contained regular provisions requiring timely repayment of principals and accrued interests, payment of default interest in the event of default, default and optional conversion and without specific financial covenants. Management of the Company believes the Company is in material compliance with the terms of the convertible note agreement.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Group’s share capital as of December 31, 2019 and 2018 shown on the consolidated balance sheet represents the aggregate nominal value of the share capital of the Company as of that date.
Common Stock:
On November 10, 2014, the Company approved an amendment to the Corporation’s Articles of Incorporation to effectuate a reverse stock split (the “Reverse Split”) of the Corporation’s common stock, par value $0.001 per share (the “Common Stock”) affecting both the authorized and issued and outstanding number of such shares by a ratio of 9.9 for 1. The Reverse Split became effective in the State of Nevada on December 16, 2014. Subsequent to the December 31, 2014, the Board of directors and the holders of a majority of the voting power of our stockholders of the company have approved an amendment to articles of incorporation to increase its authorized shares of Common Stock from 17,171,716 to 22,727,272.
The Board of directors and the holders of a majority of the voting power of our stockholders of the company have approved an amendment to articles of incorporation to increase its authorized shares of Common Stock from 22,727,272 to 27,000,000 and the amendment was filed on December 28, 2016.
The Board of directors and the holders of a majority of the voting power of our stockholders of the company have approved an amendment to articles of incorporation to increase its authorized shares of Common Stock from 27,000,000 to 50,000,000 and the amendment was filed on August 24, 2018 with an effective date of August 25, 2018.
During the year ended December 31, 2018, the Company (i) issued 1,167,502 shares of employees and directors at fair value of $1.00 to $3.45 per share for $1,454,352 for employee compensation; (ii) issued 500,800 shares of common stock valued to professionals at fair value of $1 per share for $500,800 for service compensation; (iii) issued 4,074,979 shares of common stock ranging from $1.40 to $5.15 amounting to $12,053,844 as collateral to secure trade and loan facilities, and the shares issued by the Company were valued at the trading price of the stock on the date the shares were issued; and (iv) 892,735 shares of common stock issued for $0 as top up securities for debts loans.
During the year ended December 31, 2019, the Company (i) issued 535,598 shares of common stock valued to employees and directors at ranging from $1 to $1.56 per share for $576,170 for employee compensation; (ii) issued 16,032,262 shares of common stock valued to professionals and contractors ranging from $ 0.55 to $1.00 per share for $9,723,720 for service compensation; and (iii) issued 3,935,439 shares of common stock valued at $ 0.30 to $0.50 per share for 1,478,029 for settlement of debts.
The Company has 49,866,174 and 29,362,875 shares of common stock issued and outstanding as of December 31, 2019 and 2018, respectively.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 25. | OBLIGATION UNDER OPERATING LEASES |
The Company leases (i) 2,178 square feet of agriculture space used for offices for a monthly rent of $812 in Enping City, Guangdong Province, P.R.C., its lease expiring on March 31, 2021; and (ii) 2,695 square feet of office space in Guangzhou City, Guangdong Province, P.R.C. for a monthly rent of $3,022 , its lease expiring on July 8, 2020.
Lease expenses were $11,121 and $140,132 for the years ended December 31, 2019 and 2018, respectively.
The future minimum lease payments as of December 31, 2020, are as follows:
| Within 1 year | | $ | 65,324 | |
| 2 to 5 years | | | 52,351 | |
| Over 5 years | | | - | |
| | | $ | 117,675 | |
| 26. | STOCK BASED COMPENSATION |
On May 10, 2016, the Company issued directors and employees a total of 1,199,068 shares of common stock valued at fair value of $5.98 per share for services rendered to the Company. The fair values of the common stock issued were determined by using the trading price of the Company’s common stock on the date of issuance of $5.98 per share. On the same date, the Company issued professionals a total of 132,787 shares of common stock valued at fair value of $5.98 per share for services rendered to the Company. The fair values of the common stock issued were determined by using the trading price of the Company’s common stock on the date of issuance of $5.98 per share.
The Company calculated stock based compensation of $7,965,624 and recognized $4,345,993 for the year ended December 31, 2016. As of December 31, 2016, the deferred compensation balance for staff was $3,982,813 and the deferred compensation balance of $3,982,813 was to be amortized over 6 months beginning on January 1, 2018.
On June 30, 2018, the Company issued employees total of 117,000 shares of common stock valued at fair value of $3.45 per share for services rendered to the Company. The fair values of the common stock issued were determined by using the trading price of the Company’s common stock on the date of issuance of $3.45 per share. On December 31, 2018, the Company issued employees total of 500,800 shares of common stock valued at fair value of $1 per share for services rendered to the Company. The fair values of the common stock issued were determined by using the trading price of the Company’s common stock on the date of issuance of $3.45 per share. On December 31, 2018, the Company issued employees total of 1,050,502 shares of common stock valued at fair value of $1 per share for services rendered to the Company. The fair values of the common stock issued were determined by using the trading price of the Company’s common stock on the date of issuance of $1 per share.
As of December 31, 2019, the deferred compensation balance for staff was $0 and $2,101,825 were to be amortized over 6 months and 1 year, respectively beginning on January 1, 2019.
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 26, 2019, a shareholder derivative complaint was filed in the United States District Court for the Southern District of New York against the Company, as well as four of its current directors. The Complaint alleges violations of securities law and state law, breaches of fiduciary duties (including gross mismanagement of the Company) by the individual defendants, a material default of its obligations under a commercial loan agreement, misleading and false statements (including material omissions) by the individual defendants, and unauthorized issuance of new shares of Common Stock to pay debts that, in the view of the plantiffs, has diluted shareholder ownership and oppressed shareholders of the Company. The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend against the Complaint.
Management does not currently believe that such claim and proceeding are likely, individually or in aggregate, to have a material adverse effect on the financial condition of the Company.
On September 22, 2015, the Company entered into a trade facility agreement with two independent third parties. Pursuant to the agreement, the Company provides collateral in the form of Company's common shares to a PRC based lender (the "Lender") and the Lender agrees to provide a revolving trade facility loan up to $20,000,000 to a PRC based borrower. The arrangement was commenced on February 15, 2016 and will be expired on September 15, 2019.
As of December 31, 2019, the Company has issued aggregate 5,708,312 common shares as collateral and the trade facility line reduced to $13 million.
| 28. | RELATED PARTY TRANSACTIONS |
In addition to the transactions and balances as disclosed elsewhere in these consolidated financial statements, during the years ended December 31, 2019 and 2018, the Company had the following significant related party transactions:-
| Name of related party | Nature of transactions |
| Mr. Solomon Yip Kun Lee, Chairman | Included in due to a director, due to Mr. Solomon Yip Kun Lee is $1,165,621 and $2,046,499 as of December 31, 2019 and 2018, respectively. The amounts are unsecured, interest free and have no fixed terms of repayment. |
| | |
| Tri-Way Industries Limited (“TRW”) Unconsolidated equity investee | Included in interest in unconsolidated equity investee, due from Tri-Way Industries Limited is $59,413,091 and $57,354,208 as of December 31, 2019 and December 31, 2018, respectively. The amounts are unsecured, interest free and have no fixed terms of repayment. |
| | |
| | Included in accounts receivable due from Tri-Way Industries Limited is $39,321,639 and $60,799,365 as of December 31, 2019 and December 31, 2018, respectively. The amounts are unsecured, interest free and have no fixed terms of repayment. |
| | |
| | The Company has revenue of consulting income of $1,719,247 and $11,127,393 from Tri-Way Industries Limited for the year ended December 31, 2019 and 2018, respectively. |
SINO AGRO FOOD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including convertible preferred stock, stock options and warrants, in the weighted average number of common shares outstanding for the year, if dilutive. The numerators and denominators used in the computations of basic and dilutive earnings per share are presented in the following table:
| | | 2019 | | | 2018 | |
| BASIC | | | | | | |
| Numerator for basic earnings per share attributable to the Company’s common stockholders: | | | | | | | | |
| Net income used in computing basic earnings per share | | | (10,342,267 | ) | | $ | 17,323,337 | |
| Basic earnings per share | | | (0.21 | ) | | $ | 0.46 | |
| Basic weighted average shares outstanding | | | 49,963,607 | | | | 37,336,164 | |
| | | | 2019 | | | | 2018 | |
| DILUTED | | | | | | | | |
| Numerator for basic earnings per share attributable to the Company’s common stockholders: | | | | | | | | |
| Net income used in computing diluted earnings per share | | | (10,342,267 | ) | | $ | 17,323,337 | |
| Diluted earnings per share | | | (0.21 | ) | | $ | 0.46 | |
| Diluted weighted average shares outstanding | | | 49,963,607 | | | | 37,336,164 | |
