Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
20-F
(Mark
One)
¨
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
OR
x
|
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended September 30, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
OR
¨
|
SHELL COMPANY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number: 000-5157
Origin
Agritech Limited
(Exact
name of Registrant as specified in its charter)
Not
Applicable
(Translation
of Registrant’s name into English)
British Virgin
Islands
(Jurisdiction
of incorporation or organization)
No.
21 Sheng Ming Yuan Road, Changping District, Beijing 102206, China
(Address
of principal executive offices)
Title of each class
|
|
Name of each exchange on which
registered
|
Ordinary
Shares
|
|
The
NASDAQ Global Select
Market
|
Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
None
(Title of
Class)
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report:
23,292,142 ordinary
shares.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨ Yes
x
No
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
¨
Yes x No
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.
x
Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
¨ Large accelerated filer
x Accelerated
filer
¨ Non-accelerated
filer
Indicate
by a check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP
x
|
International
Financial Reporting Standard as
|
Other
¨
|
|
Issued
by the International Accounting Standards
|
|
|
Board
¨
|
|
Indicate
by check mark which financial statement item the registrant has elected to
follow:
¨
Item 17 ¨
Item 18
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
¨
Yes x
No
TABLE
OF CONTENTS
INTRODUCTION
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PART
I
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Item
1.
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Identity
of Directors, Senior Management and Advisors
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4
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Item
2.
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Offer
Statistics and Expected Timetable
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4
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Item
3.
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Key
Information
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4
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Item
4.
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Information
on the Company
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28
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Item
5.
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Operating
and Financial Review and Prospects
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47
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Item
6.
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Directors,
Senior Management, and Employees
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65
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Item
7.
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Major
Shareholders and Related Party Transactions
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73
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Item
8.
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Financial
Information
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75
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Item
9.
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The
Offer and Listing
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76
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Item
10.
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Additional
Information
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78
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Item
11.
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Quantitative
and Qualitative Disclosures About Market Risk
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84
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Item
12.
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Description
of Securities Other than Equity Securities
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85
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PART
II
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Item
13.
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Defaults,
Dividend Arrearages, and Delinquencies
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86
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Item
14.
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Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
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86
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Item
15.
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Controls
and Procedures
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86
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Item
16A.
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Audit
Committee Financial Expert
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87
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Item
16B.
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Code
of Ethics
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87
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Item
16C.
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Principal
Accountant Fees and Services
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87
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Item
16D.
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Exemption
from the Listing Standards for Audit Committees
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88
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Item
16E.
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Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
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88
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PART
III
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Item
17.
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Financial
Statements
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89
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Item
18.
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Financial
Statements
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89
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Item
19.
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Exhibits
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89
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EX-1.1
CEO CERTIFICATION
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EX-1.2
CFO CERTIFICATION
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EX-1.3
CEO CERTIFICATION PURSUANT TO SECTION 906
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EX-1.4
CFO CERTIFICATION PURSUANT TO SECTION 906
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EX-1.5
CONSENT OF BDO TO S-8
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INTRODUCTION
Except
where the context otherwise requires and for purposes of this Annual Report
only:
|
o
|
“we,” “us,” “our company,” “our,”
the “Company” and “Origin” refer to Origin Agritech Limited and, in the
context of describing our operations, also include State Harvest Holdings
Limited and the following, which are collectively described in this Annual
Report as “our PRC Operating Companies”: Beijing Origin State Harvest
Biotechnology Limited, or Origin Biotechnology and its subsidiary Shandong
Kunfeng or Origin Kunfeng, Beijing Origin Seed Limited, or Beijing Origin,
and its five subsidiaries, Changchun Origin Seed Technology
Development Limited, or Changchun Origin, Henan Origin Cotton Technology
Development Limited, or Henan Origin, Denong Zhengcheng Seed Limited, or
Denong, Jilin Changrong High-tech Seed Limited, or Jilin Changrong and
Linze Origin Seed Limited, or Linze
Origin,;
|
|
o
|
“last year,” “fiscal year 2010,”
“the year ended September 30, 2010” and “the fiscal year ended September
30, 2010” refer to the twelve months ended September 30, 2010, which
is the period covered by this Annual
Report;
|
|
o
|
all references to “Renminbi,”
“RMB” or “yuan” are to the legal currency of China; all references to
“U.S. dollars,” “dollars,” “$” or “US$” are to the legal currency of the
United States. Any discrepancies in any table between totals and sums of
the amounts listed are due to rounding. The translation of Renminbi
amounts into United States dollar amounts has been made for the
convenience of the reader. Such translation amounts should
not be construed as representations that the Renminbi amounts could be
readily converted into United States dollar amounts at that rate or any
other rate;
|
|
o
|
“China” or “PRC” refers to the
People’s Republic of China, excluding Taiwan, Hong Kong, and
Macau;
|
|
o
|
“Hong Kong” refers to the Hong
Kong Special Administrative Region of the People’s Republic of China;
and
|
|
o
|
“shares” and “ordinary shares”
refer to our ordinary shares, “preferred shares” refers to our preferred
shares.
|
FORWARD-LOOKING
INFORMATION
This
Annual Report on Form 20-F contains forward-looking statements that are based on
our current expectations, assumptions, estimates, and projections about our
company and industry. All statements other than statements of historical fact in
this Annual Report are forward-looking statements. These forward-looking
statements can be identified by words or phrases such as “may,” “will,”
“expect,” “anticipate,” “estimate,” “plan,” “believe,” “is/are likely to” or
other similar expressions. The forward-looking statements included in this
Annual Report relate to, among others:
|
¨
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our goals and strategies,
including how we implement our goals and
strategies;
|
|
¨
|
our expectations for our future
business and product development, business prospects, results of business
operations or any seed production operations, and current
financial condition;
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¨
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expected changes in our margins
and certain costs or expenditures, inclusive of changes in our product
costs;
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¨
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our future pricing strategies or
pricing policies;
|
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¨
|
our ability to successfully
anticipate market demand for crop seeds in our market and plan our volume
and product mix;
|
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¨
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our plans for development of seed
or technology internally, including our ability to successfully develop,
produce, receive regulatory approval for and distribute proprietary seed
products;
|
|
¨
|
our expectations regarding our
need to produce seeds and other biotechnology under licenses from third
parties, and production results of our contracted farming production
base;
|
|
¨
|
the future development of
agricultural biotechnology as a whole and the impact of genetically
modified crop seeds in our
industry;
|
|
¨
|
the scope and impact of the
governing and regulatory policies and laws regarding genetically modified
seed products in China, and our ability to apply for and receive necessary
approvals and to develop, produce, market and distribute genetically
modified crop seeds;
|
|
¨
|
compliance
with government registration and regulation, including environmental
regulations relating to our seed production and our chemical
operations;
|
|
·
|
compliance
with environmental regulatory standards relating to our chemical
products;
|
|
¨
|
our
plans to license or co-develop any seed product or
technology;
|
|
¨
|
our plans regarding any future
business combination or business
acquisition;
|
|
¨
|
PRC and other international
governmental policies and regulations relating to the crop seed
industry;
|
|
¨
|
our plans to expand our business
level or corporate level operations and product
offerings;
|
|
¨
|
the likelihood of recurrence of
accounting charges or
impairments;
|
|
¨
|
expected changes in our sources
of revenue and income base from our business operations or other
sources;
|
|
¨
|
competition in the crop seed
industry in China and other international
markets;
|
|
¨
|
the future development of the
crop seed industry in China and other international
markets;
|
|
¨
|
our plans for current staffing
requirements, research and development and regional business
focus;
|
|
¨
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our ability to successfully raise
capital to accommodate growing company needs under acceptable terms or
acceptable share price and at reasonable cost;
and
|
|
¨
|
the adequacy of our facilities or
seed production for our future
operations.
|
We
believe it is important to communicate our expectations to our shareholders.
However, there may be certain events in the future that we are not able to
predict with accuracy or over which we have no control. The risk factors and
cautionary language discussed in this Annual Report provide examples of risks,
uncertainties and events that may cause actual results to differ materially from
the expectations in these forward-looking statements, including among other
things:
|
¨
|
changing interpretations of
generally accepted accounting principles and the adoption or use of
international accounting standards in the
future;
|
|
¨
|
outcomes of PRC and international
government reviews, inquiries, investigations and related
litigation;
|
|
¨
|
continued compliance with the
government regulations of the PRC and other
governments;
|
|
¨
|
legislative and regulatory
environments, requirements or changes adversely affecting the businesses
in which we and our PRC operating companies are
engaged;
|
|
¨
|
fluctuations in the PRC or
international customer
demand;
|
|
¨
|
management of the growth of our
business and introduction of genetically modified products and chemical
products;
|
|
¨
|
timing of approval, production,
and market acceptance of new products, inclusive of chemical products and
genetically modified
products;
|
|
¨
|
general economic conditions in
the PRC and worldwide; and
|
|
¨
|
geopolitical events and
regulatory changes.
|
The
forward-looking statements in this Annual Report involve various risks,
assumptions, and uncertainties. Although we believe that our expectations
expressed in these forward-looking statements are reasonable, we cannot be
certain that our expectations will materialize. Our actual results could be
materially different from and worse than our expectations. Important risks and
factors that could cause our actual results to be materially different from our
expectations are generally set forth in the risk factors included in this Annual
Report.
This
Annual Report also contains information relating to the crop seed market and
agricultural chemical market in China. The market data includes projections
based on a number of assumptions. The crop seed market and agricultural chemical
may not grow at the rates we project, or at all. The failure of these markets to
grow at the projected rates may have a material adverse effect on our business
and the market price of our shares. In addition, the relatively new and rapidly
changing nature of the genetically modified crop seed industry subjects any
projections or estimates relating to the growth prospects or future condition of
our markets to significant uncertainties. Furthermore, if any one or more of the
assumptions underlying the market data turns out to be incorrect, actual results
may differ based on these assumptions.
The
forward-looking statements made in this Annual Report relate only to events or
information as of the date of the statements. Readers should read these
statements in conjunction with the risk factors disclosed in this Annual
Report.
All
forward-looking statements included herein attributable to us or other parties
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. Except to
the extent required by applicable laws and regulations, we undertake no
obligations to update these forward-looking statements to reflect events or
circumstances after the date of this Annual Report or to reflect the occurrence
of unanticipated events.
Not
Applicable.
Not
Applicable.
A. Selected
financial data.
The
following selected consolidated financial information was derived from our
fiscal year end consolidated financial statements. The following information
should be read in conjunction with those statements and Item 5, “Operating
and Financial Review and Prospects.” Our summary consolidated statements of
operations and comprehensive income data for the years ended September 30, 2008,
2009 and 2010 and our summary consolidated balance sheet data as
of September 30, 2009 and 2010, as set forth below, are derived from, and
are qualified in their entirety by reference to, our audited consolidated
financial statements, including the notes thereto, which are included in this
Annual Report. The summary statement of operations and comprehensive income data
the nine months ended September 30, 2006 and the years ended September 30, 2007
and the summary balance sheet data as of September 30, 2006, 2007 and 2008, set
forth below are derived from our audited consolidated financial statements which
are not included herein.
Our
consolidated financial statements are prepared and presented in accordance with
accounting principles generally accepted in the United States, or U.S.
GAAP.
|
|
For the nine
months
ended
|
|
|
For the year
ended
|
|
|
|
September 30
|
|
|
September 30,
|
|
except share data)
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Consolidated
statement of income and comprehensive income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
522,999 |
|
|
|
489,379 |
|
|
|
513,490 |
|
|
|
592,492 |
|
|
|
584,860 |
|
|
|
87,278 |
|
Cost
of revenues
|
|
|
(362,982 |
) |
|
|
(462,852 |
) |
|
|
(404,795 |
) |
|
|
(392,842 |
) |
|
|
(353,587 |
) |
|
|
(52,766 |
) |
Gross
profit
|
|
|
160,017 |
|
|
|
26,527 |
|
|
|
108,695 |
|
|
|
199,650 |
|
|
|
231,273 |
|
|
|
34,512 |
|
Selling
and marketing
|
|
|
(49,651 |
) |
|
|
(57,994 |
) |
|
|
(53,203 |
) |
|
|
(55,648 |
) |
|
|
(52,227 |
) |
|
|
(7,794 |
) |
General
and administrative
|
|
|
(40,933 |
) |
|
|
(92,246 |
) |
|
|
(73,355 |
) |
|
|
(64,833 |
) |
|
|
(78,708 |
) |
|
|
(11,745 |
) |
Research
and development
|
|
|
(13,144 |
) |
|
|
(28,441 |
) |
|
|
(24,513 |
) |
|
|
(33,473 |
) |
|
|
(38,356 |
) |
|
|
(5,724 |
) |
Total
operating expenses
|
|
|
(103,728 |
) |
|
|
(178,681 |
) |
|
|
(151,071 |
) |
|
|
(153,954 |
) |
|
|
(169,291 |
) |
|
|
(25,263 |
) |
Income
(loss) from operations
|
|
|
56,289 |
|
|
|
(152,154 |
) |
|
|
(42,376 |
) |
|
|
45,696 |
|
|
|
61,982 |
|
|
|
9,249 |
|
Interest
income
|
|
|
8,783 |
|
|
|
10,942 |
|
|
|
5,199 |
|
|
|
2,036 |
|
|
|
1,634 |
|
|
|
244 |
|
Interest
expenses
|
|
|
(5,005 |
) |
|
|
(21,697 |
) |
|
|
(36,939 |
) |
|
|
(16,784 |
) |
|
|
(8,539 |
) |
|
|
(1,274 |
) |
Other
income (expense)
|
|
|
2,893 |
|
|
|
1,312 |
|
|
|
628 |
|
|
|
(49,110 |
) |
|
|
2,340 |
|
|
|
349 |
|
Equity
in earnings/ gain on disposal of associated company
|
|
|
12,828 |
|
|
|
(669 |
) |
|
|
(7,702 |
) |
|
|
4,669 |
|
|
|
18,253 |
|
|
|
2,724 |
|
Changes
in the fair value of embedded derivatives
|
|
|
- |
|
|
|
12,601 |
|
|
|
20,229 |
|
|
|
3,300 |
|
|
|
- |
|
|
|
- |
|
Income
(loss) before income taxes
|
|
|
75,788 |
|
|
|
(149,665 |
) |
|
|
(45,557 |
) |
|
|
(10,193 |
) |
|
|
75,670 |
|
|
|
11,292 |
|
|
|
For the nine
months
ended
|
|
|
For the year
ended
|
|
|
|
September 30
|
|
|
September 30,
|
|
except share data)
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Income benefit (tax)
|
|
|
(367 |
) |
|
|
(49 |
) |
|
|
3,995 |
|
|
|
(11,732 |
) |
|
|
(9,319 |
) |
|
|
(1,391 |
) |
Income (loss) before non-controlling interests
|
|
|
75,421 |
|
|
|
(149,616 |
) |
|
|
(41,562 |
) |
|
|
(21,925 |
) |
|
|
66,351 |
|
|
|
9,901 |
|
Non-controlling interests
|
|
|
910 |
|
|
|
(13,584 |
) |
|
|
(1,724 |
) |
|
|
(18,892 |
) |
|
|
(17,298 |
) |
|
|
(2,581 |
) |
Net income (loss)
|
|
|
76,331 |
|
|
|
(163,200 |
) |
|
|
(43,286 |
) |
|
|
(40,817 |
) |
|
|
49,053 |
|
|
|
7,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) attributable to ordinary shareholders
|
|
|
76,331 |
|
|
|
(163,200 |
) |
|
|
(43,286 |
) |
|
|
(40,817 |
) |
|
|
49,053 |
|
|
|
7,320 |
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3.25 |
|
|
|
(7.01 |
) |
|
|
(1.88 |
) |
|
|
(1.77 |
) |
|
|
2.12 |
|
|
|
0.32 |
|
Diluted
|
|
|
3.03 |
|
|
|
(7.01 |
) |
|
|
(1.88 |
) |
|
|
(1.77 |
) |
|
|
2.10 |
|
|
|
0.31 |
|
Shares
used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,472,910 |
|
|
|
23,268,062 |
|
|
|
22,987,270 |
|
|
|
23,013,692 |
|
|
|
23,189,464 |
|
|
|
23,189,464 |
|
Diluted
|
|
|
25,187,753 |
|
|
|
23,268,062 |
|
|
|
22,987,270 |
|
|
|
23,013,692 |
|
|
|
23,337,265 |
|
|
|
23,337,265 |
|
(in thousands)
|
|
September 30
2006
|
|
|
September 30
2007
|
|
|
September 30
2008
|
|
|
September 30
2009
|
|
|
September 30
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Consolidated
balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
140,953 |
|
|
|
162,314 |
|
|
|
102,263 |
|
|
|
121,255 |
|
|
|
299,672 |
|
|
|
44,720 |
|
Current
working capital (2)
|
|
|
208,809 |
|
|
|
294,976 |
|
|
|
77,966 |
|
|
|
(33,533 |
) |
|
|
67,650 |
|
|
|
10,096 |
|
Total
assets
|
|
|
984,126 |
|
|
|
1,110,983 |
|
|
|
894,296 |
|
|
|
824,544 |
|
|
|
935,011 |
|
|
|
139,531 |
|
Deferred
revenue
|
|
|
24,101 |
|
|
|
23,238 |
|
|
|
34,848 |
|
|
|
18,280 |
|
|
|
23,111 |
|
|
|
3,449 |
|
Total
current liabilities
|
|
|
509,631 |
|
|
|
499,347 |
|
|
|
487,576 |
|
|
|
546,822 |
|
|
|
596,611 |
|
|
|
89,032 |
|
Total
liabilities
|
|
|
512,511 |
|
|
|
765,291 |
|
|
|
591,048 |
|
|
|
546,822 |
|
|
|
606,037 |
|
|
|
90,439 |
|
Non-controlling
interests
|
|
|
13,049 |
|
|
|
48,775 |
|
|
|
39,224 |
|
|
|
51,389 |
|
|
|
57,089 |
|
|
|
8,519 |
|
Total
shareholders’ equity
|
|
|
458,566 |
|
|
|
296,917 |
|
|
|
264,024 |
|
|
|
226,333 |
|
|
|
271,885 |
|
|
|
40,573 |
|
(1)
Translation of Renminbi amounts into United States dollar amounts has been made
for the convenience of the reader for the year ended September 30, 2010 and has
been made at the exchange rate quoted by the closing rate by the State
Administration of Foreign Exchange in China on September 30, 2010 of RMB6.7011
to US$1.00. Such translation amounts should not be construed as
representations that the Renminbi amounts could be readily converted into United
States dollar amounts at that rate or any other rate.
(2)
Current working capital is the difference between total current assets and total
current liabilities.
Exchange
Rate Information
The
conversion of Renminbi into U.S. dollars in this Annual Report is based on the
noon buying rate in the City of New York for cable transfers of Renminbi as
certified for customs purposes by the Federal Reserve Bank of New York through
December 31, 2008 and the State Administration of Foreign Exchange as of January
1, 2009 with respect to our historical financial statements relating to those
time periods. As of December 31, 2008, the Federal Reserve Bank of New York
discontinued publication of foreign exchange rates. The consolidated
financial statements are presented in Renminbi as the reporting currency. The
translation of Renminbi amounts into United States dollar amounts has been made
for the convenience of the reader and has been made at the exchange rate quoted
by the closing rate by the State Administration of Foreign Exchange in China on
September 30, 2010 of RMB6.7011 to US$1.00. Such translation amounts should
not be construed as representations that the Renminbi amounts could be readily
converted into United States dollar amounts at that rate or any other
rate. Unless otherwise noted, for the nine months ended September 30, 2006
and the years ended September 30, 2007, 2008, 2009 and 2010, all translations
from Renminbi to U.S. dollars in this Annual Report were made at RMB7.904, RMB7.4928,
RMB6.7899, RMB 6.829 and RMB6.7011 per US $1.00, respectively, which were
the prevailing year or period end closing rates for those periods. We make no
representation that any Renminbi or U.S. dollar amounts could have been, or
could be, converted into U.S. dollars or Renminbi, as the case may be, at any
particular rate, the rates stated below, or at all. The PRC government imposes
controls over its foreign currency reserves in part through direct regulation of
the conversion of Renminbi into foreign exchange and through restrictions on
foreign trade.
The
following table sets forth information concerning exchange rates between the
Renminbi and the U.S. dollar for the periods indicated. These rates are provided
solely for your convenience and are not necessarily the exchange rates that we
used in this Annual Report or will use in the preparation of our periodic
reports or any other information to be provided to you. The source of these
rates is the Federal Reserve Bank of New York until December 31,
2008. Starting from January 1, 2009, the source of the rates is the
State Administration of Foreign Exchange in China, as the Federal Reserve Bank
of New York discontinued publication of foreign exchange rates. At
September 30, 2010 the closing exchange rate was RMB6.7011 for one U.S.
dollar.
|
|
Average (1)
|
|
|
High
|
|
|
Low
|
|
|
Period-end
|
|
|
|
(RMB
per $1.00)
|
|
2006
|
|
|
7.9723 |
|
|
|
8.0702 |
|
|
|
7.8041 |
|
|
|
7.9040 |
|
2007
|
|
|
7.6947 |
|
|
|
7.9168 |
|
|
|
7.4928 |
|
|
|
7.4928 |
|
2008
|
|
|
7.0578 |
|
|
|
7.5158 |
|
|
|
6.7800 |
|
|
|
6.7899 |
|
2009
|
|
|
6.8328 |
|
|
|
6.8527 |
|
|
|
6.8201 |
|
|
|
6.8262 |
|
2010
|
|
|
6.8120 |
|
|
|
6.8287 |
|
|
|
6.6936 |
|
|
|
6.7011 |
|
June
|
|
|
6.8165 |
|
|
|
6.8284 |
|
|
|
6.7890 |
|
|
|
6.7909 |
|
July
|
|
|
6.7775 |
|
|
|
6.7859 |
|
|
|
6.7718 |
|
|
|
6.7750 |
|
August
|
|
|
6.7901 |
|
|
|
6.8105 |
|
|
|
6.7685 |
|
|
|
6.8105 |
|
September
|
|
|
6.7462 |
|
|
|
6.8126 |
|
|
|
6.6936 |
|
|
|
6.7011 |
|
October
|
|
|
6.6732 |
|
|
|
6.6986 |
|
|
|
6.6497 |
|
|
|
6.6908 |
|
November
|
|
|
6.6558 |
|
|
|
6.6925 |
|
|
|
6.6239 |
|
|
|
6.6762 |
|
December
|
|
|
6.6494 |
|
|
|
6.6654 |
|
|
|
6.6227 |
|
|
|
6.6227 |
|
(1)
|
Annual averages are calculated
from month-end rates. Monthly averages are calculated using the average of
the daily rates during the relevant
period.
|
B. Capitalization
and indebtedness.
Not
Applicable
C. Reasons
for the offer and use of proceeds.
Not
Applicable.
D. Risk
factors.
Risks
relating to our business
If
we do not manage our ongoing growth successfully, our growth and chances for
profitability may be hindered or impeded.
We
continue to be a growth orientated company. We expanded our
operations during the last several years, and we plan further expansion with
changing and new crop seed, biotechnology, and chemical products and increase
and enhancement of our distribution channels and expansion into existing or new
markets and new lines of business. Expansion is expected to create significant
demands on our corporate administrative, operational and financial personnel and
other human resources and on our cash flow needs and the requirement for
additional working capital. Our current resources may not be adequate to support
further expansion and diversification. These demands and ongoing industry
factors such as overproduction or governmental policy changes may hinder our
cash flow as our margins and sales may be adversely affected.
We
require short-term financing to fund our working capital, especially due to the
seasonal nature of our business.
The
nature of the agricultural seed production industry involves expenses and
revenue cycles that are seasonal in nature. In our fiscal year third quarter, we
may face costs that are in excess of our cash flow sources. The advance payments
made to our seed producing farmers may exceed the amount of deposits received
from our customers, the distributors and end users. The exact timing of these
deposit payments is dependent on the Chinese lunar calendar, which varies from
one calendar year to the next. As a result, we have customarily relied upon
short term bridge loans to cover our expenses pending receipt of cash payment
from farmers at the time of seed purchases. Although historically we
have had access to sufficient financing to manage our cash flow cycles, we
cannot be certain that we will be able to obtain sufficient debt financing on
terms that are satisfactory to us to maintain consistent operating results given
changing credit conditions worldwide and internal PRC
policies. Downgrades in our credit rating, tightening of related
credit facilities or financial markets or other limitations on our ability to
access short-term financing would increase our interest costs and adversely
affect our operating results and operations.
Because
of the nature of our business, which has seasonal variation, it is likely that
our future financial performance will fluctuate from period to
period.
Our
operating results likely will fluctuate due to a number of factors, many of
which are beyond our control. Our quarterly and annual revenues and costs and
expenses as a percentage of our revenues may be significantly different from our
historical rates. Our operating results in future quarters may fall below
expectations. The industry in which we operate is seasonal in nature. The sales
season of corn, rice, and cotton seed lasts from October to June; the sales
season of canola seed lasts from July to September. We generally do not
have significant sales revenue from July to September, which results in
cyclical changes of our cash flow and operating activities. As a
result, if we are unable to generate sufficient working capital from cash flow
from operations and working capital facilities, we may encounter liquidity
difficulties from the period of July through September, which may harm our
operations. The seasonal nature of our business causes our operating results to
fluctuate from quarter to quarter. Any unexpected seasonal or other fluctuations
could cause the price of our common shares to fall. As a result, you may not
rely on comparisons of our quarterly operating results as an indication of our
future performance.
In
addition, the future achievement and growth of our profits depends on our
ability to secure sufficient orders from customers coupled with securing
sufficient seed production from the seed production farms. An adverse change in
market conditions may have material and adverse effects on our operating results
if we cannot adjust our operating and marketing strategy to respond to such
changes. Our results of operations may be adversely affected by reduced orders
and profit margins in the event of a slowdown in market demand, constraint on
the market supply, an increase in business competition, a decrease in government
subsidies to farmers, increased costs, or for other reasons. As such, there is a
risk that we will not be able to achieve or maintain profitability or our
historical results.
Aged
inventory may result in an increase of our expenses and cause operating
losses.
Due to
the nature of the seed industry, we normally produce seeds according to our
annualized production plan at least one entire year before we deliver the seeds
to our customers. If our production plan is too aggressive, we could produce
more seeds than the market demands resulting in aged seeds. We may decide not to
sell the aged seeds as crop seed products, taking into account factors, such as
the quality of the seeds and commodity pricing. In that case, the aged inventory
may be sold as common feed products at greatly reduced prices. Aged inventory
could result in asset impairment risk, in which case we would suffer a loss and
incur an increase in our cost of revenue and a decrease in gross
profit.
If
we are unable to match our production requirement to the demand of our direct
customers, our business, financial condition and results of operations may be
adversely affected.
We
normally produce seeds according to an annualized production plan based on
estimated customer demand that is developed before we sell and deliver crop
seeds to distributors, which are our direct customers. Chinese farmers, the end
users of our crop seed, generally make purchasing decisions for our products
based on market prices, economic and weather conditions and other factors that
we and our distributors may not be able to fully or accurately anticipate in
advance, which is usually more than one to two years before the sales period. If
we fail to accurately estimate the volume and types of products sought by
farmers and otherwise adequately manage production amounts, which may also be
adversely affected by weather conditions, we may produce more seeds than we are
able to sell resulting in excess inventory and aged seeds. On the other hand, if
we underestimate demand, we may not be able to satisfy demand for our crop
seeds, and thus damage our customer relations and end-user loyalty. Our failure
to estimate farmers’ future needs and to match our production to the demand of
our direct customers may adversely affect our business, financial condition and
results of operations. In addition, inadequate distributor liquidity could
affect distributors’ ability to pay for our products and, therefore, affect our
sales or our ability to collect on our receivables.
The
successful development and commercialization of our biotech pipeline products
will be necessary for our growth.
We
conduct our own research and development efforts for genetically modified seeds,
and we have entered into agreements with the Chinese Academy of Science and the
China Agricultural Academy of Science in the PRC working on genetic
modifications and other biotechnology that give us the right to market the seeds
and technologies they develop. We are also seeking other development and
marketing arrangements with other entities, in China and
elsewhere. There can be no assurance that these efforts will produce
improved seed varieties and resistant seeds. Commercial success frequently
depends on being the first company to enter a particular market. The length of
time and the risk associated with the breeding and biotech pipelines are similar
and interlinked because both are required as a package for commercial success in
markets where biotech traits are approved for growers. Regulatory requirements
affect the development of our biotech products, including the GM crop testing of
seeds containing the biotech traits, which could harm our business and results
of operations if regulations are not satisfied. The testing procedures can be
lengthy and costly, with no guarantee of success. It could have an adverse
effect on our operations if our genetically modified products are unable to pass
the safety evaluation of genetically modified agricultural
organisms.
The
potential for uncertainty in the government regulation of genetic technology and
genetically modified, or GM, agricultural products could have an adverse effect
on our business.
We
continue to undertake a transition from a conventional hybrid seed company to an
agricultural biotechnology company. However, genetically modified seed products
are controversial, and genetic modification has not yet been widely accepted in
many regions of the world, including China. Since the Chinese government
approved the commercial planting of GM cotton in 1997, the government has only
just begun to approve GM crops for commercial cultivation. The relative newness
and the potential for uncertainty in the government regulation of genetic
technology could have an adverse effect on our business development strategy and
our ability to develop new seeds that may provide us with better
margins.
The
global competition in biotechnology will affect our business.
We
believe we are a leader in biotechnology in China since we initiated our own
biotechnology research program many years ago and we have built the first
internal biotech research center among Chinese companies. However, if and when
multinational corporations engaged in the crop seed business expand into the
agricultural market in China in the future, they may have a greater portfolio of
seed products and more advanced technologies. The major multinational
competitors have a long operating history in the research and commercialization
of their products, sophisticated marketing capabilities and strong intellectual
property estates, all of which may give them competitive advantage over us. Any
of these competitive advantages could cause our existing or candidate products
to become less competitive or outdated, and adversely affect our product
acceptance in the market place and our results of operations.
The
degree of public acceptance or perceived public acceptance of our biotechnology
products can affect our operations.
Although
all of the genetically modified products must go through rigorous testing, some
opponents of the technology actively raise public concern about the potential
for adverse effects of our products on human or animal health, other plants and
the environment. The potential for adventitious presence of commercial
biotechnology traits in conventional seed, or in the grain or products produced
from conventional or organic crops, is another factor that could affect general
public acceptance of these traits. Public concern can affect the timing of, and
whether we are able to obtain, government approvals. Even after approvals are
granted, public concern may lead to increased regulation or legislation, which
could affect our business and operations, and may adversely affect sales of our
products to farmers, due to their concerns about available markets for the sale
of crops or other products derived from biotechnology.
We
are currently dependent on licensed seed products for the majority of our
revenues, and if we lose the right to produce and sell licensed seeds, we will
lose substantial revenues and suffer substantial losses.
The
following table sets forth the amount and percentage of our revenues resulting
from licensed hybrid seeds as compared to our internally developed proprietary
hybrid seeds for the periods listed:
|
|
Year Ended
September 30,
2008
|
|
|
Year Ended
September 30,
2009
|
|
|
Year Ended
September 30,
2010
|
|
Revenue
resulting from licensed hybrid seeds
|
|
$
|
52,023,150
|
|
|
$
|
50,513,090
|
|
|
$
|
49,331,898
|
|
Percentage
of our total seed revenue resulting
from licensed hybrid seeds
|
|
|
68.79
|
%
|
|
|
58.22
|
%
|
|
|
58.51
|
%
|
Revenue
resulting from internally developed proprietary hybrid
seeds
|
|
$
|
23,603,275
|
|
|
$
|
36,248,141
|
|
|
$
|
34,982,517
|
|
Percentage
of our total seed revenue resulting
from internally developed proprietary hybrid seeds
|
|
|
31.21
|
%
|
|
|
41.78
|
%
|
|
|
41.49
|
%
|
The
majority of the seeds that we sell have been developed and produced under our
license agreements with the Corn Research Institute Li County, Hebei Province
(now Shijiazhuang Liyu Technology Development Co., Ltd.) and the Henan
Agricultural University, which we collectively refer to as the significant
licensors, as set forth in the table below.
|
|
Year Ended
September 30,
2008
|
|
|
Year Ended
September 30,
2009
|
|
|
Year Ended
September 30,
2010
|
|
Revenue
resulting from hybrid seeds developed
and produced under our license agreements
with the significant licensors
|
|
$
|
24,938,593
|
|
|
$
|
20,378,080
|
|
|
$
|
25,395,082
|
|
Percentage
of our total seed revenue resulting
from hybrid seeds developed and produced under our license agreements with
the significant licensors
|
|
|
32.98
|
%
|
|
|
23.49
|
%
|
|
|
30.12
|
% |
If we are
not able to develop and produce the licensed seed products or if the current
license agreements are terminated or if we are unable to renew some of these
license agreements on commercially reasonable terms or at all, we will suffer a
substantial loss of our product offerings and consequently our revenues will be
substantially limited and our financial condition and results of operations may
be adversely affected.
We
have a relatively short operating history and are subject to the risks of any
growing enterprise, any one of which could limit our growth and our product and
market development.
As an
expanding company and one that does not have a long operating history, it is
difficult to predict how our businesses will develop over the long term.
Accordingly, we face all of the risks and uncertainties encountered by companies
in the earlier stages of development and expansion, such as:
|
¨
|
uncertain and continued market
acceptance for our product extensions and our
services;
|
|
¨
|
the evolving nature of the crop
seed industry in the PRC, where significant consolidation may occur,
leading to the formation of companies which may be better able to compete
with us than is currently the
case;
|
|
¨
|
changing competitive conditions,
technological advances or customer preferences could harm sales of our
products or services;
|
|
¨
|
maintaining our competitive
position in the PRC and competing with Chinese and international
companies, many of which have longer operating histories and greater
financial resources than us;
|
|
¨
|
maintaining our current licensing
arrangements and entering into new ones to expand our product
offerings;
|
|
¨
|
continuing to offer commercially
successful products to attract and retain a larger base of direct
customers and ultimate
users;
|
|
¨
|
retaining access to the farmland
we currently use for production of our products and obtaining access to
additional farmland for
expansion;
|
|
¨
|
continuing our existing
arrangements with production farms that grow our seed products and
entering into new arrangements with additional production
farms;
|
|
¨
|
maintaining effective control of
our costs and expenses; and
|
|
¨
|
retaining our management and
skilled technical staff and recruiting additional key
employees.
|
If we are
not able to meet the challenge of building our businesses and managing our
growth, the likely result will be slowed growth, lower margins, additional
operational costs and lower income.
We
substantially depend on a few key personnel who, if not retained, could cause
declines in productivity and operational results and loss of our strategic
guidance, all of which would diminish our business prospects and value to
investors.
Our
success depends to a large extent upon the continued service of a few executive
officers and key employees, including:
|
¨
|
Dr. Gengchen Han, our Chairman of
the Board; and
|
|
¨
|
Liang Yuan, our Chief Executive
Officer and President.
|
The loss
of the services of one or more of these key employees would have an adverse
effect on us and our PRC operating subsidiaries, as each of these individuals
played and continues to play a significant role in developing and executing our
overall business plan and maintaining customer relationships and proprietary
technology systems. While none of these key personnel is irreplaceable, the loss
of the services of any of these individuals would be disruptive to our business.
We believe that our overall future success depends in large part upon our
ability to attract and retain highly skilled managerial and marketing personnel.
There is no assurance that we will be successful in attracting and retaining
such personnel on terms acceptable to them. Inadequate personnel will limit our
growth, and will be seen as a detriment to our prospects, leading potentially to
a loss in value for investors.
We
or our licensors may be subject to intellectual property infringement claims,
which may force us to incur substantial legal expenses and, if determined
adversely against us or our licensors, may materially disrupt our
business.
We cannot
be certain that our licensed or self-developed proprietary seed or chemical
products do not or will not infringe upon intellectual property rights held by
third parties. We, or any of our licensors, may become subject to legal
proceedings and claims from time to time relating to the intellectual property
of others. If we, or any of our licensors, are found to have violated the
intellectual property rights of others, we may be required to pay damages and be
enjoined from using such intellectual property, and we may incur new or
additional licensing fees if we wish to continue using the infringing products,
or be forced to develop or license alternatives. In addition, we may incur
substantial expenses in defending against these third party infringement claims,
regardless of their merit.
Intellectual
property rights are important to our business. We endeavor to obtain and protect
our intellectual property rights where our products are produced. However, we
may be unable to obtain protection for our intellectual property. Even if
protection is obtained, competitors, growers or others in the chain of commerce
may raise legal challenges to our rights or illegally infringe on our rights,
including through means that may be difficult to prevent, detect or defend. In
addition, because of the rapid pace of technological change and the
confidentiality of patent applications in some jurisdictions, competitors may be
issued patents from applications that were unknown to us prior to issuance.
These patents could reduce the value of our commercial or pipeline products or,
to the extent they cover key technologies on which we have unknowingly relied,
require that we seek to obtain licenses at a financial cost to us or cease using
the technology, no matter how valuable the patents may be to our business. We
cannot assure you we would be able to obtain such licenses on acceptable terms.
Also, litigation may be necessary to enforce our intellectual property rights,
protect our trade secrets or determine the validity and scope of the proprietary
rights of others. There is a risk that the outcome of such potential litigation
will not be in our favor. Such litigation may be costly and may divert
management attention as well as expend other resources which could otherwise
have been devoted to our business. An adverse determination in any such
litigation will impair our intellectual property rights and may harm our
business, prospects and reputation. In addition, we have no insurance coverage
against litigation costs and would have to bear all costs arising from such
litigation to the extent we are unable to recover such costs from other parties.
The occurrence of any of the foregoing may harm our business, results of
operations and financial condition.
Finally,
implementation of PRC intellectual property-related laws has historically been
lacking, primarily because of ambiguities in the PRC laws and difficulties in
enforcement. Accordingly, intellectual property rights and confidentiality
protections in China may not be as effective as in the United States or other
countries, which increases the risk that we may not be able to adequately
protect our intellectual property.
Our
business will not be able to be profitable if we do not continue to find and
market products considered valuable by our customers.
To be
profitable, our crop seed and chemical business depends on recurring and
sustained reorders by farmers in China. Reorder rates are inherently uncertain
due to several factors, many of which are outside our control. These include
changing customer preferences, competitive price pressures, failure to develop
acceptable new products, development of higher quality products by competitors,
weather conditions and general economic conditions.
Our
business focus on crop seed development and production does not permit us to
spread our business risks among different businesses and, thus, a disruption in
our seed production or the industry would harm us more immediately and
directly.
Our crop
seed business is the principal business activity of the company. Our venture
into the chemical business expands our options but without a large amount of
business diversity, we will not be able to spread the risk of our operations.
Therefore, our business opportunities, revenues and income could be more
immediately and directly affected by disruptions from such things as drought and
disease or widespread problems affecting the crop seed industry, such as limited
farmer credit, payment disruptions or customer rejection of genetically modified
crop seeds, among other things. If there is a disruption as described above, our
revenues and income will be reduced, and our business operations may have to be
scaled back.
We
are dependent on revenue from our corn seed products and, therefore, our
operating results could be disproportionately and negatively impacted if we are
unable to sell a sufficient amount of corn seed at satisfactory
margins.
Corn seed
represents the principal source of revenue for the company. For the
fiscal year ended September 30, 2010, sales of our corn seed products
constituted approximately 73.32% of our revenues, as compared to 70.89% for the
year ended September 30, 2009. Our dependence on the corn seed market makes
us particularly vulnerable to any negative market changes that might occur in
this product line. In particular, if demand for our corn seed products generally
decreases or if industry supply exceeds demand, prices will be driven downward
and our margins will be negatively impacted, which would have an adverse effect
on our business, results of operations and financial condition.
Failure
to develop and market new products could impact the company’s competitive
position and have an adverse effect on the company’s financial
results.
The
company’s operating results are largely dependent on its ability to renew its
pipeline of new products and services and to bring those products and services
to market. This ability could be adversely affected by difficulties or delays in
product development such as the inability to identify viable new products,
greater than anticipated development costs, technical difficulties, regulatory
obstacles, competition, lack of demand, insufficient intellectual property
protection, or lack of market acceptance of new products and services. Due to
the lengthy development process, technological challenges and intense
competition, there can be no assurance that any of the products the company is
currently developing, or could begin to develop in the future, will achieve
substantial commercial success. Consequently, if we are not able to fund
extensive research and development activities and deliver new products to the
markets we serve on a timely basis, our growth and operations will be harmed. In
addition, sales of the company’s new products could replace sales of some of its
current products, offsetting the benefit of even a successful product
introduction.
If
we fail to introduce and commercialize new crop seed and chemical varieties, we
will not be able to recover research, development and cover our other
costs.
We cannot
guarantee the development and performance of new crop seed and chemical
varieties, whether licensed or proprietary, or that they will meet our and our
customers’ expectations. Farmers generally need time to learn about
new seed varieties and how to plant and tend them. Their traditional planting
experience may make it difficult for them to adapt to the new varieties. The
process for new seed and chemical products to gain market recognition and
acceptance is long and has uncertainties. If we fail to introduce and
commercialize a new seed or chemical variety that meets the demand of farmers in
China and to provide the proper education about them to the distributors,
farmers and public, we may not be able to generate sufficient sales to cover our
costs or generate a financial return on our investment.
One
or more of our distributors could engage in activities that are harmful to our
brand and to our business.
Our crop
seed and chemical products are sold primarily through
distributors. The distributors are responsible for ensuring that our
products have the appropriate licenses to be sold to farmers in the PRC
provinces. If the distributors do not apply for and receive the appropriate
licenses, their sales of our products in those provinces may be illegal, and we
may be subject to government sanctions, including confiscation of illegal
revenues and a fine of between two and three times the amount of such illegal
revenues. Unlicensed sales in a province may also cause a delay for our other
distributors in receiving a license from the authorities for that province,
which could further adversely impact our sales in that province. In addition,
distributors may sell our products under another brand that is licensed in a
particular province if our product is not licensed there. If our products are
sold under another brand, the purchasers will not be aware of our brand name,
and we will be unable to cross-market other crop seed varieties or other
products as effectively to these purchasers. Moreover, our ability to provide
appropriate customer service to these purchasers will be negatively affected,
and we may be unable to develop our local knowledge of the needs of these
purchasers and their environment. If any of our distributors sell inferior crop
seeds or chemicals produced by other companies under our brand name, our brand
and reputation could be harmed, which could make marketing of our branded crop
seeds or chemicals more difficult.
As
we expand into agricultural chemical products, we will be subject to
environmental regulation and regulation relating to the purchase, storing,
packaging and distribution of chemicals, which if violated will result in fines
or cessation orders, and may have an adverse impact on our expansion and
business.
We are
expanding into agricultural chemical products, which initially involve the
purchase of active pesticide ingredients which we formulate and mix for
agricultural use. These products are distributed through our
distribution chain. The purchase, storage, packaging and distribution
of agricultural chemicals is subject to various regulations, including
environmental regulation and permitting requirements. The failure to
obtain required licenses or the failure to conduct our business in compliance
with applicable laws may result in fines, clean up costs or cessation orders,
any of which would have an adverse impact on our expansion into this area of
products and may have an adverse impact on our financial condition and results
of operations.
The
performance of our seeds depends on climate, geographical areas, cultivation
method, farmers’ degree of knowledge and other factors in addition to genetic
traits and the quality of our seeds. Natural disasters may also affect the
performance of our seeds, particularly when farmers are not able to timely and
effectively respond to those disasters. Furthermore, the cultivability of some
farmland is deteriorating because of toxic and hazardous materials resulting
from farmers’ overuse of chemical herbicides and pesticides. These factors
generally cause underproduction, but farmers generally attribute underproduction
to seed quality. We may be subject to legal proceedings and claims from time to
time relating to our seed quality. The defense of these proceedings and claims
can be both costly and time consuming and may significantly divert efforts and
resources of our management personnel. An adverse determination in any such
proceeding could subject us to significant liability and damage our market
reputation and prevent us from achieving increased sales and market share.
Protracted litigation could also result in our customers or potential customers
deferring or limiting their purchase of our products.
Our
revenues depend on the ability of a large number of small farmers to buy seed
for cash because financing for purchases of this size and type is not available;
therefore, if a substantial number of our customers become unable to pay for
seed, our sales, revenues and operating results will decline.
We have a
large and diversified customer base, with no single customer representing more
than 1.5% of our revenues. The large customer base provides some protection to
us against a loss of revenues due to the inability of a significant number of
our customers to pay for seed that has been previously ordered. The
unavailability of credit for farmers in the PRC, however, reduces the ability of
those farmers to withstand the effects of difficult economic times. The lack of
credit could prevent farmers from fulfilling their purchasing commitments to us
with the result that we may suffer a lower amount of recognized revenues or our
revenues and results of operations may be reduced.
Fluctuations
in commodity prices can increase our costs and decrease our sales.
We
purchase our seed inventories from production growers at market prices and
retain the seed in inventory until it is sold. We also purchase our active
ingredients from chemical manufacturers at market prices. These
purchases constitute a significant portion of the manufacturing costs for our
seeds and chemicals. We use hedging strategies to mitigate the risk of
short-term changes in these prices, but we are unable to avoid the risk of
medium and long-term changes. Accordingly, increases in commodity prices may
negatively affect our cost of goods sold or cause us to increase seed or
chemical prices, which could adversely affect our sales. Farmers’ incomes are
also affected by commodity prices; as a result, commodity prices could have a
negative effect on their ability to purchase our products.
Price
increases for energy costs and raw materials could have a significant impact on
our ability to sustain and grow earnings.
Our
production and distribution processes consume significant amounts of energy and
raw materials, especially in transportation the costs of which are subject to
worldwide supply and demand and other factors beyond the control of the company.
Significant variations in the cost of energy, which primarily reflect market
prices for oil and raw materials may affect the company’s operating results from
period to period though this has not been a factor. When possible, the company
purchases raw materials through negotiated long-term contracts to minimize the
impact of price fluctuations. The company has taken actions to offset the
effects of higher energy and raw material costs through selling price increases,
productivity improvements and cost reduction programs. Success in offsetting
higher raw material costs with price increases is largely influenced by
competitive and economic conditions and could vary significantly depending on
the market served. If the company is not able to fully offset the effects of
higher energy and raw material costs, it could have a significant impact on the
company’s financial results.
There
are difficulties in managing our storage system, which may result in damage to
our seeds in storage and, thus, operating losses.
Seed
storage entails significant risks, including difficulties in management of
moisture, temperature and humidity of storage condition, any failure of which
may result in damage to our seeds in storage and, thus, an impairment of our
inventory and possible operating losses.
We
have limited business insurance coverage in China.
PRC
insurance companies do not offer extensive business insurance products. As a
result, we have very limited business liability, business disruption insurance,
or product liability coverage for our operations in China. We have determined
that the difficulties associated with acquiring such insurance on commercially
acceptable terms make it impractical for us to obtain such coverage. Most likely
we would bear the effects of any business disruption, litigation or natural
disaster resulting in our incurring substantial costs and the diversion of our
resources, and could adversely affect our operations and financial
condition.
We
rely on our network of over 100,000 farmers for the production of our crop seed
products of which the vast majority has been operating with us for a long period
of time. Although our relationship with those farmers has been stable in the
past, there are no assurances that those relationships will remain stable in the
future. Instability of this kind could limit the amount of seed products
available to us for sale to customers and threaten customer
loyalty.
We
believe we maintain a favorable relationship with the farmers in our seed
production network. In addition, the fact that we rely on a large number of
farmers to produce crop seeds means that not one or even several farmers can,
acting independently, adversely affect our business. However, events such as a
shift in pricing caused by an increase in the value of commodity food crops
other than seed crops, increase in land prices or competition could disrupt our
chain of supply. Any of these disruptions could limit the supply of seeds that
we obtain in any given year, adversely affecting supply and thereby lowering
revenues in the subsequent marketing season. Such disruption could also damage
our distributor relationships and farmer loyalty to us if we cannot supply the
quantity of seed expected by them.
We
rely on license and technical service agreements, and there is no assurance that
we will be able to renew these agreements.
We have
multiple license agreements for designated seed products in relation to
exclusive production and marketing within China. Our license agreements with
Hubei Province Shiyan Agricultural Sciences Institute and Handan Agricultural
Academy each have terms expiring on July 1, 2011, respectively. Origin
Biotechnology will provide technical research, production and distribution
services to our several subsidiaries. In return, Beijing Origin and the other
subsidiaries are required to pay Origin Biotechnology a service fee calculated
according to the weight of corn, rice, and cotton seeds sold. The initial term
of the technical services agreements is three years and either party has the
right to terminate the agreement if it does not desire to renew the provisions
thereof at the expiration of the term. There is no guarantee that any of the
agreements upon which we or our subsidiaries depend for licensing and technical
services will be renewed. Moreover, there is no assurance that any steps we have
already taken or might take in the future will ensure the successful renewal of
any or all our rights or the granting of further new rights or that the terms of
any renewals of our rights would not be significantly less favorable to us than
the terms of our current rights under these agreements.
Agreements
between our subsidiaries may not reflect terms that would have resulted from
arm’s length negotiations among unaffiliated third parties.
Agreements
between our subsidiaries that have been entered into, including the technical
services agreements, by and among Beijing Origin, Changchun Origin, Henan Origin
and Origin Biotechnology, may not reflect terms that would have resulted from
arm’s-length negotiations among unaffiliated third parties. These agreements
relate to, among other things, the transfer of intellectual property rights and
the provision of technical research, production and distribution services.
If
our rights to lease land from farmers were subject to a dispute, or if their
legality or validity were challenged, our operations could be
disrupted.
PRC law
provides for the registration of land ownership and land-use rights and for the
issuance of certificates evidencing land ownership or the right to use land. The
administrative system for registration of land ownership and land-use rights,
however, is not well-developed in rural areas where most of our crop seed
production bases are located. As a result, we generally are not able to verify
through the land registry system the ownership or land-use rights of the parties
from whom we have leased land. Despite our efforts to obtain representations
from the farmers that they own the land, possess land-use rights or have the
right to sub-contract the land-use right on behalf of the holder of such rights,
there is nevertheless a risk that they have not legally and validly granted the
right to use the land to us. Moreover, there is a risk that farmers may, in
breach of the terms of the applicable leases, enter into leases with other third
parties in respect of land-use rights which they have previously granted to us,
or that they have not entered into leases with third parties before entering
into leases with us.
There is
a risk that the legality or validity of our leases will be subject to dispute or
challenge in the future. If our leases become subject to a dispute or challenge,
our operations on such land, especially our research and development on crop
breeding, could be suspended and we could lose our rights to use such land which
could adversely affect our business, financial condition and results of
operations.
Any
diversion of management attention to matters related to acquisitions or any
delays or difficulties encountered in connection with integrating acquired
operations may have an adverse effect on our business, results of operations,
and/or financial condition.
We have
completed several acquisitions involving seed companies and may complete other
acquisitions in the near future. These transactions are designed to contribute
to our long-term growth. We must fit such acquisitions into our growth
strategies to generate sufficient value to justify their cost. Acquisitions also
present other challenges, including geographical coordination, personnel
integration and retention of key management personnel, systems integration and
the reconciliation of corporate cultures. Those operations could divert
management’s attention from our business or cause a temporary interruption of or
loss of momentum in our business and the loss of key personnel from the acquired
companies. In addition, proposed acquisitions which are not consummated will
cause us to incur substantial costs, none of which are generally
recoverable.
Certain
of our current outstanding credit agreements contain financial and operating
covenants that limit our management’s discretion with respect to certain
business matters. Among other things, these covenants require us
to restrict our ability and our subsidiaries’ ability to incur additional
debt, create liens or other encumbrances, change the nature of our business, pay
dividends, sell or otherwise dispose of assets, and merge or consolidate with
other entities. Any failure by us or our subsidiaries to comply with these
agreements could harm our business, financial condition and operating
results.
Risks
relating to our industry
The
Chinese agricultural market is highly competitive and our growth and results of
operations may be adversely affected if we are unable to compete
effectively.
The
agricultural market in China is highly fragmented, largely regional and
competitive, and we expect competition to increase and intensify within the
sector. We face significant competition in our crop seed business. Our
competitors may have greater financial, research and development resources than
we have. Competition may also result from consolidation or other market forces
within the crop seed industry in China and the privatized crop seed producers
that were operated by the local governments in China. Our competitors may be
better able to take advantage of industry consolidation and acquisition
opportunities than us. The reform and restructuring of the previously
state-owned equity in seed enterprises will likely lead to the reallocation of
market share in the seed industry, and our competitors may increase their market
share by participating in the restructuring of the state-owned seed companies.
Privatization will likely mean that these producers will need to develop more
efficient and commercially viable business models in order to survive. In
addition, the PRC government currently restricts foreign ownership of any
domestic seed development and production business to no more than 49%. When and
if such restrictions are lifted, multinational corporations engaged in the seed
business may expand into the agricultural market in China. These companies have
significantly greater financial, technological and other resources than us and
may become our major competitors in China. In particular, our industry was
affected by a widespread overproduction during 2007. As a result, supply of
certain of our products exceeded demand for those products and, as a result,
market prices were reduced and our margins and revenues were negatively impacted
in 2007 and 2008. However, this was not the case in 2009 and 2010,
but similar changes in supply and demand pressure may result in similar trends
in upcoming years. If these trends occur, we may be unable to successfully
compete in our industry, especially if our competitors can produce and
distribute seeds at a lower cost than us. If competition intensifies, our
margins may continue to be compressed by more competitive pricing in the short
term and may also to be compressed in the long term, and we may lose our market
share and experience a negative impact on our margins, revenues and results of
operations.
China’s
commitments to the World Trade Organization may intensify
competition.
In
connection with its accession to the World Trade Organization, China made many
commitments including opening its markets to foreign products, allowing foreign
companies to conduct distribution businesses within China, and reducing customs
duties. Although the impact of these commitments in our business segment has not
been significant to date, foreign manufacturers may begin to manufacture
competing seeds, both non-genetically modified and genetically modified and ship
their products or establish manufacturing facilities in China. Competition from
foreign companies may reduce our current profit margins, and hence our business
results may suffer.
Natural
or man-made disasters could damage seed production, which would cause us to
suffer production losses and material reduction of revenues.
We
produce our seeds using a network of over 100,000 farmers who plant the crops
and harvest the seeds for use as crop seeds for the next growing season. As a
result, the source of supply for our seeds is subject to all of the risks
associated with any agricultural enterprise, including natural disasters such as
widespread drought, flood, snowstorm, pestilence and plant diseases, and
man-made disasters such as environmental contamination. Other man-made incidents
may damage our products, such as arson or other acts that may adversely affect
our crop seed inventory in the winter storage season. Furthermore, natural or
man-made disasters may cause farmers to migrate from the farmland, which would
decrease the number of end users of our products. While our use of a large
number of farmers provides some protection against a widespread failure of any
particular crop, the majority of our seed production farmers are located in
Gansu, Sichuan, and Hunan provinces, making them subject to risks that are
somewhat local in nature. We have attempted to manage this risk by obligating
ourselves to pay the farmers who produce our seeds only for the quantity of
seeds that they produce, thus limiting our expenses somewhat. We have also set
up a storage system since 2003 attempting to manage this risk. However, in the
event of a widespread failure of the crop seed in these areas, we would likely
sustain substantial operating losses, due to both the fact that a significant
portion of our expenses are fixed overhead and that the loss of a large portion
of a crop seed would limit our revenues significantly.
We
primarily rely on arrangements with farmers to produce our crop seed products.
If we were unable to continue these arrangements or enter into new arrangements
with other farmers, our total land acreage devoted to crop seed production would
decrease and our growth would be inhibited.
We have
access to over 3,800 hectares of farmland in several provinces mainly through
contractual arrangements with farmers for seed production. These production
agreements to produce crop seeds are typically one year in length, covering one
growing season. In the event that prices for other crops increase, these farmers
may decide to farm other crops in breach of our seed production agreements with
them. If we are unable to find new village collectives willing to produce crop
seeds for us, our business and results of operations would be materially and
adversely affected. Any of these disruptions could materially and adversely
affect our supply of crop seeds and our revenues. Such disruptions could also
damage distributor relationships and farmer loyalty if we cannot supply them
with the quantities and varieties of seeds that they expect.
Crop
seed prices and sales volumes may decrease in any given year with a
corresponding reduction in sales, margins and results of
operations.
Previously,
there have been some elements of instability in seed production in China as a
result of the privatization of state crop seed producers and because of the
worldwide economic situation. There may be other periods of instability in the
future during which commodity prices and sales volumes fluctuate greatly.
Commodities can be affected by general economic conditions, weather, disease and
aspects of demand such as financing, competition and trade restrictions.
Although we follow a branded product strategy to differentiate our products from
those of other crop seed producers, the crop seed market continues to behave as
a commodity market. As a result, the price that we are able to demand for our
seeds is somewhat dependent on the size of the supply of our seeds and the seeds
of other producers. Therefore, the potential exists for fluctuation in supply
and, consequently, in price, in our own markets, even in the absence of
significant external events that might cause volatility. As a result, the amount
of revenue that we receive in any given year is subject to change. Because
decisions are made regarding the level of production prior to the time that the
volume of orders and the market price for those orders is known, it is possible
that we will have too much or not enough product available, each with the
attendant impact on revenues, margins and results of operations.
Historically,
prices of crop seed products in China have fluctuated due to changes in supply
and demand.
The
ability of our operations to be profitable is affected by the selling prices of
our products. We benchmark the prices of our crop seed products against the
prevailing domestic market prices of crop seed products of similar quality and
attributes. During the past five years, crop seed products in China have
experienced price declines though selling prices have increased in the recent
years. If the general prices for such products decline at a faster rate than our
cost of sales, our profits will decrease and our ability to generate operating
results at historical levels will be adversely affected. This may be caused by
any number of circumstances including poor production by the farmer, adverse
weather conditions, theft, inventory spoilage, increase in the cost of
production either via storage cost, drying cost, purchase cost, or any other
such increase in the cost of sales.
We
may face increased regulatory risks with respect to our recent expansion into
Southeast Asia.
In
connection with certain recent acquisition and seed approval activities,
including particular investments in rice seed varieties applicable to the soil
conditions in the region, we have begun to develop a limited market among
farmers in Southeast Asia for our rice hybrid products. We expect to continue to
expand our business into Southeast Asia in the future. We may face material
financial, business, and legal risks with respect to our expansion into Vietnam
given that our business and operating results may be adversely affected by
changes in the political and social conditions in Southeast Asia and by changes
in local government policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods taxation, among other things.
Technological
change in creating seed hybrids could harm our business, causing a shift in
business opportunities, market share, and revenues.
For the
most part, we rely upon traditional methods of creating crop seed hybrids to
develop new products. While these methods are highly effective, there has been
an increase in the development of genetically modified agricultural products in
an effort to increase the quality and quantity of crop yields, in which we also
engage. Genetic technology is controversial, and it has not been widely accepted
in many regions of the world, including the PRC. However, as the ability to use
genetic modification to produce seeds that are superior to or less costly than
those that we produce by traditional methods increases, the threat of
competition from this source becomes more realistic. A number of factors that
are currently difficult to predict, including a shift in farmer and consumer
attitudes regarding the acceptability of genetic technology, affect the extent
to which this potential threat could affect our business prospects as we deploy
more resources into genetically modified crop seeds.
Risks
relating to our business organization and structure
Three
of our PRC operating subsidiaries are controlled subsidiaries through stock
consignment agreements rather than by direct ownership of shares, the terms of
which may have to be enforced, which would require us to incur extra costs,
create uncertainty as to ownership of the operating businesses involved and risk
the possible loss of rights.
Under PRC
law, foreign entities are not currently permitted to own more than 49% of a seed
production company. In order to address those restrictions, Origin, a
non-Chinese entity that cannot directly own the shares of our PRC operating
subsidiaries, namely, Beijing Origin, Changchun Origin and Henan Origin, will
instead hold the right to control such shares in all respects, including voting,
dividends, nomination of directors, and corporate management, through stock
consignment agreements executed by the owners of the stock of these companies.
In addition, if we engage in the sale of genetically modified seed products,
then foreign entities are not currently permitted to own any portion of the seed
production company. Moreover, if we engage in the research and development of
genetically modified seed products, then foreign entities are not currently
permitted to own any of the seed production company.
There is
the risk, however, that a consigning shareholder will not fulfill its
obligations under the stock consignment agreement. In that event, we may need to
resort to the PRC courts to have our rights under the applicable agreement
enforced. Such enforcement will cause us to incur legal expenses. In addition,
while a case is pending there will be uncertainty regarding our rights as to the
three PRC operating subsidiaries involved. In addition, a PRC court may decide
not to enforce the agreements in whole or in part. To the extent these
agreements are neither observed nor enforced as intended, the PRC operating
subsidiaries including Denong, which is approximately 97.87% (acquired in portions of
52.21%, 42.42%, 2.99%, and 0.25%) owned by
Beijing Origin, will not be controlled by us as intended, which will affect our
enterprise value and restrict our ability to obtain the income and other rights
of ownership associated with the consigned stock. It may also prevent the
consolidation of our financial statements with the PRC operating subsidiaries,
which would reduce the reported earnings of the consolidated companies. The
uncertainty of ownership may also adversely affect the market value of our
ordinary shares.
Whether
or not a stock consignment agreement is terminated depends on the consensus of
our board and the consignees. Any such termination could result in a possible
loss of certain rights or assets held by us without receiving fair value in
return.
The stock
consignment agreements relating to our control of the stock of our PRC operating
subsidiaries (not including Origin Biotechnology) may be terminated or extended
after three years upon mutual agreement between us and the consignees. Three of
the PRC consignees, Messrs. Han, Yuan and Yang, also serve as our officers
and/or directors. These three persons own, in the aggregate, 7,809,780 shares of
our ordinary stock, or about 32.83% of our issued and outstanding ordinary
stock. Holding this amount of stock will allow these officers to control or
greatly influence the selection of directors and matters submitted to a vote of
our shareholders, including voting to terminate the stock consignment
agreements.
There are
corporate protections in place designed to protect our interests, such as an
independent board of directors, an audit committee comprised of independent
directors that must approve insider transactions, a code of conduct requiring
fair dealing with the company, and the British Virgin Islands statutory
provision that a disposition of more than 50% of the assets of a company must be
approved by a majority of the shareholders. Moreover, if consigned stock is
transferred to us as provided in the stock consignment agreements when the
restrictions under PRC law are lifted, that stock will no longer be subject to
the stock consignment agreements, and the termination of the stock consignment
agreements would then have no effect on the ownership of that stock. However, if
the stock consignment agreements are terminated, then we would lose our rights
with respect to the consigned stock and the profits from the issuing
corporation. Such a loss would impair the value of the company and would reduce
our ability to generate revenue.
Our
executive officers have entered into employment agreements with us which provide
that they may be entitled to certain rights upon a change of
control.
The
following executive officers have entered into employment agreements which
provide that they may terminate their respective employment agreements with us
as a result of a change of control:
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Dr. Gengchen Han, our Chairman of
the Board; and
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Liang Yuan, our Chief Executive
Officer and President.
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A change
of control includes if any person other than us and/or any our officers or
directors as of the date of the employment agreement acquires our securities
other than from the executive or his affiliates (in one or more transactions),
having 51% or more of the total voting power of all of our securities then
outstanding. If the executive terminates his employment agreement due to a
change of control, we must continue to pay the executive all payments,
compensation and benefits pursuant to the terms of his employment agreement upon
the earlier of two years from the date of termination or through the term of the
employment agreement (each employment agreement has a term of three years
commencing on January 1, 2009).
Risks
relating to doing business in China
If
we do not comply with PRC regulations, we may not be able to operate our
business or we may be fined, both of which would adversely affect our business,
operations and revenues.
The PRC
has many regulations relating to the seed business and businesses involved in
chemicals that could be considered pollutants, including obtaining and
maintaining operating licenses and permits. Seed products must be licensed and
undergo a stringent review process before they may be sold in the PRC.
Environmental regulation is equally as extensive with licensing and other
compliance requirements. We believe we currently have all the necessary licenses
for our business, and that we are in compliance with applicable laws and
regulations. If we are not in compliance, we may be fined or lose the ability to
sell a particular seed or operate our business altogether. If the fines are
substantial or if our ability to sell or operate is withdrawn, this will result
in additional costs or the loss of revenues and could prevent us from continuing
as an operating business.
If
we do not comply with applicable government regulations, we may be prohibited
from continuing some or all of our operations, resulting in a reduction of
growth and ultimately market share due to loss of competitive
position.
The
majority of our revenue depends on receiving approval from the PRC government to
market new seed hybrids that we are developing and will develop. In addition,
there may be circumstances under which the governmental approvals granted are
subject to change without substantial advance notice, and it is possible that we
could fail to obtain the approvals that we require to expand our business as we
intend to do. The failure to obtain or to maintain such approvals would limit
the number and quality of products that we would be able to offer. This
reduction in product offerings would cause a reduction in the growth previously
experienced and over time would result in the loss of market share from the
competitive pressures of seeds developed by others that would likely be better
than our products.
The
technical services agreements between Origin Biotechnology and the other three
operating subsidiaries may be subject to scrutiny by the PRC tax authorities for
transfer pricing adjustments.
We could
face adverse tax consequences if the PRC tax authorities determine that our
technical service agreements between Origin Biotechnology and the other PRC
operating subsidiaries, namely, Beijing Origin, Changchun Origin and Henan
Origin, were not entered into based on arm’s length negotiations. If the PRC tax
authorities determine that these agreements were not entered into on an arm’s
length basis, they may adjust our income and expenses for PRC tax purposes in
the form of a transfer pricing adjustment. A transfer pricing adjustment could
result in a reduction, for PRC tax purposes, of deductions recorded by the three
PRC operating subsidiaries, which could adversely affect us by:
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increasing the PRC operating
subsidiaries’ tax liability without reducing Origin Biotechnology’s tax
liability, which could further result in late payment fees and other
penalties to our PRC operating subsidiaries for under-paid taxes;
or
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limiting Origin Biotechnology’s
ability to maintain preferential tax treatment and government financial
incentives, which, if the transfer pricing adjustment is significant,
could result in Origin Biotechnology failing to qualify for those
preferential tax treatments and government financial
incentives.
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As a
result, any transfer pricing adjustment could have an adverse impact on our
financial condition.
Deficient
railway transportation capacity in China, particularly in the Northwestern area,
may result in the increase of our transportation-related costs and thus
adversely affect our business.
Our seeds
are transported throughout China each year by railway, which we believe is
currently the most cost-efficient means. Much of our production is in the
Northwest region of China. With economic development throughout China, we
believe the Chinese rails system, and in particular the Northwest railway, may
not be able to provide sufficient capacity over time, at reasonable rates. As
our volume of freight increases year by year, the seeds may have to be
transported by other means if the railway cannot guarantee to carry the
increasingly larger volume of freight. We may experience higher rail rates or
the higher transportation costs of trucking our products. In such event, the
production costs will increase correspondingly with the increase in
transportation costs, which may adversely affect our business.
Our
business benefits from certain PRC government subsidies. Expiration of, or
changes to, these incentives could have a material adverse effect on our
operating results.
The PRC
government has in recent years reduced taxes and increased subsidies and other
support across the agricultural industry. For instance, the government
subsidizes farmers for their seed purchases, and has increased spending on rural
infrastructure. Sales of agricultural products from producers to intermediaries
or to farmers are exempt from PRC value-added tax. The discontinuance of
preferential treatments granted by the Chinese government to the seed industry,
could adversely affect our earnings.
In
addition, subsidy policies may have an adverse effect on our ability to market
our products. Farmers can buy crop seeds designated as “high-quality” at
subsidized prices, but the designation of seeds as “high-quality” is at the
discretion of the local government, companies owned by the local government and
local private seed companies. It is possible that this policy could result in
preferential treatment for local seed producers, with locally produced seeds
being designated as “high-quality” while ours are not designated as such. If
such preferential treatment were to occur, the price for our seeds to farmers in
those provinces would be higher than the subsidized local seeds, and our sales
in that province could suffer, which could adversely affect our results of
operations.
The
discontinuation of any of the preferential tax treatments currently available to
our PRC subsidiaries could materially increase our tax liabilities.
Prior to
January 1, 2008, under applicable PRC tax laws, companies established in China
were generally subject to a state and local enterprise income tax, or EIT, at
rates of 30% and 3%, respectively . In addition, an enterprise qualified as a
“high and new technology enterprise,” including agricultural companies, located
in certain specified high-tech zones was entitled to a preferential state EIT
rate of 15% and could enjoy an exemption from the state EIT for the first three
years since its establishment and a 50% reduction of the state EIT for the
succeeding three years. The qualification of a “high and new technology
enterprise” was subject to an annual or biennial evaluation by the relevant
government authority in China. Beijing Origin and Jilin Changrong are entitled
to a preferential tax rate of 15% as a new technology company.
In 2007,
the National People’s Congress, enacted the Enterprise Income Tax Law, or the
New EIT Law, and in December 2007, the State Council promulgated the
implementing rules of the EIT Law, both of which became effective on January 1,
2008. The EIT Law significantly curtails tax incentives granted to
foreign-invested enterprises under the previous tax law. The EIT Law, however,
(i) reduces the top rate of enterprise income tax to 25%, (ii) permits companies
to continue to enjoy their existing tax incentives, subject to certain
transitional phase-out rules, and (iii) introduces new tax incentives, subject
to various qualification criteria. Under the phase-out rules, enterprises
established before the promulgation date of the EIT Law and which were granted
preferential EIT treatment under the then effective tax laws or regulations may
continue to enjoy their tax holidays until their expiration and will gradually
transition to the uniform 25% EIT rate over a five-year transition period. In
addition, the new technology enterprise qualification of our PRC subsidiaries is
subject to a biennial re-assessment by the relevant PRC government authority. In
the event the preferential tax treatment for our PRC subsidiaries is
discontinued, the affected entity will become subject to the standard PRC
enterprise income tax rate. There is no assurance that the local tax authorities
will not, in the future, change their position and discontinue any of our
preferential tax treatments, potentially with retroactive effect. The
discontinuation of any of our preferential tax treatments could materially
increase our tax obligations.
Under
China’s Enterprise Income Tax Law, we may be classified as a “resident
enterprise” of China. Such classification could result in unfavorable tax
consequences to us and our non-PRC shareholders.
Under the
current Enterprise Income Tax Law, or the New EIT Law, an enterprise established
outside of China with “de facto management bodies” within China is considered a
“resident enterprise,” meaning that it can be treated in a manner similar to a
Chinese enterprise for enterprise income tax purposes. The implementing rules of
the EIT Law define de facto management as “substantial and overall management
and control over the production and operations, personnel, accounting, and
properties” of the enterprise. However, it is unclear how tax authorities will
determine tax residency based on the facts of each case. If the PRC tax
authorities determine that our British Virgin Islands holding company is a
“resident enterprise” for PRC enterprise income tax purposes, a number of
unfavorable PRC tax consequences could follow. First, we may be subject to
enterprise income tax at a rate of 25% on our worldwide taxable income as well
as PRC enterprise income tax reporting obligations. Second, under the EIT Law
and its implementing rules dividends paid to holding companies outside of China
which are “resident enterprises will be subject
to a 10% withholding tax. It is possible that future guidance issued with
respect to the new “resident enterprise” classification could be applied to our
British Virgin Islands sub-holding company with similar consequences. Therefore,
any dividends paid by our PRC subsidiaries may be subject to a 10% withholding
obligation.
In
addition to the uncertainty in how the new “resident enterprise” classification
could apply, it is also possible that the rules may change in the future,
possibly with retroactive effect.
Adverse
changes in political and economic policies of the PRC, including its policy of
reforming its economic system, could have an adverse effect on the growth of
private businesses in the PRC such as ours.
Since the
late 1970’s, the PRC has been reforming its economic system and changing from a
planned economy based on governmental dictates and priorities to one that uses
market forces to influence deployment of economic resources, labor and capital
and to determine business endeavors. We cannot predict whether or not the
government will continue to encourage economic liberalization and further
release its control over the economy and encourage private enterprise. We also
cannot predict the timing or extent of future economic reforms that may be
proposed. Any re-imposition of planned economy regulation or similar kinds of
restrictions could reduce the freedom of private businesses to operate in a
profitable manner, restrict inflows of capital or stifle investor willingness to
participate in the PRC economy. To the extent we need additional capital; any
restrictions on foreign ownership, foreign investment and repatriation of
profits will hamper our ability to find capital outside of the
PRC.
A
return to profit repatriation controls may limit our ability to pay dividends
and expand our business, and may reduce the attractiveness of investing in PRC
business opportunities.
PRC law
allows enterprises owned by foreign investors to remit their profits, dividends
and bonuses earned in the PRC to other countries, and the remittance does not
require prior approval by the State Administration of Foreign Exchange, or SAFE.
SAFE regulations require extensive documentation and reporting, some of which is
burdensome and slows payments. If there is a return to payment restrictions and
reporting, the ability of a PRC company to attract investors will be
reduced.
Also, our
investors may not be able to obtain the benefits of the profits of the business
generated in the PRC for other reasons. Relevant PRC laws and regulations permit
payment of dividends only from accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. Each of our
subsidiaries and our affiliated entities in China is required to set aside at
least 10% of its after-tax profits each year, if any, to fund a statutory
reserve until such reserve reaches 50% of its registered capital, and to further
set aside a portion of its after-tax profits to fund the employee welfare fund
at the discretion of the shareholders’ meeting or the board. These reserves are
not distributable as cash dividends. In addition, the PRC tax authorities may
require us to adjust our taxable income under the contractual arrangements we
currently have in place in a manner that would materially and adversely affect
our subsidiary’s ability to pay dividends and other distributions to us. Any
limitation on the ability of our subsidiary and our affiliated entity to
distribute dividends or other payments to us could materially limit our ability
to grow, make investments or acquisitions that could be beneficial to our
businesses or otherwise fund and conduct our business.
Pursuant
to PRC enterprise income tax law, dividends payable by a foreign-invested
enterprise, or FIE, including Origin Biotechnology to its foreign investors are
subject to a 10% withholding tax, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a
different withholding arrangement. No such treaty currently exists with the
British Virgin Islands or the United States. Prior to 2008, dividend payments to
foreign investors made by FIEs were exempted from PRC withholding
tax.
Any
fluctuations in exchange rates may adversely affect your
investment.
The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in political and economic
conditions. Because our earnings and cash from operations are denominated in
Renminbi, as the reporting currency, fluctuations in exchange rates between U.S.
dollars and Renminbi will affect our balance sheet and earnings per share when
stated in U.S. dollars. The translation of Renminbi amounts into United States
dollar amounts has been made for the convenience of the reader. Such translation
amounts should not be construed as representations that the Renminbi amounts
could be readily converted into United States dollar amounts at that rate or any
other rate. In addition, appreciation or depreciation in the value of the
Renminbi relative to the U.S. dollar would affect our financial results when
reported in U.S. dollar terms without giving effect to any underlying change in
our business or results of operations. The source of these rates is the Federal
Reserve Bank of New York until December 31, 2008. Starting from January 1, 2009,
the source of rates is from the State Administration of Foreign Exchange in
China as the Federal Bank of New York discontinued publication of foreign
exchange rates. Effective from July 21, 2005, the Renminbi is no longer pegged
solely to the U.S. dollar. Instead, it is pegged to a basket of currencies
determined by the People’s Bank of China. The Renminbi may be revalued further
against the US dollar or other currencies or the Renminbi may be permitted to
enter into a full or limited free float, which may result in an appreciation or
depreciation in the value of the Renminbi against the US dollar or other
currencies. Fluctuations in the exchange rate will affect the relative value of
any dividend we issue which will be exchanged into U.S. dollars, the value of
any U.S. dollar denominated investments we make in the future and any earnings
on such investments.
There
are government regulations that limit or prohibit foreign investment in the PRC,
which may restrict our growth.
Notwithstanding
the general restriction on foreign investment in the seed industry in the PRC,
our corporate structure currently enables us to receive foreign investment. Our
continued ability to receive foreign investment may be important to our ability
to continue to expand our business rapidly and to manage that expansion
effectively. We cannot be certain that a change in the regulations allowing us
to receive foreign investment will not occur. In the event of such a change, our
plan to expand our business could be disrupted.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
Substantially
all our revenues and expenses are denominated in Renminbi. We may need to
convert a portion of our revenues into other currencies to meet our foreign
currency obligations, including, among others, payment of dividends declared, if
any, in respect of our ordinary shares. Under China’s existing foreign exchange
regulations, the PRC Operating Companies may not pay dividends in foreign
currencies, without prior approval from SAFE, unless they comply with certain
procedural requirements. The PRC government may also take measures in the future
to restrict access to foreign currencies for current account
transactions.
Foreign
exchange transactions under the capital account continue to be subject to
significant foreign exchange controls and require the approval of PRC
governmental authorities, including the SAFE. If the PRC Operating Companies
borrow in foreign currency from us or other foreign lenders, these loans must be
registered with the SAFE, and if we finance the PRC Operating Companies by means
of additional capital contributions, these capital contributions must be
approved by certain government authorities, including the Ministry of Commerce
or its local counterparts. These limitations could adversely affect the ability
of the PRC Operating Companies to obtain foreign exchange through debt or equity
financing, which could harm our ability to fund our operations or cause us to
seek additional financing on terms that may not be favorable.
PRC
regulations relating to offshore investment activities by PRC residents may
increase the administrative burden we face and create regulatory uncertainties
that could restrict our overseas and cross-border investment activity. Failure
by our shareholders who are PRC residents to make any required applications and
filings pursuant to such regulations may prevent us from being able to
distribute profits, if any, and could expose us and our PRC resident
shareholders to liability under PRC law.
SAFE
promulgated regulations that require registration with local SAFE offices in
connection with direct or indirect offshore investment by PRC residents,
including PRC individual residents and PRC corporate entities. These regulations
apply to our shareholders who are PRC residents and also apply to our prior and
future offshore acquisitions. In particular, the SAFE regulations require PRC
residents to file with competent SAFE offices information about offshore
companies in which they have directly or indirectly invested and to make
follow-up filings in connection with certain material transactions involving
such offshore companies, such as increases or decreases in investment amount,
transfers or exchanges of shares, mergers or divisions, long-term equity or debt
investments, or external guarantees or other material events that do not involve
return investment.
The SAFE
regulations required prior registration of direct or indirect investments
previously made by PRC residents in offshore companies. If a PRC resident with a
direct or indirect stake in an offshore parent company fails to make the
required SAFE registration, the PRC subsidiaries of such offshore parent company
may be prohibited from making distributions of profit to the offshore parent and
from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Further, failure to
comply with various SAFE registration requirements described above could result
in liability under PRC law for foreign exchange evasion.
We
believe our major shareholders who are PRC residents, or whose shares are
beneficially owned by PRC residents, have completed foreign exchange
registration with the local foreign exchange bureau according to these SAFE
regulations. However, with these regulations there is uncertainty concerning the
reconciliation of the new regulations with other approval requirements, it is
unclear how the regulations, and any future legislation concerning offshore or
cross-border transactions, will be interpreted, amended and implemented by the
relevant government authorities. We cannot assure you that all of our
shareholders who are PRC residents will comply with our request to make or
obtain any applicable registrations or approvals required by the regulations or
other related legislation. The failure or inability of our PRC resident
shareholders to receive any required approvals or make any required
registrations may subject us to fines and legal sanctions, restrict our overseas
or cross-border investment activities, limit our PRC subsidiary to make
distributions or pay dividends or affect our ownership structure. As a result,
our business operations and our ability to distribute a dividend to you could be
adversely affected.
The
PRC legal system has inherent uncertainties that could limit the legal
protections available to you.
Nearly
all of our assets and all of our operations are in the PRC. The PRC legal system
is based on written statutes. Prior court decisions may be cited for reference
but are not binding on subsequent cases and have limited precedential value.
Since 1979, the PRC legislative bodies have promulgated laws and regulations
dealing with such economic matters as foreign investment, corporate organization
and governance, commerce, taxation and trade. However, because these laws and
regulations are relatively new, and because of the limited volume of published
decisions and their non-binding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties. The laws in the PRC differ
from the laws in the United States and may afford less protection to our non-PRC
shareholders.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in the PRC based on United States
judgments against us, our subsidiaries, officers and directors.
We are
incorporated in the British Virgin Islands and our PRC operating subsidiaries
are formed under PRC law. Substantially all of our assets are located in the
PRC. In addition, most of our directors and executive officers reside within the
PRC, and substantially all of the assets of these persons are located within the
PRC. It may not be possible to affect service of process within the United
States or elsewhere outside the PRC upon our directors, or executive officers
and experts, including effecting service of process with respect to matters
arising under United States federal securities laws or applicable state
securities laws. The PRC does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the United States and
many other countries. As a result, recognition and enforcement in the PRC of
judgments of a court in the United States or many other jurisdictions in
relation to any matter, including securities laws, may be difficult or
impossible. Furthermore, an original action may be brought in the PRC against
our assets and our subsidiaries, our directors and executive officers and
experts only if the actions are not required to be arbitrated by PRC law and
only if the facts alleged in the complaint give rise to a cause of action under
PRC law. In connection with any such original action, a PRC court may award
civil liability, including monetary damages.
Risk
relating to tax matters
We
may be subject to contingent tax liabilities.
On
December 20, 2004, Chardan China Acquisition Corp., or Chardan, entered into a
stock purchase agreement with State Harvest, and all the shareholders of State
Harvest for Chardan’s acquisition of State Harvest. In connection with the
acquisition, Chardan formed its wholly-owned subsidiary, Origin Agritech. On
November 8, 2005, Chardan merged with and into Origin Agritech for the purpose
of re-domestication out of the United States. The re-domestication merger was
achieved by a one-for-one exchange of all the outstanding common stock of
Chardan for ordinary common shares of Origin Agritech, and the assumption of all
the rights and obligations of Chardan by Origin Agritech. Immediately after the
re-domestication merger, Origin Agritech acquired all the common equity of State
Harvest by the issuance of shares and payments of cash consideration to the
shareholders of State Harvest or their designee. We may be subject to contingent
tax liabilities in connection with the above share exchange transaction. As of
September 30, 2010, such contingent tax liabilities could be within the range of
RMB39.06 million to RMB64.22 million. We do not expect to incur tax liabilities
at the high end of the range based on the annual assessment.
Last
year, we began a fresh review of the contingent tax position by requesting and
receiving alternate U.S. tax counsel on this matter. On September 23, 2010, the
Company filed a revised 2005 tax return to the United States Internal Revenue
Service, or IRS in a way to rectify the previously filed tax return regarding
this tax liability. The IRS has not responded to the tax filing either directly
or with any paperwork as of the date of this filing. While the timeline for the
IRS to question on the tax return is generally three years, this matter may take
a prolonged period of time to resolve depending on the return time from IRS and
the necessity of future appeals or re-evaluation.
We
may become a passive foreign investment company, which could result in adverse
U.S. tax consequences to U.S. holders.
Depending
upon the value of our shares and the composition of our assets and income over
time, we could be classified as a passive foreign investment company, or PFIC,
by the IRS, for U.S. federal income tax purposes. If we were classified as a
PFIC in any taxable year in which you hold our shares and you are a U.S.
investor, you would generally be taxed at higher ordinary income rates, rather
than lower capital gain rates, when you dispose of those shares at a gain in a
later year, even if we are not a PFIC in that year. In addition, a portion of
the tax imposed on your gain would be increased by an interest charge. Moreover,
if we were classified as a PFIC in any taxable year, you would not be able to
benefit from any preferential tax rate with respect to any dividend distribution
that you may receive from us in that year or any later year. Finally, you would
also be subject to special U.S. tax reporting requirements.
Based on
our understanding and current assessment, we believe that we were not a PFIC for
the taxable year 2010. However, there can be no assurance that we will not be a
PFIC for the taxable year and/or later taxable years, as PFIC status is
re-tested each year and depends on the facts in such year. For example, we would
be a PFIC for the taxable year 2010 if the sum of our average market
capitalization, which is our share price multiplied by the total number of our
outstanding shares, and our liabilities over that taxable year is not more than
twice the value of our cash, cash equivalents, and other assets that produce, or
are held for the production of, passive income. We could also be a PFIC for any
taxable year if the gross income that we and our subsidiaries earn from passive
investments is substantial in comparison with the gross income from our business
operations. While we will continue to examine our PFIC status, we cannot assure
you that we will not be a PFIC for any future taxable year.
Risks
related to our shares
Voting
control by executive officers, directors and other of our affiliates may limit
investors’ ability to influence the outcome of director elections and other
matters requiring shareholder approval.
Three of
our executive officers and directors, Messrs. Han, Yang and Yuan, own
approximately 32.83% of our issued and outstanding ordinary shares. These three
major shareholders may maintain significant control over the outcome of some
corporate transactions or other matters submitted to our shareholders for
approval, including the election of directors and the approval of other business
transactions. This level of ownership could have the effect of delaying or
preventing a change in our control or discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have an adverse effect
on the market price of our ordinary shares or prevent shareholders from
realizing a premium over the market price for their ordinary shares. In
addition, if these major shareholders choose to dispose of a material portion of
our ordinary shares they hold, the prevailing market price of our securities may
decline.
Certain
provisions in our organizational documents may discourage our acquisition by a
third party, which could limit your opportunity to sell your shares at a
premium.
Our
memorandum and articles of association include provisions that could limit the
ability of others to acquire control of us. Under those provisions, our board of
directors has the power to issue preferred shares with such rights attaching to
them as they decide and this power could be used in a manner that would delay,
defer or prevent a change of control of us. These provisions could have the
effect of depriving you of the opportunity to sell your shares at a premium over
prevailing market prices by discouraging third parties from seeking to acquire
control of us in a tender offer or similar transactions.
We
qualify as a foreign private issuer and, as a result, are subject to reduced
requirements with respect to the reporting of financial statements and other
material events to our shareholders and the SEC.
As a
foreign private issuer, we are obligated to file an Annual Report with audited
financial statements and Form 6-K reports with the United States Securities and
Exchange Commission, or the SEC, at such times as we release information to the
public either voluntarily or pursuant to the laws of the British Virgin Islands
or the PRC. Therefore, the regularity of financial and other information will be
less than would be applicable to a domestic United States registered company
under the rules and regulations of the SEC. Investors may not receive
information on a timely basis, which could increase their risk of investment in
us.
Because
we are a foreign private issuer, we have elected to follow British Virgin
Islands law in connection with compliance under the NASDAQ Marketplace Rules,
which restrict the application of the NASDAQ corporate governance
requirements.
The
NASDAQ Marketplace Rules permit foreign private issuers to elect not to be
governed by all the corporate governance rules. We have elected to avail
ourselves of the exemption provided by NASDAQ, and we have elected to be
governed by only the British Virgin Island laws and the terms of our memorandum
and articles, which for example do not require us to hold an annual meeting each
year. Consequently, investors may not have the ability to express their opinion
on our business and the actions of directors through the voting process. In
other respects, we do follow the NASDAQ Marketplace Rules, such as having a
nominations and compensation committee, but these are voluntary and may be
eliminated at any time.
Leverage
and debt service obligations may adversely affect our cash flows.
We
currently have short-term borrowings of approximately US$12.82 million. The
degree to which we are leveraged could, among other things:
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require us to dedicate a portion
of our near term cash flows from operations and other capital resources to
debt service;
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make it difficult for us to
obtain necessary financing in the future for working capital, acquisitions
or other purposes on favorable terms, if at
all;
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make us more vulnerable to
industry downturns and competitive pressures;
and
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limit our flexibility in planning
for, or reacting to changes in, our
business.
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Our
ability to meet our debt service obligations will depend upon our future
performance, which will be subject to financial, business and other factors
affecting our operations, many of which are beyond our control.
Future
sales by us or our existing shareholders could depress the market price of our
ordinary shares.
If we or
our existing shareholders sell a large number of shares of our ordinary stock,
or if we sell additional securities that are convertible into ordinary stock,
the market price of our ordinary stock could decline significantly. Further,
even the perception in the public market that we or our existing shareholders
might sell shares of ordinary stock could depress the market price of our
ordinary stock.
ITEM 4. INFORMATION ON THE
COMPANY
A. History
and development of the company.
Origin
was first incorporated in the British Virgin Islands on February 10, 2005, and
is governed by the BVI Business Companies Act, 2004, or BCA, by re-registration
on July 10, 2006.
Chardan
China Acquisition Corp., the predecessor of Origin, was a blank check company
organized as a corporation under the laws of the State of Delaware on December
5, 2003. Chardan was formed for the purpose of effecting a business combination
with companies having operations based in China and significant growth
potential. Initially, Chardan’s efforts were limited to organizational
activities, completion of its initial public offering and the evaluation of
possible business combination opportunities.
On
December 20, 2004, Chardan entered into a stock purchase agreement, or the Stock
Purchase Agreement, with State Harvest, a company incorporated in the British
Virgin Islands on October 6, 2004, and all the shareholders of State Harvest. On
February 10, 2005, Chardan formed a wholly-owned subsidiary under the laws of
the British Virgin Islands, under the name “Origin Agritech Limited” to effect a
stock acquisition of State Harvest. Pursuant to the terms and conditions of the
Stock Purchase Agreement, Chardan merged into Origin for the purpose of
re-domestication out of the United States, and immediately thereafter, Origin
acquired all of the issued and outstanding stock of State Harvest, which
acquisition included four controlled affiliated operating companies, namely,
Beijing Origin, Changchun Origin, Henan Origin and Origin Biotechnology. These
four controlled operating companies are organized under the laws of the
PRC.
On
December 5, 2005, Origin commenced redemption of outstanding callable warrants
that had been assumed in the transaction with Chardan. The warrants
were exercisable into ordinary shares of Origin at $5.00 per warrant.
Approximately 8,043,752 of the 8,050,000 warrants were exercised through the
redemption date of January 9, 2006, and the balance of the outstanding warrants
was paid $0.01 per warrant and all the warrants were extinguished. The gross
proceeds received upon exercise of the warrants were approximately $40 million,
of which $15 million was used to satisfy the outstanding obligations of Origin
to the shareholders of State Harvest under the Stock Purchase Agreement, and the
remainder used as working capital and for other corporate purposes. After the
redemption of the warrants, Origin had approximately 23,472,910 ordinary shares
issued.
On June
26, 2007, our common shares began trading on the NASDAQ Global Select Market;
our common shares had been listed on the Nasdaq Global Market from November 8,
2005 to June 25, 2007.
On July
25, 2007, we entered into a Notes Purchase Agreement with Citadel Equity Fund
Ltd. or Citadel. Pursuant to the Notes Purchase Agreement, Citadel purchased $40
million in principal amount of 1% guaranteed senior secured convertible notes,
or the notes, issued by us. These notes have been retired by redemption with a
final payment in December 2009 of $17.2 million. None of these notes
were converted into common shares.
As part
of our efforts to expand our operations, we have made the following investments
and acquisitions:
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on January 24, 2006, Beijing
Origin and Jilin Jinong Hi-tech Limited jointly established Jilin
Changrong, with Beijing Origin holding 34.77% of Jilin Changrong. On April
11, 2007, Beijing Origin acquired an additional 9.18% equity interest in
Jilin Changrong for RMB22.04 million (US$2.94 million). On December 15,
2009, Beijing Origin acquired an additional 10% stake in Jilin Changrong
for RMB 24.00
million (US $3.58 million) bringing Beijing Origin’s total
direct ownership to 53.95% and our combined direct and indirect ownership
to 61.66%. Jilin Changrong engages in the research, development,
production, sale and distribution of hybrid corn in the northeast region
of China;
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on
January 24, 2006, Beijing Origin acquired a 52.21% controlling interest in
Denong. On October 8, 2006, Beijing Origin acquired an additional 42.42%
equity interest in Denong, and together with a 2.99% equity interest
acquired on December 25, 2006, with a 0.25% equity interest acquired on
January 20, 2010 bringing its total ownership to approximately 97.87%, for
which it paid total consideration of approximately RMB54.76 million
(US$7.31 million). Denong is a developer, producer and marketer of hybrid
rice, cotton, corn and canola, principally in the southwest region of
China; and
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on
October 19, 2006, Beijing Origin acquired a 19% interest in Biocentury, a
leading company engaged in GM cotton research, seed production, and
marketing in China, for RMB16.7 million (US$2.23 million). After acquiring
a 7% interest in 2004 and an 8% interest in 2005, Beijing Origin now holds
34% of Biocentury. On May 27, 2010, Beijing Origin divested a 34% interest
in Biocentury, for RMB60.0 million (US$8.95
million).
|
|
·
|
on
June12, 2010, Origin Biotechnology acquired a 80% interest in Shandong
Kunfeng, a company engaged in agricultural chemical production and
marketing in China, for RMB14.96 million (US$2.23
million).
|
Our
principal executive offices are located at No. 21 Sheng Ming Yuan Road,
Changping District, Beijing 102206, China, and our telephone number is (86-10)
5890-7588.
Since
2005, our capital expenditures consisted primarily of construction and purchase
of plant and equipment. The table below sets forth our capital expenditures for
the periods shown:
For the twelve months
ended September 30,
|
|
For the year ended
September 30,
|
|
For the year ended
September
30,
|
|
For the year ended
September 30,
|
2007
|
|
2008
|
|
2009
|
|
2010
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
36.53
million
|
|
19.66
million
|
|
RMB18.80
million
|
|
15.84million
|
(US$4.88
million)
|
|
(US$2.90
million)
|
|
(US$2.75million)
|
|
(US$2.58
million)
|
B. Business
overview.
Overview
We are
the leading, technology-focused crop seed company serving mainland China. As of
June 2010, we added branded agricultural chemicals to our product
line. We have sought to broaden our usage and penetration of our
innovative plant breeding techniques, modern biotechnology, and innovative
information and research management to develop and deliver high-yield seeds to
the Chinese farming customer base. Our goal is to lead the industry by providing
farmers with unique enabling technology and services, producing and protecting
higher crop yields. Our activities include the specialization in the research
and development, production, and sales and marketing of crop seeds (corn, rice,
cotton and canola) throughout the PRC. We have pursued genetically
modified research, and in November 2009, we received notification of the
Bio-Safety Certificate from the Ministry of Agriculture as a final approval for
commercial use of the world’s first genetically modified phytase corn. This is
the first genetically modified corn seed product in China. We are
also actively pursuing the approval of other GM seed products including
glyphosate resistant corn and bacillus thuringiensis, or BT,
Corn. Our focus remains in the production of higher quality seed
products, whether proprietary or licensed.
The
following table sets forth the amount and percentage of our revenues resulting
from licensed hybrid seeds as compared to our internally developed proprietary
hybrid seeds for the periods listed
|
|
Twelve Months
Ended
September 30,
2007
|
|
|
Year Ended
September 30,
2008
|
|
|
Year Ended
September 30,
2009
|
|
|
Year Ended
September 30,
2010
|
|
Revenue
resulting from licensed hybrid seeds
|
|
$
|
52,052,737
|
|
|
$
|
52,023,150
|
|
|
$
|
50,513,090
|
|
|
$
|
49,331,898
|
|
Percentage
of our total seed revenue resulting from licensed hybrid
seeds
|
|
|
79.7
|
%
|
|
|
68.79
|
%
|
|
|
58.22
|
%
|
|
|
58.51
|
%
|
Revenue
resulting from
internally developed proprietary hybrid seeds
|
|
$
|
13,260,433
|
|
|
$
|
23,603,275
|
|
|
$
|
36,248,141
|
|
|
$
|
34,928,517
|
|
Percentage
of our total seed revenue resulting from internally developed proprietary
hybrid seeds
|
|
|
20.3
|
%
|
|
|
31.21
|
%
|
|
|
41.78
|
%
|
|
|
41.49
|
%
|
As an
adjunct to our crop seed business, building on our growing brand awareness and
extensive distribution and end user base, we are expanding into the area of
agricultural chemicals. While fiscal year 2011 will be our first full year
involved in the agricultural chemical business and only represents a very small
portion of our overall business at this time and less than 3.24% in gross
revenues for the fiscal year ended September 30, 2010, agricultural chemical
will encompass an entirely different product category this upcoming year. Please
refer to note 1 in the notes to the consolidated financial statements for a more
detailed summary of the Shandong Kunfeng acquisition. Our initial products are
pesticides for use for the farming community for general use across various crop
varieties. Currently, we acquire the active ingredients for our pesticides to be
blended at our manufacturing facilities in Shandong, we mix them with inert
chemicals and package them for distribution. We market the agricultural
chemicals under the Kunfeng brand name, currently through our current seed
distribution network with plans to expand to our existing network. This business
was commenced on September 12, 2010.
Our sales
offices are spread throughout the entire mainland China region including
central, northern, and southern regions of China. We continue to develop our
sales and marketing team of 272 employees located in 12 sales offices. Our
nationwide distribution network covers most parts of China and consists of over
3,800 first-level distributors and over 65,000 second-level distributors and
retailers. Our distributors sell our products to retailers who in turn sell to
farmers, who are end-users of our products. We currently provide branded
products and technical support to farmers in 30 of China’s 34
provinces.
During
the last several years, we continued to develop our established plant genetic
engineering technology platforms, including transforming herbicide tolerance,
insect resistance, nitrogen efficiency, and drought stress tolerance traits into
corn inbred lines. Of note, we made significant strides in developing our
exclusive insect resistance and phytase product, respectively. In November 2009,
we received the Chinese government approval for commercial use of genetically
modified phytase corn. We continue to seek to further effectively utilize modern
biotechnology in China and hope to further expand beyond China in the
future.
We plan
to use China’s emerging technology base to take advantage of operations within
China. In particular, from time to time we enter and further develop cooperative
agreements with publicly funded research institutes in China. In exchange for
providing funding to these institutes, we receive rights, which are frequently
exclusive rights, to market any seeds developed by these institutes. When a seed
is ready to be marketed, we negotiate with the institute to establish an
arrangement by which we are permitted to sell the newly developed seeds in
exchange for the payment of certain fees to the institute. We believe that these
cooperative ventures allow us to access new products without expending
substantial costs for our own research and development.
Our
business model draws from existing and new technologies by utilizing both
conventional breeding and advances in biotechnology. We aim to build upon our
current hybrid base where we have accumulated parental seeds with advantageous
traits optimized to local soil conditions. We have roughly 100 total products,
both licensed and proprietary, in the market. We began to develop our own
proprietary hybrid seed varieties in 1998, and, as of December 2010, we have
25 proprietary corn
seed products, 21 proprietary rice seed products, 5 proprietary cotton seed
products and 2 proprietary canola seed products that are in commercial
production and distribution. Currently, we have 9 breeding stations and employ
150 full time research personnel.
Over the
past year, the number of corn, cotton, rice and canola varieties we have sold
(both licensed and proprietary) has decreased slightly. The following table
illustrates the change in the number of the seed varieties we sold over the past
four years.
Varieties
of Seed Products:
Year
|
|
Varieties of Seed Products
|
|
|
|
Corn
|
|
|
Cotton
|
|
|
Rice
|
|
|
Canola
|
|
|
Total
|
|
2007
|
|
|
44
|
|
|
|
11
|
|
|
|
60
|
|
|
|
9
|
|
|
|
124
|
|
2008
|
|
|
47
|
|
|
|
16
|
|
|
|
57
|
|
|
|
15
|
|
|
|
135
|
|
2009
|
|
|
46
|
|
|
|
13
|
|
|
|
53
|
|
|
|
7
|
|
|
|
119
|
|
2010
|
|
|
45
|
|
|
|
10
|
|
|
|
55
|
|
|
|
7
|
|
|
|
117
|
|
The
following table illustrates the total revenues for each of our seed
varieties:
Year
|
|
Revenues*
|
|
|
|
Corn
|
|
|
Cotton
|
|
|
Rice
|
|
|
Canola
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Year
ended September 30, 2007
|
|
|
365,203,037 |
|
|
|
32,030,858 |
|
|
|
72,549,582 |
|
|
|
17,958,429 |
|
Year
ended September 30, 2008
|
|
|
364,843,855 |
|
|
|
16,663,187 |
|
|
|
106,636,187 |
|
|
|
24,855,519 |
|
Year
ended September 30, 2009
|
|
|
414,625,462 |
|
|
|
9,917,053 |
|
|
|
125,134,572 |
|
|
|
42,747,377 |
|
Year
ended September 30, 2010
|
|
|
428,863,503 |
|
|
|
11,996,313 |
|
|
|
84,211,605 |
|
|
|
38,515,030 |
|
*
Substantially all of our revenues are derived from sales in China.
Research
and Development
Developments
in the science of genetics have allowed seed producers to create entirely new
species of corn, rice and cotton, rather than merely new varieties, as has
historically been the case. Compared with conventional varieties, the obvious
advantages of these new species, known as GM varieties, are higher yield, better
quality and increased disease-resistance and herbicide tolerance. Farmers plant
GM varieties to save time and cost, while also reducing field labor. GM corn,
soybean and cotton have been widely used in the United States and many other
countries to guard against insect damage and to increase yields. Since receiving
Chinese government approval in 1997, cotton that has been genetically modified
to guard against damage from borer insects is now widely planted and accepted in
China. The Chinese market has widely accepted GM cotton and the PRC Ministry of
Agriculture has approved GM corn and rice seed as well. We believe that GM food
crop seeds increasingly will be approved by the PRC government for production
and sale and will be accepted in the Chinese market over time.
Utilizing
our existing hybrid seed product line, we seek to further increase crop yield
and produce higher quality seeds with the addition of GM traits. We commenced
our own biotechnology research program in 2000 with a goal of having technology
in place to produce GM products when demand for these products is sufficiently
high. In 2005, we built an internal research and development center in China for
GM crop seeds, which we believe was the first such facility to be utilized by a
Chinese crop seed company. We have been successful in marketing genetically
modified BT cotton varieties in China and plan to continue to develop other new
seed varieties. Our key focus remains on biotechnology which has been
accelerated significantly. We currently employ people who are primarily engaged
in genetic transformation, molecular biomarker testing and genetic mapping
activities. Our development efforts go beyond our internal biotechnology center,
as this unit serves as a central hub to connect with other research facilities
throughout China. We are collaborating with the Chinese Academy of Sciences,
Peking University and China Academy of Agriculture Science in the field of
biotechnology. These co-operations help enhance our research capabilities and
will help enable us to develop and commercialize our products. We have
established several plant genetic engineering technology platforms, which
incorporate increased herbicide tolerance, insect resistance, nitrogen
efficiency, and drought stress tolerance traits into corn inbred lines. The GM
traits and products we are working on now include increased herbicide tolerance,
insect resistance, nitrogen efficiency, and drought stress tolerance in corn We
also developed phytase GM corn, which has become the first GM corn product to be
approved for commercial production and sales in China. Notwithstanding our
obtaining the first government approval for a GM corn product, there can be no
assurance given that GM products generally will be approved in China, and we
expect that the introduction and acceptance of GM products will be
cautious.
In
addition to biotechnology, our internal research and development also invests
considerable effort in the conventional breeding of hybrid crop seed. Currently,
we have 9 breeding stations and employ 150 full time research personnel in this
area. We strive to maintain our position as a quality producer of advanced
products by budgeting approximately 5% of our gross revenues (based on the prior
year’s results) for research and development. Historically, because of the
increase in our gross revenues, the actual amount spent in any year has
generally been around 3% of gross revenues in that year. Because our sales last
year were lower than expected, our actual amount exceeded 5%. The table below
shows the amount we have spent on research and development for the following
periods, as an absolute monetary amount.
For the year
|
|
|
For the year ended
|
|
|
For the year ended
|
|
|
For the year ended
|
|
ended September 30
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
28,440,781
|
|
|
|
24,512,551
|
|
|
|
33,473,117
|
|
|
|
38,4355,325
|
|
US$
|
(3,795,748
|
)
|
|
US$
|
(3,610,149
|
)
|
|
US$
|
(4,901,613
|
)
|
|
US$
|
(5,723,825
|
)
|
Commercial
Production
Once
approval for distribution of a new seed is obtained from both national and
provincial regulatory bodies, a producer of that seed must commence commercial
development of the seed variety. We produce our hybrid seeds by contracting with
local farmers in China to whom we provide parental seeds and technical support.
Currently, we have 247 production personnel and seed conditioning plants located
in Gansu, Jilin, Henan, Sichuan, Hunan, Jiangxi, Inner Mongolia and Beijing with
our main production facilities in Gansu. These production centers work to supply
these parental seeds to our producer-farmers. At present, we have over 51,000
corn seed farmers and in excess of 38,000 rice seed farmers producing seeds for
us, each of whom plants, grows and harvests the hybrid to produce seeds for
commercial distribution in the following season. This network of local farmers
who produce our seeds is an important element of our strategy to produce an
increasing number of products with consistent quality. We are the first Chinese
seed company to gain ISO9001-2000 certification by the China Certification
Center for Quality Mark. We maintain a strict seed quality control system and we
have sufficient processing capability and advanced equipment to allow us to
operate efficiently and maintain a high quality of seed products. By
employing these practices, we have achieved product quality on par with that of
our foreign competitors and that is consistently well received by our
customers.
According
to the sales plan we develop for each year, before the growing season, we choose
the planting area according to the trait of the seed variety, and enter into a
seed booking production agreements with the local farmers. Under the agreement,
we provide the producer-farmers with the parental seed, as well as the technical
support in the course of farming. After the growing season, we purchase the
seeds that meet our quality specifications from the farmers.
National
Marketing and Distribution
We have
our own sales organization consisting of 272 employees who oversee all aspects
of our distribution and retail sale network and promote our sales within the
distribution chain. In addition, these individuals provide high-level technical
service to our end customers.
We have
established a nationwide distribution network with over 3,800 first-level direct
distributors and over 65,000 second-level distributors and retailers, who
receive our products through first level dealers. These distributors sell our
products to retailers and the retailers sell them to the farmers who are our end
consumers. This distribution network covers almost all the provinces of the PRC,
excluding only Qinghai and Tibet, and allows us to effectively distribute to
roughly 200 million farms throughout China.
The terms
of our distributor agreements provide for territorial exclusivity for a
distributor on a designated product, usually on a county-wide basis. To enforce
exclusivity and monitor product locations, we assign a code to each distributor
and mark all packaging sent to the distributor with this code. Careful
monitoring of territorial integrity and enforcement of contractual penalties,
which may include termination of distribution rights and cancellation of
discounts on prices, provides stability and profitability within the
distribution network and aims to provide quality services and product
availability. We enjoy a positive reputation with our distributors for our
implementation and enforcement of this exclusive distribution system.
Distributors buy our seeds at a wholesale price established by us and are
required to make payments to us prior to delivery. Distributors that place
orders and that make deposits on orders for sales to be made the following year
at least two months prior to delivery are generally offered a discount. At the
end of the annual sales season, we set a discounted final sales price. The
discounted final sales price results from the fact that the PRC government sets
the price for agricultural commodities after we have sold our seeds to
distributors. Seed prices fluctuate with agricultural commodity prices. This
correlation is particularly strong for seeds that can be consumed as food and
grown as seeds, such as corn. For example, if the price for corn for consumption
increases, the price for corn seeds will increase as well. Once the PRC
government has set the price for agricultural commodities, we negotiate with
distributors the final price for our seeds which reflects the price the
distributors sold our seeds to farmers and includes any season discount we may
offer to such distributors. If the final price is lower than the preliminary
price previously offered by us, we will return the difference to our
distributors. Although the final price could technically be higher than the
preliminary price, we have never experienced such a result. As a result of our
discount policy, we cannot set the final price of our seeds to distributors
prior to the end of their selling season to farmers. Selling seasons vary among
distributors from region to region and from year to year, and generally start in
October and end in June of the following year for most of our products. We
deliver our products and receive payments on a relatively predictable schedule.
First, we request and generally receive a cash deposit, followed by a further
pre-payment of the expected sales price. Then, we deliver products to our
customers and receive confirmation of delivery. Finally, we set the final sales
price of our delivered products to a customer based on the total volume of
product delivered to that customer.
The
specific terms of the distributor agreements vary depending on negotiations and
the nature of the distributor and its prospective territory. There usually is an
initial payment made by the distributors to the Company for the distribution
right which is applied in whole or in part to future orders, depending upon
compliance with the terms of the agreement. The agreement also delineates
pricing adherence requirements and permissible discounting sales, territory,
ordering and supply obligations, returns, market support and other regular
business terms and dispute resolution provisions. No one distributor accounts
for more than 1.28% of our sales.
On an
annual basis, our sales team assists distributors in writing monthly sales
plans. These sales plans are then submitted to us 30 days prior to the required
seed delivery dates. Every year during the harvest season, we invite farmers and
others in the seed distribution chain to attend production demonstrations in
cooperation with local villages and seed distributors. At these demonstrations,
our teams show their hybrid seeds, explain planting techniques, discuss industry
best practices and disseminate promotional materials. These marketing and
production demonstrations help create new demand, not only in each village where
demonstrations are held, but also in nearby villages, for both the current
season and for succeeding years.
Our
technical service department has a 24-hour toll-free telephone number available
for our producer-farmers and distributors, through which they can obtain
solutions to specific technical problems. In addition, customers can report
issues of seed piracy. If on-site help is required, we generally dispatch a
technical assistant to arrive on location within 48 hours of a call. We also
enlist the help of our distributors to provide help and advice to farmers. We
believe that our focus on customer service and technical support have helped us
to build brand identity and loyalty and have contributed to our total sales
volume.
We
publish a seasonal newspaper, “Technology and Service,” with a distribution to
about thirty million farmers, which addresses technical issues, shares success
stories and further promotes the Origin brand. Origin maintains a database of
over 15,000,000 farmers to track buying habits and contact
information.
Product
and technical service brochures are provided throughout the distribution network
and have proved to be a valuable tool in promoting the sale of our crop seed
products and the recognition of the Origin brand. Our slogan, “When buying seed,
quality is paramount — trust Origin,” appears on all promotional material,
helping to build the brand in all the local markets.
Four
years ago, three of our existing rice hybrids were approved to be sold in
Vietnam. The approval process in Vietnam is a two year process. We began
exporting products across the border at the end of year 2007 in small
quantities. As Vietnam shares a border with China, we are able to use standard
transportation, such as trucks, and deliver our products to selected
distributors though an agent. We are also currently exploring sales channels to
other countries in Southeast Asia and the Middle East.
Intellectual
Property
Our
intellectual property includes trademarks and patents relating to our seed
products. All of the intellectual property has been registered for IP protection
in China (or is the subject of a pending application), and is used in connection
with our seed products packaging, production and distribution. Although we do
not require our distributors to pay any license fee for the seed products, the
value of the intellectual property has been reflected in selling price directly.
Our intellectual property is crucial to our business, and bears directly on our
ability to generate revenues.
We
currently have two Chinese patents registered with the State Intellectual
Property Office of China and twelve Chinese trademarks, including two trademarks
registered with the Trademark Office of China’s State Administration for
Industry and Commerce. One of the patents relating to the method of producing
hybrid corn seed is jointly owned by Henan Agriculture University and Beijing
Origin. In addition, we have applied for nine additional trademarks, and the
applications have been accepted and are now being reviewed by the Trademark
Office of China’s State Administration for Industry and
Commerce.
The
following table lists our self-developed proprietary seed products that have
been approved by the national variety authorization committee or provincial
variety authorization committee:
|
|
|
|
|
|
Name of Seed
|
No.
|
|
|
Name of Variety
|
|
|
Product
|
1
|
|
|
AoTian 8210
|
|
|
Corn
|
2
|
|
|
Ao
Yu 1
|
|
|
Corn
|
3
|
|
|
Ao
Yu 20
|
|
|
Corn
|
4
|
|
|
Ao
Yu 2
|
|
|
Corn
|
5
|
|
|
Ao
Yu 3007
|
|
|
Corn
|
6
|
|
|
Ao
Yu 3101
|
|
|
Corn
|
7
|
|
|
Ao
Yu 3102
|
|
|
Corn
|
8
|
|
|
Ao
Yu 3111
|
|
|
Corn
|
9
|
|
|
Ao
Yu 3118
|
|
|
Corn
|
10
|
|
|
Ao
Yu 3202
|
|
|
Corn
|
11
|
|
|
Ao
Yu 3206
|
|
|
Corn
|
12
|
|
|
Ao
Yu 3210
|
|
|
Corn
|
13
|
|
|
Ao
Yu 3220
|
|
|
Corn
|
14
|
|
|
Ao
Yu 4
|
|
|
Corn
|
15
|
|
|
Ao
Yu 5102
|
|
|
Corn
|
16
|
|
|
Ao
Yu 5
|
|
|
Corn
|
17
|
|
|
Ji
Dan262
|
|
|
Corn
|
18
|
|
|
Ji
Dan29
|
|
|
Corn
|
19
|
|
|
Ji
Dan413
|
|
|
Corn
|
20
|
|
|
Ji
Dan515
|
|
|
Corn
|
21
|
|
|
Ji
Si 8
|
|
|
Corn
|
22
|
|
|
Lin
Ao 1
|
|
|
Corn
|
23
|
|
|
Yu
Ao 6
|
|
|
Corn
|
24
|
|
|
Ao
Yu 3214
|
|
|
Corn
|
25
|
|
|
Ao
Yu 3628
|
|
|
Corn
|
26
|
|
|
Fei
You 98
|
|
|
Rice
|
27
|
|
|
Gang
You 94-11
|
|
|
Rice
|
28
|
|
|
Nei
Xiang You 9
|
|
|
Rice
|
29
|
|
|
Zhong
You 456
|
|
|
Rice
|
30
|
|
|
Liang
You 456
|
|
|
Rice
|
31
|
|
|
De
Xiang Zao 4
|
|
|
Rice
|
32
|
|
|
De
Nong 108
|
|
|
Rice
|
33
|
|
|
De
Nong 88
|
|
|
Rice
|
34
|
|
|
De
Nong 90
|
|
|
Rice
|
35
|
|
|
Nei
Xiang You 3618
|
|
|
Rice
|
36
|
|
|
Zhong 9
You 1254
|
|
|
Rice
|
37
|
|
|
De
E Liang You 1
|
|
|
Rice
|
38
|
|
|
Zheng
Cheng 456
|
|
|
Rice
|
39
|
|
|
De
You 1254
|
|
|
Rice
|
40
|
|
|
Zhu
Liang You 4290
|
|
|
Rice
|
41
|
|
|
Zhu
Liang You 3
|
|
|
Rice
|
42
|
|
|
Guang
Liang You 192
|
|
|
Rice
|
43
|
|
|
Zhong
You 4202
|
|
|
Rice
|
44
|
|
|
Ling
You 2
|
|
|
Rice
|
45
|
|
|
Te
You 757
|
|
|
Rice
|
46
|
|
|
Zhu
Liang You 312
|
|
|
Rice
|
47
|
|
|
De
You 13
|
|
|
Canola
|
48
|
|
|
De
You 22-1
|
|
|
Canola
|
49
|
|
|
Ao
Mian 4
|
|
|
Cotton
|
50
|
|
|
Ao
Mian 6
|
|
|
Cotton
|
51
|
|
|
Ao
Mian 618
|
|
|
Cotton
|
52
|
|
|
Ao
Mian 8
|
|
|
Cotton
|
53
|
|
|
Ao
Mian 9
|
|
|
Cotton
|
With our
research, breeding system and management, as of December 2010, we
have 25 proprietary corn seed
products, 21 proprietary rice seed products, 5 proprietary cotton seed
products and 2 proprietary canola seed products that are in commercial
production and distribution. Although representing only a minority of our
revenues historically, we expect that an increasing portion of our revenues in
future years will be derived from our proprietary seeds as opposed to seeds
produced under licenses from third parties.
Licensed
Seed Products
In
addition to the development of our own proprietary seeds, we have licenses to
distribute seeds developed by independent research and development institutions
which have no commercialization ability or distribution channels of their own.
Currently, we have licenses to distribute thirty-one varieties of corn seed,
eleven varieties of cotton seed, eleven varieties of rice seed and nine
varieties of canola seed. Although substantially all of our historical revenues
were derived from the sale of licensed hybrid seeds, the impact of our
proprietary seeds has increased in recent years. In the 2007 and 2008 fiscal
years, approximately 79.7% and 69.0%, respectively of our revenues resulted from
sales of licensed seeds, while in the fiscal years 2009 and 2010, that figure
had decreased to 58.22% and 58.51%, respectively.
Under a
typical license agreement, one of our PRC Operating Companies will obtain a
license for a designated product for exclusive production and marketing within
China. The license fees vary in their method of determination, but generally
they are either a percentage of revenues from the sale of the variety or a flat
fee arrangement. None of our license agreements results in a payment in excess
of 1% of our revenues. Beijing Origin has these types of agreements with China
Academy of Sciences Microbiology Institute, Liyu in Hebei Province, Henan Puyang
Agricultural Academy, Tieling Agricultural Academy, Liaoning Benxi Agricultural
Academy, Sichuang Agricultural Academy, Corn Research Institution of Beijing
Agricultural Forestry Academy, Huafeng Seed Limited, Liaocheng Huafeng Corn
Breeding Research Institution, Food Corn Research Institution of Yunnan
Agricultural Academy, Henan Agriculture University, Handan Agricultural Academy,
Hubei Province Shiyan Agricultural Sciences Institute, Shandong Cotton Research
Center, China Rice Research Institution, among others. Except for the agreement
with Handan Agricultural Academy, which will expire in July 2011, these
agreements generally have no fixed term or termination date. The agreements may
be terminated for breach by either party. We may terminate the agreements at any
time, in effect, by not producing seeds thereunder, without
penalty.
We have
joint development agreements with the Liyu under which we and Liyu are
coordinating to develop several varieties of corn seeds. Under these agreements,
we have developed and produced six varieties of corn seeds, which together have
represented a substantial amount of sales in each fiscal year since 2005 as
illustrated in the following chart for the three fiscal years ended September
30, 2008, 2009 and 2010:
Varieties
of
Corn
Seeds
|
|
2008
Sales
|
|
|
2009
Sales
|
|
|
2010
Sales
|
|
LinAo1
|
|
|
5.66
|
%
|
|
|
3.79
|
%
|
|
|
3.96
|
%
|
AoYu
17
|
|
|
1.38
|
%
|
|
|
1.11
|
%
|
|
|
0.82
|
%
|
Liyu
16
|
|
|
10.42
|
%
|
|
|
12.99
|
%
|
|
|
14.76
|
%
|
AoYu
19
|
|
|
0.01
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Liyu
26
|
|
|
0.27
|
%
|
|
|
0.30
|
%
|
|
|
0.57
|
%
|
Liyu35
|
|
|
7.14
|
%
|
|
|
8.42
|
%
|
|
|
10.58
|
%
|
Total
|
|
|
24.88
|
%
|
|
|
26.61
|
%
|
|
|
30.69
|
%
|
We have
exclusive rights to produce and market the seeds developed under the agreements
until the agreements are terminated, and Liyu has agreed that it will not
develop any derivative hybrids from these seeds. Moreover, Liyu will pay the
government fees to protect our exclusive rights. The agreement has no
termination date, hence it continues until the parties jointly agree to
terminate or a party breaches the agreement.
In
addition to the exclusive license agreements set forth above, we also have
non-exclusive license agreements. The non-exclusive license fees tend to be
lower than the typical exclusive license fees. Those licensors that lack
production ability or distribution channels of their own grant us the right to
produce, distribute and propagate the covered variety of seeds, provide us with
technical materials and instructions, supervise seed quality and evaluate
growing areas. We are responsible for undertaking all the propagation costs and
maintaining quality standards. So far, Beijing Origin has entered into these
types of agreements with Henan Agriculture University for YuYu 22, Liaocheng
Huafeng Maize Breeding Research Institution for Feng Liao 008 and Handan Academy
of Agricultural Sciences for Ao Mian 885 and Ao Mian 802. The agreements may be
terminated for breach by either party. We may terminate the agreements at any
time by not producing seeds thereunder, without penalty.
With
regards to the licensed GM varieties, we have entered into a strategy
cooperation agreement with the China Academy of Agriculture Science, or CAAS, to
work on biotechnology research and development. That agreement gives us the
right to produce and sell the GM crop varieties that are developed in connection
with this arrangement, subject to our obligation to reimburse certain of CAAS’
expenses.
Except
what was discussed immediately above, no other licensed seed product represented
more than 10% of our sales in the fiscal years ended September 30, 2008, 2009
and 2010. In addition, except as disclosed above, no one licensor is responsible
for a seed product or group of seed products that represents more than 1% of our
revenues during the same periods.
The
Chinese Crop Seed Market
The
Chinese agricultural sector is primarily made up of small, family-oriented
farms. Increasingly, corn is becoming an important crop in China because it has
a number of uses, including the use as livestock feed, source of industrial
products and a source of fuel in the form of ethanol. In addition, rice is an
important human food crop, cotton is an important industrial crop and canola is
used to produce cooking oil.
The
Chinese agricultural seed industry is fragmented, with the corn seed market in
particular being served by approximately 5,000 small, local seed suppliers. Most
of these seed companies were established in the 1960s and 1970s by local county
governments to address Chinese central government agricultural initiatives. They
were designed at the time to provide service and support to local farmers. These
local seed providers usually sell varieties of agricultural seeds that have been
grown in their respective locales for years.
Improved
seed products have been generally available in China through large multinational
suppliers, the largest being Pioneer Hi-Bred International, Inc., or Pioneer,
Monsanto Company, or Monsanto, and Syngenta AG, or Syngenta, each of which
established operations in China more than a decade ago. These multinational
companies, however, have not yet penetrated the Chinese market to any
appreciable extent.
Our
business strategy focuses on meeting the needs of small Chinese farmers and
includes the following elements:
|
(i)
|
producing and distributing
high-quality seed products, initially under third-party licenses and, over
time, increasingly internally developed proprietary seeds, to deliver
superior value to our distributor-customers and their
farmer-customers;
|
|
(ii)
|
devising a process for obtaining
regulatory approvals for new crop seeds (a Chinese legal requirement) that
is efficient and effective;
|
|
(iii)
|
establishing a broad network of
producer-farmers in several regions to participate in the seed development
process and to produce approved crop seeds for commercial
distribution;
|
|
(iv)
|
creating an effective
distribution system using a relatively small network of primary
distributors, only one in each county with exclusive territories, with
which we can deal directly and efficiently which, in turn, develop their
own secondary distribution network to reach out directly to the consumer-
farmers. This distribution network is not only a means for securing and
fulfilling orders, but acts as a conduit for our marketing and technical
support activities;
|
|
(v)
|
relying on a number of marketing
activities to retain existing customers and attract new ones. These
marketing activities
include:
|
|
-
|
a demonstration program that
provides technical assistance to customers regarding the correct seed
choice and proper cultivation
methods;
|
|
-
|
a database of over 15 million
customers that we use to keep repeat sales at a high level, an important
component of revenue growth;
and
|
|
(vi)
|
delivering service and technical
support to customers throughout the growing season for its products.
End-user customers can contact us through a dedicated call center that
handles up to 1,000 calls per day. Field service representatives are
dispatched within 48 hours of a customer’s request for
help.
|
The
average lifespan of a typical product in our industry is five to seven years.
After this period, the product begins to lose potency and develops material
genetic weaknesses that make the product significantly less attractive in the
marketplace. New hybrids are approved every year and the speed at which
technology changes is driven by the amount of high quality hybrids produced in
the local region for the local seed type. One product may dominate a particular
region for a three to five year time period, and then dominance may shift
depending on the available seeds for the local soil types.
Competition
We face
competition at three primary levels, including other private Chinese companies,
smaller local seed companies, and large multinational hybrid and GM seed
producers. Currently, we believe that we can compete effectively with each of
these competitors and that we can continue to do so in the future. Each of these
groups of competitors is discussed in turn below.
Larger Domestic Seed
Companies. Historically, we relied primarily on standard hybridizing
techniques to produce our improved seed varieties for the Chinese marketplace.
However, we recognized that genetically modified crop seeds will gain wide
acceptance in China, and for that reason we began a biotech seed development
program that relies on genetic modifications to improve the quality of seeds and
their yields. As a result, we believe we are in a position to compete in the
genetically modified portion of the seed market.
While
there are six seed companies that control roughly 25% of the corn seed market of
China, we believe we may possess the most competitive technology base, including
the capability to develop and commercialize genetically modified seeds. However,
there is little disclosed information in this regard, and as a result internal
research pipelines remain unclear. Much of the genetically-modified product
research remains at the academic levels. The majority of the largest crop seed
companies have been in existence for considerably longer periods of time than we
have, and though they have sophisticated breeding techniques, are somewhat
entrenched in their ways. Some of these larger entities are evolved state owned
enterprises. We compete within this group on the basis of our consistent product
quality, brand identity, customer and technical support, enforcement of our
intellectual property rights and a pipeline of proprietary
products.
Smaller Local Seed Companies.
The local seed companies in China are the legacy of the centrally planned
agricultural economy that was predominant in China until recently. Most of these
were affiliated with county governments, which played a role in determining what
crops would be grown and by whom. As was often the case with planned economies,
these extensions of the bureaucracy had no profit motive, and no incentive to
improve efficiencies, increase sales or innovate with new products. Market
expansion was limited by the tight geographic boundaries within which they were
designed to operate.
The
majority of these local companies lack the scale and the resources to compete
with us in a number of ways. They lack access to the improved, proprietary
hybrids. For the most part they do not have effective marketing, advertising,
technical support or customer service operations. The majority of our recent
growth has come from acquiring customers from these operations. We believe that
the existing trend will continue, and that eventually some of these smaller,
local distributors can be integrated into our distribution network.
Multinational Seed Companies.
At the opposite end of the competitive spectrum from the local seed companies
are the large multinational companies, including Pioneer, Monsanto, and
Syngenta. These companies present a formidable competitive threat from the
standpoint of their financial resources, the high quality of their seed
products, and biotechnological capabilities. However, the unique aspects of the
Chinese crop seed market, which distinguish it from the market in Western
countries, have proven a significant barrier to entry for these very large
companies, even though they have come to the market through joint ventures
formed with existing Chinese seed companies.
The
principal difference between the Chinese and Western markets is that in China a
large number of low volume sales are made to local farmers, while in the West,
relatively few sales of very large volumes make up the majority of product
sales. As a result, success in China depends on marketing and distributing
effectively to a very large number of small customers. Relatively few Chinese
companies have achieved any degree of success in doing so, and the international
competitors, despite several years of trying, have not succeeded to any
meaningful degree.
These
multinationals rely heavily on GM seed products. Our market research indicates
that most of the superior products that the multinationals have to offer are
genetically modified. GM seed products have only begun to be accepted in China,
and the extent of this acceptance is not yet determinable. To date, phytase corn
and Bt Rice are the only genetically modified major food crop seed products that
have received approval for sale in China.
Should GM
seed products become approved by the government on a larger scale and begin to
gain broader acceptance in the market, as we expect will occur in the future,
the large biotech companies would become more serious competitors. However, they
will also continue to face numerous obstacles in competing with us, including
the significant lead time associated with obtaining approval of a new seed
(usually at least six years) and the need to establish effective sales,
marketing and distribution networks to manage the large volume of small
purchases that is characteristic of the Chinese market.
In our
agricultural chemical business, which is currently only a small portion of our
revenues, we face competition from a large number of small and large chemical
companies, which are both domestic and international in their
business. In some instances, these companies have substantial
resources, including large production capabilities, brand awareness, and
financial resources. We plan to compete based on our established
reputation in the crop seed business and deploying our extensive distribution
network and relationship with our distribution participants and the farmers who
are our ultimate users of our seed products.
Government
Regulation
We
operate our business mainly in China under a legal regime that consists, at the
national level, of the State Council, which is the highest authority of the
executive branch of the PRC central government, and several ministries and
agencies under its leadership, including:
|
¨
|
the Ministry of Agriculture and
its local authorities;
|
|
¨
|
the Ministry of Commerce and its
local authorities;
|
|
¨
|
SAFE and its local
authorities;
|
|
¨
|
the State Administration of
Industry and Commence and its local authorities;
and
|
|
¨
|
the State Environmental
Protection Administration;
and
|
|
¨
|
the State Administration of
Taxation, and the Local Taxation
Bureau.
|
The
following sets forth a summary of significant regulations or requirements that
affect our business activities in China and our shareholders’ right to receive
dividends and other distributions from us.
Seed
Law and Other Relevant Regulations
Participation
in the crop seed business is a highly regulated activity in the PRC. In July
2000, China enacted its Seed Law, which became effective on December 1, 2000.
The Seed Law was revised in August 2004. The Seed Law sets forth provisions
concerning the development, government approval, production, and distribution of
crop seeds. Various provinces have enacted regulations to implement the Seed
Law.
Under the
Seed Law, for a company to engage in the seed business, it must obtain two
licenses. One is the production license, which is issued at the provincial
level, entitling the holder to engage in seed production in that province. The
production license specifies the types of seeds that may be produced, the
location of the production of the seeds, and the term of the production license.
The second is a license to distribute seeds. Generally, a distribution license
is issued by the government at the county level or above. A seed company must
obtain a provincial-level license to distribute major crop seeds in that
province. In addition, a national level license is necessary for a seed company
to distribute seeds nationwide. Among other standards, the amount of the
licensee’s registered capital determines if the distribution license is issued
at the national or local level, along the following lines:
|
¨
|
to obtain a national distribution
license, the licensee must have a registered capital of at least RMB30
million (approximately
$4,418,327);
|
|
¨
|
to obtain a provincial license to
distribute hybrid seed varieties, the licensee must have a registered
capital of at least RMB5 million (approximately $736,388);
and
|
|
¨
|
to obtain a provincial license to
distribute non-hybrid seed varieties, the licensee must have a registered
capital of at least RMB1 million (approximately
$147,278).
|
A
separate license is required to import and export seeds. To obtain this license,
the applicant must have a minimum registered capital of RMB10 million
(approximately $1,472,776).
We have a
national distribution license, which entitles us to sell approved crop seeds in
any province in the PRC without the need for any provincial
licenses.
In
addition to the license(s) needed to engage in the seed production and
distribution business, each seed must undergo a stringent regulatory review
before it may be sold in China. A seed production company cannot receive a
license to engage in seed production, regardless of the level of its registered
capital, until it has secured rights to an approved seed product.
The
testing of seeds for approval can be conducted at the provincial level or the
national level. However, seeds that have been approved at the provincial level
can only be distributed in the province in which the approval was issued. An
approval at the national level means the approved seed can be distributed
nationwide.
The
procedure for provincial examination and approval requires the applicant
to:
|
¨
|
submit the application to the
provincial variety authorization
committee;
|
|
¨
|
undergo two growing seasons of
monitored growth in at least five different locations in the province.
Seeds submitted for testing are planted together with control seeds, which
is typically the most popular seed with farmers in the testing locations.
Only seeds that have an increased yield of 8% or higher versus the control
seeds and that rank in the top six among all seeds then being tested are
cleared to proceed to the second year of testing, during which the results
of the initial test season must be confirmed;
and
|
|
¨
|
go through one successful growing
season of trial production, also in at least five different locations. If
successful, a provincial examination certificate is granted and a public
announcement is made.
|
The
procedure for national examination and approval requires the applicant
to:
|
¨
|
submit the application to the
national variety authorization
committee;
|
|
¨
|
complete two growing seasons of
monitored production in at least five different locations. Only seeds that
have 8% or higher yield compared to control seeds and that also rank in
the top six among all seeds being tested in that cycle can proceed to the
second year of testing; and
|
|
¨
|
complete one successful growing
season of trial production in at least five different
locations.
|
Seeds
developed outside of China must also follow the above procedures before they can
be distributed in China.
The
ability to process an application for approval is an important element of
success, especially in view of the long timeframe associated with obtaining
approval after the seed has been developed. Failures and delays in getting the
approvals on a timely basis can seriously disrupt the planning that is critical
to successful commercial production. A minimum of six years - three to obtain
approval and three to develop the first crop of seed for commercial distribution
- - is required to bring a seed to market after it has been developed. Because of
our extensive network of seed-producing farmers, we have consistently been able
to bring a new product to market in the minimum time. Other seed companies often
take an additional season or more to bring an approved product to market. This
loss of an entire growing season can be a significant disadvantage.
Genetically
Modified Organisms Safety Regulations
GM
products are controversial in China, and, to date, very few have been approved.
There are public concerns regarding the potential for adverse effects of GM
products on human health. In May 2001, the State Council of China enacted the
Agricultural Genetically Modified Organisms Safety Regulation. The Ministry of
Agriculture enacted the Agricultural Genetically Modified Organisms Safety
Assessment Approach which became effective in July 1996 and was revised in March
2002. These enactments set forth provisions concerning the classification,
testing, safety evaluation and identification of GM crop seeds.
Considering
the degree of risk faced by humans, animals, plants, micro-organisms and the
ecological environment, agricultural genetically modified organisms are divided
into the following four levels:
Safety
level I: no danger;
Safety
level II: low danger;
Safety
level III: moderately dangerous;
Safety
level IV: highly dangerous.
Agricultural
genetically modified organisms testing shall generally go through three stages
including the intermediate test, environmental release and production test. When
finished with the production test, the company can apply for the certificate of
agricultural genetically modified organisms safety.
Due to
the fact that we are engaged in the GM seed business in China, we must comply
with the Seed Law as well as the GM regulations described above.
The
Chinese Agricultural Chemical Market
According
to China's National Bureau of Statistics, 2.26 million tons of agricultural
chemicals (including active ingredients and formulations) were produced last
year, up 12.3% year over year. China's agricultural chemical industry
is estimated at a total industrial production value of RMB132.03 billion, up
4.4% year on year, with total market sales value of RMB128.04 billion, up
5.4%. As a recent trend, the regulations of the Chinese chemical
industry have eliminated the production and sales of the more toxic and harmful
insecticides formulations and increased the production of environmentally
friendly, water-based insecticides to promote efficient and safe forms of new
formulations of chemicals. The Chinese central government has focused
on the increase of direct investment in agriculture along with the increase of
subsidies to agriculture and agricultural materials which may raise purchase
prices of crops in the following years. These policies should encourage more of
the farming population base to purchase more fertilizers and
pesticides.
Environmental
Protection and Chemical Regulation.
China has
been strengthening its laws and regulations in respect of environmental
protection. There is an increasing body of law that governs air,
water and other forms of pollution, and the laws apply to all persons and
entities in China. The State Council, the State Environmental
Protection Administration and other central ministries, governmental
organizations and local governments have issued rules and regulations under the
authority of the various applicable statutes. Generally, China follows the
principal that the polluter or potential polluter must pay to be engaged in the
regulated activities, and therefore, a company conducting business involving
pollutants and the storage and discharge of pollutants, must obtain required
licenses and pay various governmental fees for their activities in addition to
following the legal requirements for the save production, storage and use of
hazardous chemicals. Sources of pollutants are subject to on site
inspection and legal liability.
According to the
provisions of
"Pesticide Management Regulations", "Implementation of Pesticide Management
Regulations" and "Pesticide Production Management Practices," Pesticide
registration system and production permit system are performed in China. To be
qualified to sell pesticide, the company must hold
"pesticide product registration card" issued by the Ministry of Agriculture, and
"industrial production permit" issued by the State General Administration of
Quality Supervision, Inspection and Quarantine or "Approval
Certificate for pesticide production"
issued by the Ministry of Information Industry. In addition, pesticide products
also need to be clearly marked "product performance standards." Kunfeng
is operating 38 pesticide products, which all own the qualification certificates
mentioned above. Also,
there are 6 varieties are applying for the qualification
certificates.
To date,
the cost of compliance with the regulation related to the agricultural business
has not been material. Improper usage by the consumer base,
inclusive of spillages of Origin product by the distributor or end farmer may
occur and may cause financial and reputational damage.
Foreign Ownership
Restrictions
Currently,
China restricts foreign ownership of businesses in the seed industry. FIEs
engaged in the breeding of new varieties, development, production, marketing,
distribution and sale of food crop seeds is limited to 49% pursuant to the
Regulation on the Approval and Registration of Foreign Investment Enterprises in
Agricultural Seed Industry (effective on September 8, 1997) and The Foreign
Investment Industrial Guidance Catalogue (effective on December 1,
2007).
In
addition to the restrictions in the conventional seed business, China forbids
FIEs from engaging in the development and production of genetically modified
corn seed pursuant to the Foreign Investment Industrial Guidance Catalogue
distributed by Ministry of Commence of China in 2007. Furthermore, the FIEs
shall obtain the approval to engage in the breeding of GM research and testing
pursuant to the Agricultural Genetically Modified Organisms Safety
Regulation.
Tax
Origin
and State Harvest are both tax-exempted companies organized in the British
Virgin Islands.
Our PRC
Operating Company Subsidiaries are organized in the PRC and governed by PRC
laws. PRC enterprise income tax, or EIT, is calculated based on taxable income
determined under PRC accounting principles. Before January 1, 2008, PRC EIT
was generally assessed at the rate of 33% (30.0% of state income tax plus 3.0%
local income tax) of taxable income. On March 16, 2007, the National
People’s Congress of China enacted the Enterprise Income Tax Law, or the New EIT
law, which became effective on January 1, 2008. Under the New EIT law, FIEs
and domestic companies will be subject to New EIT at a uniform rate of 25% and
the current tax exemption, reduction and preferential treatments which are
applicable only to FIEs will be revoked. However, any enterprises established
before the promulgation of the New EIT law that are entitled to preferential tax
treatments for a fixed period will continue to be entitled to such preferential
tax treatment until the expiration of such period.
The
applicable tax rate of the PRC New EIT to Beijing Origin is 15% since January 1,
2008. However, the Beijing Origin and Jilin Changrong have been approved as new
technology enterprises and enjoy the reduced New EIT rate of 15% while our other
operating companies are subject to the New EIT at a uniform rate of
25%.
Pursuant
to the Provisional Regulation of China on Value Added Tax, or VAT, and their
implementing rules, all entities and individuals that are engaged in the sale of
goods, the provision of repairs and replacement services and the importation of
goods in China are generally required to pay VAT at a rate of 17.0% of the gross
sales proceeds received, less any deductible VAT already paid or borne by the
taxpayer. Pursuant to the Notice of the Ministry of Finance and the State
Taxation Administration on Exempting the Value Added Tax for Agricultural
Material, self-produced agricultural products sold by agricultural producers
shall be exempt from VAT. Pursuant to an approval document received from Beijing
Haidian District State Tax Bureau, Beijing Origin has been entitled to exemption
from VAT since August 1, 2001. Changrong has been exempted from VAT since its
establishment in 2006 and Denong has also been exempted from VAT since January
1, 2006.
Dividend
Distribution
Under PRC
law, FIEs in China, including Origin Agritech may pay dividends only out of
their accumulated profits, if any, determined in accordance with PRC accounting
principles. In addition, FIEs in China are required to set aside at least 10% of
their after-tax profit based on PRC accounting standards each year for their
general reserves until the accumulative amount of such reserves reaches 50% of
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a FIE has the discretion to allocate a portion of its
after-tax profits to staff welfare and bonus funds, and expansion (development)
funds which may not be distributed to equity owners except in the event of
liquidation.
We are
currently in compliance with all applicable PRC laws and regulations relating to
our business.
C. Organizational
structure.
Origin
Agritech is a holding company with no operations of its own. We conduct our
operations in China primarily through our PRC Operating Companies. The following
diagram illustrates our current organizational structure:
(1)
We do not have any ownership interest in Beijing Origin, Henan Origin, Changchun
Origin, Jilin Changrong or Denong. Through State Harvest, we have entered into a
series of stock consignment agreements with their respective shareholders.
Gengchen Han (our Chairman), Liang Yuan (our Chief Executive Officer and
president), and Yasheng Yang (Vice Chairman of the Board), currently own 34.4%,
25.8%, and 28.68% of Beijing Origin, respectively.
The table
below lists each of our group companies, their place of incorporation and their
percentage of ownership interest:
Name
|
|
Place
of incorporation
(or
establishment)/operation
|
|
Percentage
of
ownership
|
State
Harvest
|
|
British
Virgin Islands
|
|
100%
owned by Origin
|
Origin
Biotechnology
|
|
Haidian
District, Beijing, PRC
|
|
100%
owned by State Harvest
|
Beijing
Origin
|
|
Haidian
District, Beijing, PRC
|
|
97.96%
controlled by State Harvest
|
Henan
Origin
|
|
Zhengzhou,
Henan Province, PRC
|
|
92.04%
owned by Beijing Origin
|
Changchun
Origin
|
|
Changchun,
Jilin Province, PRC
|
|
99%
owned by Beijing Origin
|
Denong
|
|
Chengdu,
Sichuan Province, PRC
|
|
97.87%
owned by Beijing Origin
|
Jilin
Changrong
|
|
Changchun,
Jilin Province, PRC
|
|
53.95%
owned by Beijing Origin
|
Liyu
|
|
Shijiazhuang,
Hebei Province, PRC
|
|
30.00%
owned by Beijing Origin
|
Linze
Origin
|
|
Linze,
Gansu Province, PRC
|
|
100%
owned by Beijing Origin
|
Shandong
Kunfeng
|
|
Jinan,
Shandong Province, PRC
|
|
80.00%
owned by Beijing
Biotechnology
|
Stock Consignment
Agreements
As
discussed above in “Foreign Ownership Restrictions,” under Chinese law, foreign
ownership of businesses engaged in the breeding of new varieties, development,
production, marketing, distribution and sale of hybrid food crop seeds is
limited to 49% pursuant to the Regulation on the Approval and Registration of
Foreign Investment Enterprises in Agricultural Seed Industry and The Foreign
Investment Industrial Guidance Catalogue. State Harvest, as a non-Chinese
corporation, may not directly own more than 49% of any of the PRC Operating
Companies. However, Chinese law does not forbid the owner of stock to consign
rights associated with the stock, as long as the owner does not transfer title
to the stock. Moreover, if we engage in the research and development
of genetically modified seed products, then foreign entities are not currently
permitted to own any of the seed production company.
To gain
control over the PRC Operating Companies (other than Origin Biotechnology, which
is not subject to the 49% ownership restriction and which State Harvest entirely
owns), State Harvest entered into a series of stock consignment agreements with
shareholders of those companies or, in the case of Denong and Jilin
Changrong, with Beijing Origin, the parent of those entities. These
agreements consign to State Harvest or Beijing Origin all of the rights of
ownership of the shares involved other than legal title, effectively
transferring the control of the shares subject to the agreements to State
Harvest. Those rights include the right to manage in all respects the shares
held in title by the shareholders that are parties to them, including all
shareholder rights to call meetings of shareholders, to submit shareholder
proposals, to elect directors, to vote the shares on all matters and to exercise
all other rights of a shareholder in respect of the shares consigned. More
specifically, the consignment agreements include giving the right to select,
replace and increase the number of the directors and supervisors, recommend new
directors and supervisory personnel and to exercise management rights,
controlling rights and decision-making power over the shares of the subject
company. Additionally, the shares of the PRC operating companies are
pledged.
Each
title holder of these shares has agreed not to interfere with State Harvest’s or
Beijing Origin’s exercise of its rights and to cooperate fully and promptly to
permit them to exercise its authority over the consigned shares. This includes
all limitations on the ability of the consignee to transfer or dispose of the
shares to someone other than to the consignee, give guarantees using the shares,
consign the shares to another, alter the ownership proportion in any way,
dispose of any rights in the ownership of the shares, and agree to any debt or
restructuring of the shares. The consignee has the right to take all action in
respect of the consigned shares to avoid any damage or infringement of its
rights, including in the event of the consigning shareholder’s bankruptcy. The
consignee, under the agreements, has virtually all of the property rights of the
consigned shares, including the profits, interests, dividends, bonuses and
residual assets, except for legal title. If in the future any stock subject to
the consignment agreements can be legally transferred to State Harvest then,
without further action by the consignee, it shall be transferred to the
consignee in whole or in part for no additional consideration to the consigning
shareholder.
The stock
consignment agreements also provide that if and when the restriction on foreign
ownership of food production companies to 49% is removed or the allowed
ownership percentage is increased, the consigned shares will then be transferred
to the consignee. If not, the consignment agreements continue in full force and
govern the consignee’s rights over the shares.
The
agreements are subject to force majeure limitations. The term of the agreements
is initially three years, but they are automatically renewed indefinitely until
both the consignee and the consignor agree to terminate. There is no unilateral
right of termination except in the event of a breach, in which event the
non-breaching party may cancel the consignment agreement after notice and a
reasonable cure period has passed and the breach continues. The consigning
shareholders have warranted their authority to enter into the agreements and
that the consignee has the exclusive right to control the shares that are
subject to the consignment agreements. The agreements are binding on the
successors, assignors and heirs of the respective consigning
shareholders.
The
importance of the stock consignment agreements is that, under U.S. GAAP, the
consignee corporation may consolidate the financial reporting of those PRC
Operating Companies whose shares are subject to stock consignment agreements in
the manner of wholly and majority owned subsidiaries and enjoy the economic
benefits of such subsidiaries. Each stock consignment agreement is subject to
enforceability and other limitations of the laws and rules of PRC. The consignee
may not transfer the consignment agreement, except as permitted by PRC law.
However, we may transfer our interest in intermediate consignee corporation
without limitation. If there is non-performance by the shareholder or some or
all of an agreement is unenforceable, we and the consignee may lose the benefits
of the agreements and suffer severe economic loss as a result. No assurance can
be given that the consignee will be able to enforce its rights vis-à-vis the
consigning shareholders in the courts of the PRC, and we are not aware of any
cases where these types of stock consignment agreements have been interpreted by
PRC courts.
We
believe that these agreements are enforceable under current PRC law. However,
none of these kinds of agreements have yet been subject to judicial review or
interpretation. The consignment agreements provide that if there is any
interpretation of the terms by a PRC court, the agreements should be construed
in such a way as to give the consignee as much of the full and actual ownership
and full beneficial rights and benefits of the consigned stock as is possible,
so as to approximate full ownership under all applicable law.
In the
event that the consignment agreement is not enforced or is terminated because of
a breach by the consignee that is not cured, the right to the underlying stock
would be lost and the economic rights would be terminated. However, such a
termination would not terminate the separate agreements entered into by Beijing
Origin, Henan Origin and Changchun Origin to transfer technology from those
companies to Origin Biotechnology, so even in the event of a termination of a
consignment agreement, the consignee would continue to own the applicable PRC
entity’s technology and intellectual property through Origin Biotechnology, its
wholly owned subsidiary (see “Technical Service Agreements” below). Also, the
termination of one shareholder’s consignment agreement does not cause the
termination of any of the other consignment agreements, so it would only result
in a reduction in consigned shares under the consignee’s control.
The
following is a table of the parties to the consignment
agreements:
PRC
Operating Company
|
|
Consigning
Owner
|
|
%
of Shares
Consigned
|
|
Beijing
Origin
|
|
Gengchen
Han
|
|
|
34.4
|
%
|
|
|
Yasheng
Yang
|
|
|
28.675
|
%
|
|
|
Liang
Yuan
|
|
|
25.8
|
%
|
|
|
Yuping
Zhao
|
|
|
3.995
|
%
|
|
|
Weidong
Zhang
|
|
|
3.13
|
%
|
|
|
Weicheng
Chen
|
|
|
1.96
|
%
|
|
|
|
|
|
97.96
|
%
|
Changchun
Origin
|
|
Beijing
Origin
|
|
|
99.0
|
%
|
|
|
Gengchen
Han
|
|
|
1.0
|
%
|
|
|
|
|
|
100.0
|
%
|
Henan
Origin
|
|
Beijing
Origin
|
|
|
90.0
|
%
|
|
|
Yingli
Zhang
|
|
|
4.08
|
%
|
|
|
Yasheng
Yang
|
|
|
3.88
|
%
|
|
|
|
|
|
97.96
|
%
|
Technical
Service Agreements
All of
the intellectual property rights of Beijing Origin, Changchun Origin and Henan
Origin have been transferred to Origin Biotechnology pursuant to technical
service agreements with each of these respective entities dated December 25,
2004. The purpose of this arrangement was to permit better management and
licensing of the intellectual property that the three assignors have developed.
Under the technical service agreements, Origin Biotechnology will provide
technical research and production and distribution services to Beijing Origin,
Changchun Origin, and Henan Origin. These services include support in the
research and development of agricultural seeds, analysis of breeding
technologies, environment and feasibility suggestions, technical tutorials and
breeding field supervision, market analysis and seed promotion, insect
prevention and technical education to distributors and farmers. The fees payable
under the agreements are variable, depending on differing formulae for different
categories of seeds, and are to be charged on the sales of certain seed products
in each fiscal year. These agreements are considered intra-company
transactions.
D. Property,
plant and equipment.
Our
principal executive offices are located in the Changping District in Beijing
where we own approximately 10,320 square meters of office space, and the right
to use approximately 19,250 square meters of land. The land use right, property,
plant, and equipment of our headquarters in Beijing and our Linze branches
currently secure a loan of RMB47.9 million. This loan was extended by the China
Construction Bank Beijing Shangdi Branch and Agricultural Bank Of China
Linze.
We own or
lease manufacturing facilities, laboratories, seed production and other
agricultural facilities, office space, warehouses, research stations and
breeding centers in Gansu, Henan, Liaoning, Jilin, Inner Mongolia, Yunnan,
Jiangsu, Shanxi, Sichuan, Hainan, Hubei, Anhui, Hunan and Jiangxi provinces, and
in Daxing of Beijing. These facilities include approximately 268,000 square
meters of land and approximately 42,800 square meters of office. The leased
facilities are rented at regular commercial rates, and management believes other
facilities are available at competitive rates should it be required to change
locations or add facilities. Poor weather conditions may limit our
ability to use the land for crop seed production.
We own
additional facilities in Chengdu, Sichuan province, including 5,000 square
meters of office space and a seed processing plant and the rights to use
approximately 15,000 square meters of land. As a result of the
Shandong Kunfeng acquisition this year, we own an additional 23,400 square
meters of land in Jinan, Shandong province, which in inclusive of 15 worker
dormitories and 2 plant buildings for chemical processing and
packaging.
We
believe that our existing facilities are adequate to conduct our current and
foreseeable future business operations.
ITEM
4A UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM 5. OPERATING AND FINANCIAL
REVIEW AND PROSPECTS
The following discussion of our
financial results of operations and condition is based upon and should be read
in conjunction with our consolidated financial statements and their related
notes included in this Annual Report on Form 20-F. This report contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including, without limitation, statements regarding our expectations,
beliefs, intentions or future strategies that are signified by the words
“expect,” “anticipate,” “intend,” “believe,” or similar language. All
forward-looking statements included in this Annual Report are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Actual results could differ
materially from those projected in these forward-looking statements. In
evaluating our business, you should carefully consider the information provided
under the caption “Risk Factors” in this Annual Report on Form 20-F. We caution
you that our businesses and financial performance are subject to substantial
risks and uncertainties.
A. Operating
Results.
Overview
We are a
leading, technology-focused crop seed company serving China. We currently employ
innovative plant breeding techniques, modern biotechnology, and innovative
information and research management to develop and deliver high-yield seeds to
our native farming customer base. This year we added agricultural chemicals to
our product mix. Our goal is to lead the industry by providing
farmers with unique enabling technology and services, producing and protecting
higher crop yields. Our activities include the specialization in the research
and development, production, and sales and marketing of crop seeds (corn, rice,
cotton and canola) throughout the PRC. We have pursued genetically modified
research, and in November 2009, we received notification of the Bio-Safety
Certificate from the Ministry of Agriculture as a final approval for commercial
use of the world’s first genetically modified phytase corn. We are
also actively pursuing approval rights for glyphosate tolerant corn and BT Corn
though the progress remains unchanged. Our focus remains in the production of
higher quality seed products, whether proprietary or licensed. The majority of
our revenues come from our seed products, the majority of which continue to be
from licensed seeds.
We
continue to develop our sales and marketing team of 272 employees located in 12
sales offices nationwide. Our nationwide distribution network covers most parts
of China and consists of over 3,800 first-level distributors and over 65,000
second-level distributors and retailers. Our distributors sell our products to
retailers who in turn sell to farmers, who are end-users of our products. We
currently provide branded products and technical support to farmers in 30 of
China’s 34 provinces. We believe that quality of seed and the correct farmer
application of that seed is the best way to increase product yields and overall
value to farmers.
The
fiscal year ended September 30, 2010 marked a year of continued growth for
our company in which we showed significant improvements in both gross margins
and net profits. This was the third consecutive year of improvements
in these categories. This was a result of our company initiatives to
improving the quality of our product portfolio and the improving industry
conditions, as again marked by strong market prices during the fiscal year ended
September 30, 2010.
With
regards to our fiscal year 2010 normal product line results, corn seed products
remains our strongest product, producing 73% of our sales, as compared to 70% in
the fiscal year ended September 30, 2009 and 71% for the fiscal year ended
September 30, 2008. The total revenue from corn seed grew 3.00 % to RMB428.86
million in fiscal year 2010 from RMB412.45 million in the fiscal year ended
September 2009. Our revenues for the rice unit for the year ended September 30,
2010 decreased approximately 32.7% to RMB84.21 million from RMB125.14 million in
the fiscal year ended September 30, 2009. The lower sales in
rice seeds were partly due to weather related factors in which the seed
production farmers produced lower amounts of quality seeds for the market this
year. The total revenue from cotton seed increased 20.90% to RMB
11.99 million in fiscal year 2010 from RMB9.92 million in the year ended
September 2009. As with the divestment of Biocentury Transgene
earlier this year, the company has begun to focus less on the cotton sales and
more on the other main crop seeds, selling a higher portion of our seeds
inventories at lower prices. Our canola sales showed a decrease of 9.91% to
RMB38.52million in fiscal year 2010 as compared to revenues of RMB42.75million
in fiscal year 2009. Given that the canola seeds are sold in the off
season, a substantial amount of the canola seed sales still exist as deferred
revenues on our balance sheet. This is the first year for our
pesticide sales and our pesticide revenues for the curtailed revenue period
starting June 12, 2010 amounted to RMB18.96 million exclusive of other sales
categories. While in the initial year the margin amounted to 13.01%,
we expect margins to rise above 20% for the next year.
Our
revenues for the year ended September 30, 2010 were RMB584.86 million (US$87.28
million), a decrease of 1.29% from September 30, 2009 with RMB592.49 million
(US$86.76 million).
Operating
expenses for the year ended September 30, 2010 were RMB 169.29 million (US$
25.26 million), representing an increase of 9.96% from September 30, 2009 with
RMB153.95 million (US$22.54 million).
Fiscal
year 2010 showed significant progress again toward improved industry conditions.
The seed industry is beginning to enter the early phases of a consolidation
period, in which we believe the next 3 to 5 years will have increased
opportunity. These upcoming years should make the period of change
and development in the industry. The fiscal year end September 30,
2010 marks the third consecutive year of improvement in both our revenues and
earnings as a result of these improving industry conditions.
Research
and Development Outlook
With the
continued growth of the economy in China the demand for higher levels of food
production has continued to increase dramatically. The demand is driven by
domestic price inflation of food products, the rising consumer desire for higher
quality food products, the increased need for fuel including the usage of
bio-fuels, and the growing constraints on land. The Chinese central government
has taken several measures to deal with these issues. Compared with conventional
varieties, the advantages of genetically modified (“GM”) varieties are high
yield, high quality and increased disease resistance and herbicide resistance.
Farmers plant GM varieties to both save time and cost, while also reducing the
amount of field work. GM corn, soybean, and cotton have been widely used in the
United States and many other countries to guard against insect damage and to
increase crop yields. Crop yields with the successful application to
biotechnology which in other developed countries have routinely reported
increases of over 10%-15%, as reported commercially by Monsanto and Syngenta.
According to the USA, planting area for GM corn increased from 160,000 hectares
in 1996 to almost 20 million hectares in 2006 in the United States. Since
receiving Chinese government approval, cotton that has been genetically modified
to guard against damage from insects, such as the borer, and these varieties are
now widely planted in China. GM cotton is widely accepted in the Chinese market.
The Chinese authorities have taken the first steps in approving GM crop seed
research and commercialization in order to meet the increasing demand of
agricultural products with the approval of our phytase corn and BT rice
seed. We expect the Chinese authorities to continue in this
direction, although cautiously.
In the
past several years our focus on biotechnology research has continued to
accelerate significantly. We were approved for the first GM corn seed crop in
China, a historical event. Our glyphosate tolerant gene was approved
to the next phase of development. We continue to seek to become the
leader in biotechnology and GM product commercialization in China. We expect
that GM crop seeds will gain acceptance in China, and for that reason we have
begun biotechnology seed development and invested in programs that focus on
genetic modifications to improve the yields, product quality and insect and
disease tolerance of seeds for corn and other corps. Development of these
biotechnology attributes remains a cornerstone aspect of our business strategy
for both the long and short term. As a result, a significant portion of our
management resources and attention are dedicated to building these capabilities
firm wide for introduction into the PRC domestic crop seed market.
During
the past several fiscal years, we established several plant genetic engineering
technology platforms. These include transforming herbicide tolerance, insect
resistance, nitrogen efficiency, and drought stress tolerance traits into corn
inbred lines. We seek to efficiently utilize modern biotechnology in China and
hope to further expand beyond China in the future.
We plan
to use China’s emerging technology base to utilize the natural advantages of
operating within China. Currently, we possess exclusive rights to five genetic
traits in various stages of testing and development. We have continued to build
upon cooperative relationships with several universities and research institutes
in China. These cooperative arrangements allow us to limit our own exposure and
fixed cost structure and maximize our flexibility in moving towards applicable
technology.
Under
relevant regulations, prior to registration and marketing GM crops in China, the
registrant company has to follow the following procedures. Each step (except
laboratory research) has an attached reporting and approval process established
by the Ministry of Agriculture in order to proceed to the next
step:
1.
|
Laboratory Research: is defined
by genetic manipulations and research work conducted under a control
system within laboratory.
|
2.
|
Intermediate Testing Phase:
signifies a small scale test conducted under a regulated control
system.
|
3.
|
Environmental Release Test: means
medium scale test conducted under natural condition by taking relatively
secure measures.
|
4.
|
Production Test: means relatively
large scale test before production and
application.
|
5.
|
Obtaining the safety certificate
on genetically modified
organisms.
|
Because
we are considered a domestic company in China, we are afforded the ability to
proceed through all five phases of GM approval, while international entities are
restricted to phase one, currently and forbidden to proceed to phases two
through five. We have already had several products in phases two through four,
and one product has achieved approval. We have become the first
company to obtain approval to produce and sell GM corn seed in
China.
We have
been successful in marketing genetically modified BT cotton varieties in China
and plan to continue to develop other new seed varieties. Upon introduction, the
BT cotton gene was able to increase yields and improve production value. As a
result, the farmers were willing to pay more for genetically modified seeds and
prices increased roughly four-fold for genetically modified cotton seed as
compared to standard hybrid seed. Today, almost all the planted acreage in China
utilizes genetically modified cotton seed, exclusive of Xinjiang province. We
believe that other crop seeds can follow similar product adoption
patterns.
If GM
seed products are approved by the government on a broader scale and begin to
gain more widespread acceptance in the market, which we expect will occur in the
near future, the large biotech companies could likely become more serious
competitors. However, they may continue to face numerous obstacles in competing
with us. Foreign-funded companies are currently prohibited from developing or
producing genetically modified plant seeds, breeding livestock and poultry, or
aquatic seed according to Catalog Guiding Foreign Investment
Industries (distributed by Ministry of Commence of China). As a result,
we believe we continue to be in a strong position to compete in the genetically
modified portion of the seed market when it becomes meaningful and legally
permissible to do so.
As part
of our internal efforts, we developed genetic markers to enhance selection of
disease resistance lines of maize to accelerate the breeding process. In
addition, we continued to utilize our previously implemented data mining
infrastructure to search for stable, high yielding hybrids. Our business model
draws from existing and new technologies using both conventional breeding and
advances in biotechnology. We aim to build upon our current hybrid base where we
have accumulated parental seeds with advantageous traits optimized to local soil
conditions. We have roughly 117 total products, both licensed and proprietary,
in the market. We began to develop our own proprietary hybrid seed varieties in
1998, and as of December 2010, we have 25 proprietary corn seed
products, 21 proprietary rice seed products, 5 proprietary cotton seed
products and 2 proprietary canola seed products that are in commercial
production and distribution in 2010. Currently, we have 9 breeding stations and
employ 150 full time research personnel.
Our
accomplishments as a company provide a foundation to launch into a range of
genetically-modified products. Our sales and technical support provide a
platform for us to educate farmers regarding the difference in our product
offerings. Our agronomists are often a trusted source to educate farmers on the
benefits of genetically modified products. Our accumulated germplasm from
conventional breeding techniques forms a base to transform our genetic traits.
Our high-end processing, production, and quality control will continue to ensure
high-quality seed production. We believe consistent product quality should
become increasingly important to consumers with more advanced products. Our
nationwide footprint and data mining infrastructure also allow for the matching
of products with their most appropriate locations throughout China. Again, this
may become more important with the advent of genetically modified products. We
believe this should provide stronger products for us in the long term and
benefit a wider customer base in the future.
Key
factors affecting our growth, operating results and financial
condition
We expect
our future growth, operating results and financial condition to be driven and
affected by a number of factors and trends including:
|
o
|
our ability to strategically
manage our growth and expansion, organically or through mergers and
acquisitions. If we do not manage our growth effectively, our growth may
slow and we may not be able to achieve or maintain
profitability;
|
|
o
|
our ability to develop new
products through research and
development;
|
|
o
|
our ability to partner or joint
venture for the creation of more advanced bio-technology
products;
|
|
o
|
market fluctuations in the demand
for and supply of crop seeds in China and our ability to anticipate market
demand and adjust our volume and product mix to maximize revenues and
maintain sufficiently high margins to achieve and maintain
profitability;
|
|
o
|
our ability to continue to
license or acquire crop seeds from third party developers and our ability
to develop proprietary crop
seeds;
|
|
o
|
our ability to continue to
effectively market and distribute our core products through active
agronomic assistance;
|
|
o
|
future consolidations in the crop
seed industry in China may give rise to new or strengthened
competitors;
|
|
o
|
the possibility that the crop
seed industry in China may favor genetically modified seeds over hybrid
seeds, and our ability to develop, produce, market, and sell such
products;
|
|
o
|
the possibility of major natural
disasters in China, which may have an adverse impact on our business and
results of operation, as there is currently no agriculture insurance
available in China against natural
disasters;
|
|
o
|
the Chinese government’s
continuing support for the growth and development of the agriculture
sector;
|
|
o
|
the impact of Chinese regulation
affecting our industry;
|
|
o
|
our benefits from certain
government incentives including tax incentives, the expiration of which,
or changes to which, could have an adverse effect on our operating
results;
|
|
o
|
the possibility that excess
supply of one or more of our products in our markets may drive down prices
and reduce our margins, especially if we are unable to sufficiently
differentiate our products from those of our competitors to allow us to
charge higher prices; and
|
|
o
|
our ability to correctly estimate
growers’ future needs, and match our product varieties and production
levels to meet those needs.
|
Revenues
The most
significant factor that affects our sale of crop seeds in China is the demand
for and supply of crop seeds in China’s agriculture market. As a result, the
price we are able to demand for our seeds is mainly dependent on the aggregate
supply of crop seeds, both from us and from our competitors, in relation with
crop seed demand in any growing season. Any potential fluctuation in the demand
and supply of seeds in China may cause significant volatility in the pricing of
crop seeds in China and, as a consequence, in our operating results and
financial condition. In addition, because decisions relating to our production
volume are made before we know the volume of seed orders and the market price
for such orders, we face the risk of either over-supplying the market or
under-supplying the market, which could materially and adversely affect our
revenues, operating results and ability to achieve or maintain
profitability.
During
the fiscal year ended September 30, 2010, we reorganized our product portfolio
to improve sales margins performance and business has returned back to normal
conditions. As mentioned earlier, these upcoming years should make
the period of change and development in the industry. The fiscal year
end September 30, 2010 marks the third consecutive year of improvement in both
our revenues and earnings as a result of these improving industry
conditions
Deferred
revenue
Because
of our revenue recognition policy, we sometimes carry sizeable deferred revenue
on our balance sheet. This deferred revenue reflects the value of our canola
seeds delivered after evidence of a sale arrangement is confirmed, delivery to
the customer is made and full pre-payment from the customer is received, but
before the final sales price is fixed and determined. This aspect of our revenue
recognition policy does not have a significant effect when deferred revenues in
the periods being compared maintain roughly the same proportion to overall
sales. However, when the proportion of our sales classified as deferred revenue
varies significantly from year to year, as sometimes occurs, our revenues and
earnings as reported in our financial statements may not exactly reflect our
operating activities.
Cost
of revenues
Our cost
of revenues consists of expenses directly related to our crop seed sales. These
expenses are primarily made up of the purchase prices for seeds, depreciation
and amortization, shipping and handling costs, salary and compensation,
supplies, license fees, and rent.
Purchase price for seeds. The
purchase price for seeds consists of the price we pay to farmers for the seeds
they grow for us. The purchase price for seeds is the largest component of our
cost of revenues and is likely to be our most variable element of our cost of
revenues.
Depreciation and
amortization. Depreciation consists of depreciation of property, plant
and equipment. Amortization consists of amortization of our seed license
fees.
Shipping and handling.
Shipping and handling costs include costs associated with product delivery and
handling cost related to transportation of goods from suppliers to factories and
factories to factories.
Salary and compensation.
Salary and compensation expenses include wages, bonuses and other benefits,
including welfare benefits. Salary and compensation included in our cost of
revenues relate to our production personnel. We expect that our salary and
compensation expenses will increase in the future in conjunction with our
intended growth.
License Fees. License
fees consist of royalty fees paid to independent research and development
institutions.
Supplies. Supplies consist of
items needed for production and packing costs for the seeds we
produce.
Write-down of Inventory. Any
excess of the cost over the net realizable value of the inventories is
recognized as a provision for diminution in the value of inventories. Net
realizable value is the estimated selling price in the normal course of business
less the estimated costs to completion and the estimated expenses and related
taxes necessary to make the sale.
Operating
expenses
Our
operating expenses consist of general and administrative expenses, research and
development expenses and selling and marketing expenses. Our operating expenses
have grown 9.96% for the year ended September 30, 2010 compared to the same
period in 2009, mainly due to the increase in General and Administrative
expenses.
We expect
our operating expenses to remain consistent to slightly lower for the
foreseeable future, but the rate of such increase or decline will depend
primarily on our current business needs, including efforts we may undertake to
expand our business.
General and administrative
expenses. General and administrative expenses primarily consist of
salary, depreciation, amortization, legal fees, professional expenses and other
expenses, including travel and other general business expenses and office
supplies. The increase was due in part to increase in salary expenses
and also additional expense related to exercise and grant of stock options as
related to our performance equity plans.
Research and development
expenses. Our research and development expenses primarily consist of
salary and compensation expenses of personnel engaged in the research and
development of our proprietary crop seeds and future genetically modified
products, rent, and depreciation of plant and equipment attributable to our
research and development efforts and the expenses paid to certain research
institutes to carrying research projects on behalf of Origin during the period.
Further in the future, we expect to continue our research and development
expenses to expand with the company after that period given the importance of
technology to our product base.
Selling and marketing
expenses. Our selling and marketing expenses primarily consist of salary
and compensation for our sales and marketing personnel, advertisement and
promotion expenses, transportation expenses and related marketing expenses.
Growth in our selling and marketing expenses will depend on our expected market
expansion. We expect to continue to remain consistent in our sales and marketing
efforts in the foreseeable future, including our plan to hire additional sales
and marketing personnel to focus on our new product promotion and market
expansion to replace previous expenses on advertising and promotion. Our sales
and marketing efforts were more intense last year as a result of the increased
competition in the industry. This added on additional costs to the company, as
we refocused efforts to spend increased time with the end consumer.
Stock
option plan and option agreements
Our stock
options are granted under the 2005 and 2009 Performance Equity Plan. We adopted
the 2005 Plan in November 2005, under which we could issue share options with
the right to purchase up to 1,500,000 ordinary shares to our directors,
officers, employees, individual consultants and advisors. During 2009, we
adjusted certain outstanding awards, pursuant to action by the compensation
committee to align the awards to the price of the stock and our financial
outlook so that the awards would continue to offer employment incentivization.
As of September 14, 2009, there are awards outstanding covering a total of
214,120 ordinary shares, and which included restricted awards for 89,300 shares.
On April 22, 2010, our company adopted the 2009 Performance Equity
Plan. We had outstanding option awards for 125,000 ordinary shares
under the Plan at September 30, 2010.
With the
adjusted awards, all the option awards have an exercise price within the range
of $0 to $12.23 and expire 5 years from the date of grant and vest immediately
or over a period of 1 to 5 years. We recorded a total stock-based compensation
expense of RMB 5,283,844 (US $705,190) for the year ended September 30, 2008 and
RMB 2,756,948 (US$ 403,769) for the year ended September 30, 2009, and
RMB4,869,489 (US$715,260) for the year ended September 30, 2010.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of those financial statements
requires us to make estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions or
conditions.
Critical
accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies that involve a high degree of judgment
and the methods of their application. For a description of all of our
significant accounting policies, see Note 2 to our consolidated financial
statements.
Revenue
We derive
revenue primarily from the sale of various crop seeds, including corn, cotton,
rice and canola in China. We recognize revenue when pervasive evidence of a
sales arrangement exists, products are delivered, the price is fixed and
determinable, collectability is reasonably assured, and the right of return has
expired. Accordingly, we defer revenue recognition until all sale return
privileges lapse, which generally occurs in May or June, and until the selling
price has been finalized by our management and confirmation has been issued to
the customer, which generally occurs at the end of our selling season. Because
of the discount policy we offer to our customers, we sometimes carry a sizeable
deferred revenue that reflects the value of our crop seeds delivered after
evidence of a sales arrangement is confirmed, delivery to the customer is made
and pre-payments from the customer are received, but before the final sales
price is fixed and determined at the end of the selling season. This aspect of
our revenue recognition policy does not have a significant effect when deferred
revenues in the periods being compared remain roughly the same proportion to
overall sales. However, when the proportion of our sales classified as deferred
revenue varies significantly from year to year, as sometimes occurs, our
revenues and earnings as reported in our financial statements may not exactly
reflect our operating activities.
Impairment
of long-lived assets.
We review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may no longer be recoverable. When
these events occur, we measure impairment by comparing the carrying value of the
long-lived assets to the estimated undiscounted future cash flows expected to
result from the use of the asset and eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss, equal to the excess
of the carrying amount over the fair market value of the asset, is
recognized.
Write-down
of Inventory.
Any
excess of the cost over the net realizable value of the inventories is
recognized as a provision for diminution in the value of inventories. Net
realizable value is the estimated selling price in the normal course of business
less the estimated costs to completion and the estimated expenses and related
taxes necessary to make the sale. As of September 30, 2010, we had a
write off of RMB22.03 million (US $3.29 million) compared to RMB
28.86 million in year ended September 30, 2009, and RMB30.82
million as of September 30, 2008.
Income
taxes.
We record
a valuation allowance to reduce our deferred tax assets to the amount that we
believe to be more likely than not to be realized. In the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of their recorded amount, an adjustment to our deferred tax assets
would increase income in the period such determination was made. Likewise,
should we determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to our deferred tax assets
would be charged to income in the period such determination was
made.
The
Company adopted FASB Accounting Standard Codification (“ASC”) 740-10 (former
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109” (“FIN48”)). The Company’s policy on
classification of all interest and penalties related to unrecognized tax
benefits, if any, as a component of income tax provisions.
Stock-based
compensation.
We adopted
FASB ASC 718-10 (former SFAS No. 123 (revised 2004), or SFAS
No. 123(R)), to measure our issued share options based on the grant-date
fair value of the options and recognized as compensation expense over the
requisite service period, with a corresponding addition to equity. We adopt the
Black-Scholes Model to value the fair value of the share options.
Results
of Operations
The
agriculture industry is closely aligned with the biotechnology industry to
foster product development. Development of these biotechnology attributes
remains a cornerstone aspect of our business strategy for both the long and
short term. As a result, a significant portion of our management resources and
attention are dedicated to building these capabilities firm wide for
introduction into the domestic crop seed market.
Additionally,
the agricultural industry is seasonal in nature and our quarterly revenues and
costs and expenses as a percentage of our revenues are affected by the seasonal
fluctuations and seasonable variations in demand for our products. Typically,
the vast majority of our seed sales for corn, rice, and cotton, which constitute
almost all of our yearly revenues, take place between October and June. These
sales are deferred until the third quarter of our fiscal year, when the vast
majority of our revenues are recognized. As a result, our revenues typically
reach seasonal peaks in the third quarter of the year. We expect such seasonal
fluctuations to occur in the foreseeable future.
The
following table sets forth certain information relating to our results of
operations, and our consolidated statements of operations as a percentage of
revenues, for the periods indicated:
|
|
For the year
|
|
|
For the nine months
|
|
|
For the year
|
|
|
|
|
|
For the year
|
|
Item
|
|
ended December 31
|
|
|
ended September 30
|
|
|
ended September 30
|
|
|
For the year ended September 30
|
|
|
ended September 30
|
|
|
|
2006
|
|
|
2006 (unaudited)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
In
|
|
|
As %
|
|
|
|
|
|
As %
|
|
|
|
|
|
As %
|
|
|
|
|
|
As %
|
|
|
|
|
|
As %
|
|
|
|
|
|
As %
|
|
|
|
thousands RMB
|
|
|
of net revenue
|
|
|
In thousands RMB
|
|
|
of net revenue
|
|
|
In thousands RMB
|
|
|
of net revenue
|
|
|
In thousands RMB
|
|
|
of net revenue
|
|
|
In thousands RMB
|
|
|
of net revenue
|
|
|
In thousands RMB
|
|
|
of net revenue
|
|
Consolidated
statement of income and comprehensive income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
522,999 |
|
|
|
100 |
|
|
|
521,910 |
|
|
|
100 |
|
|
|
489,379 |
|
|
|
100 |
|
|
|
513,490 |
|
|
|
100 |
|
|
|
592,492 |
|
|
|
100 |
|
|
|
584,860 |
|
|
|
100 |
|
Cost
of revenues
|
|
|
362,982 |
|
|
|
-69 |
|
|
|
-365,726 |
|
|
|
-70.07 |
|
|
|
-462,852 |
|
|
|
-94.58 |
|
|
|
-404,795 |
|
|
|
-78.83 |
|
|
|
-392,842 |
|
|
|
-66.30 |
|
|
|
-353,587 |
|
|
|
-60.46 |
|
Gross profit
|
|
|
160,017 |
|
|
|
31 |
|
|
|
156,184 |
|
|
|
29.93 |
|
|
|
26,527 |
|
|
|
5.42 |
|
|
|
108,695 |
|
|
|
21.17 |
|
|
|
199,650 |
|
|
|
33.70 |
|
|
|
231,273 |
|
|
|
39.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
-49,651 |
|
|
|
-9 |
|
|
|
-57,695 |
|
|
|
-11.05 |
|
|
|
-57,994 |
|
|
|
-11.85 |
|
|
|
-53,203 |
|
|
|
-10.36 |
|
|
|
-55,648 |
|
|
|
-9.39 |
|
|
|
-52,227 |
|
|
|
-8.93 |
|
General
and administrative
|
|
|
-40,933 |
|
|
|
-8 |
|
|
|
-50,204 |
|
|
|
-9.62 |
|
|
|
-92,246 |
|
|
|
-18.85 |
|
|
|
-73,355 |
|
|
|
-14.29 |
|
|
|
-64,833 |
|
|
|
-10.94 |
|
|
|
-78,708 |
|
|
|
-13.46 |
|
Research
and development
|
|
|
-13,144 |
|
|
|
-3 |
|
|
|
-14,158 |
|
|
|
-2.71 |
|
|
|
-28,441 |
|
|
|
-5.81 |
|
|
|
-24,513 |
|
|
|
-4.77 |
|
|
|
-33,473 |
|
|
|
-5.65 |
|
|
|
-38,356 |
|
|
|
-6.56 |
|
Total
operating expenses
|
|
|
-103,728 |
|
|
|
-20 |
|
|
|
-122,057 |
|
|
|
-23.39 |
|
|
|
-178,681 |
|
|
|
-36.51 |
|
|
|
-151,071 |
|
|
|
-29.42 |
|
|
|
-153,954 |
|
|
|
-25.98 |
|
|
|
-169,291 |
|
|
|
-28.95 |
|
Income
from operations
|
|
|
56,289 |
|
|
|
11 |
|
|
|
34,127 |
|
|
|
6.54 |
|
|
|
-152,154 |
|
|
|
-31.09 |
|
|
|
-42,376 |
|
|
|
-8.25 |
|
|
|
45,696 |
|
|
|
7.71 |
|
|
|
61,982 |
|
|
|
10.60 |
|
Interest
income
|
|
|
8,783 |
|
|
|
2 |
|
|
|
9,294 |
|
|
|
1.77 |
|
|
|
10,942 |
|
|
|
2.24 |
|
|
|
5,199 |
|
|
|
1.01 |
|
|
|
2,036 |
|
|
|
0.34 |
|
|
|
1,634 |
|
|
|
.28 |
|
Interest
expenses
|
|
|
-5,005 |
|
|
|
-1 |
|
|
|
-5,391 |
|
|
|
-1.03 |
|
|
|
-21,697 |
|
|
|
-4.43 |
|
|
|
-36,939 |
|
|
|
-7.19 |
|
|
|
-16,784 |
|
|
|
-2.83 |
|
|
|
-8,539 |
|
|
|
-1.46 |
|
Other
income
|
|
|
2,893 |
|
|
|
1 |
|
|
|
5,441 |
|
|
|
1.04 |
|
|
|
1,312 |
|
|
|
0.27 |
|
|
|
628 |
|
|
|
0.12 |
|
|
|
1,991 |
|
|
|
0.34 |
|
|
|
2,340 |
|
|
|
.40 |
|
Loss
on repurchase of convertible notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
51,101 |
|
|
|
-8.62 |
|
|
|
- |
|
|
|
- |
|
Equity
in earnings of associated company
|
|
|
12,828 |
|
|
|
2 |
|
|
|
13,400 |
|
|
|
2.57 |
|
|
|
-669 |
|
|
|
-0.14 |
|
|
|
7,702 |
|
|
|
1.50 |
|
|
|
4,669 |
|
|
|
0.79 |
|
|
|
18,253 |
|
|
|
3.12 |
|
Changes
in the fair value of embedded derivatives
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,601 |
|
|
|
2.57 |
|
|
|
20,229 |
|
|
|
3.94 |
|
|
|
3,300 |
|
|
|
0.56 |
|
|
|
- |
|
|
|
- |
|
Income
before income taxes
|
|
|
75,788 |
|
|
|
14 |
|
|
|
56,862 |
|
|
|
10.89 |
|
|
|
-149,665 |
|
|
|
-30.58 |
|
|
|
-45,557 |
|
|
|
-8.87 |
|
|
|
-10,193 |
|
|
|
-1.72 |
|
|
|
75,670 |
|
|
|
12.94 |
|
Income
tax
|
|
|
-367 |
|
|
|
0 |
|
|
|
-566 |
|
|
|
-0.11 |
|
|
|
49 |
|
|
|
0.01 |
|
|
|
3,995 |
|
|
|
0.78 |
|
|
|
-11,732 |
|
|
|
-1.98 |
|
|
|
-9,319 |
|
|
|
-1.59 |
|
Income
before non-controlling interests
|
|
|
75,421 |
|
|
|
14 |
|
|
|
56,260 |
|
|
|
10.78 |
|
|
|
-149,616 |
|
|
|
-30.57 |
|
|
|
-41,562 |
|
|
|
-8.09 |
|
|
|
-21,925 |
|
|
|
-3.70 |
|
|
|
66,351 |
|
|
|
11.34 |
|
Non-controlling
interests
|
|
|
910 |
|
|
|
0 |
|
|
|
1,558 |
|
|
|
0.30 |
|
|
|
-13,584 |
|
|
|
-2.78 |
|
|
|
-1,724 |
|
|
|
-0.34 |
|
|
|
-18,892 |
|
|
|
-3.19 |
|
|
|
-17,298 |
|
|
|
-2.96 |
|
Net
income
|
|
|
76,331 |
|
|
|
15 |
|
|
|
57,818 |
|
|
|
11.08 |
|
|
|
-163,200 |
|
|
|
-33.35 |
|
|
|
-43,286 |
|
|
|
-8.43 |
|
|
|
-40,817 |
|
|
|
-6.89 |
|
|
|
49,053 |
|
|
|
8.39 |
|
Fiscal
Year Ended September 30, 2010 Compared To Fiscal Year Ended September 30,
2009
While our
results of operations were recovering during fiscal year 2009 from the lingering
effects of the industry reorganization of state seed enterprises and other
factors, the 2010 fiscal year results of operations were influenced by our
further detailed attention to proper management of our resources and reaction to
marketplace conditions, including the proper management of our product portfolio
and elimination of poorer performing products. The results were primarily
indicative of the increase in seed prices, mainly in the corn seed variety which
comprise the majority of our sales. This is reflected in the increase
in the gross margin of corn seeds which increased from 40.60% to 49.65% (as
shown below) which added to increased performance in the gross profit and net
profit from the fiscal year ended 2010.
Revenues
& Gross Margin
Our
revenues for the year ended September 30, 2010 were RMB584.86 million (US$87.28
million), a slight decrease of 1.29% from September 30, 2009 with RMB592.49
million (US$86.76 million).
Exclusive
of the scrap sales, revenues from our hybrid corn seeds increased 2.44% to
RMB421.42 million (US$62.89 million) in the fiscal year ended September 30, 2010
from RMB411.40 million (US$ 60.24 million) in the fiscal year ended 2009. Gross
margin of our corn products increased by 6.49% in fiscal year 2010, as compared
to the previous twelve month period. This was a result of an increase of corn
seed price as a result of our continued aggressive management of the reorganized
product portfolio. Revenues from our hybrid rice seeds decreased 34.18% to
RMB82.38 million (US$12.29 million) in the fiscal year ended September 30, 2010
from RMB125.14 million (US$ 18.37 million) in the fiscal year ended 2009,
exclusive of scrap seed sales. The lower sales in rice seeds were due
in part to weather related factors in which the seed production farmers produced
lower amounts of quality seeds for the market this year. Gross margin of our
rice products decreased 124% in fiscal year 2010, as compared to the previous
twelve month period. The total revenue from cotton seed increased
19.83% to RMB 11.88 million in fiscal year 2010 from RMB9.92 million in the year
ended September 2009. As with the divestment of Biocentury Transgene
earlier this year, the company has begun to focus less on the cotton sales and
more on the other main crop seeds, selling a higher portion of our seeds
inventories at lower prices . Our canola sales showed
a decrease of 10.86% to RMB38.11 million in fiscal year 2010, as compared to
revenues of RMB42.75 million in fiscal year 2009. Given that the
canola seeds are sold in the off season, a substantial amount of the canola seed
sales still exist as deferred revenues on our balance sheet. This is the first
year for our pesticide sales and our pesticide revenues for the curtailed
revenue period starting September 12, 2010 amounted to RMB18.96 million
exclusive of other sales categories. While in the initial year the
margin amounted to 13.01%, we expect margins to rise above 20% for the next
year.
The
revenues resulting from non-scrap seed sales for the twelve months ended
September 30, 2010 as compared to that of the twelve months ended September 30,
2009 were as follows:
Items
|
|
Revenues
|
|
|
Gross Margin
|
|
|
|
Year ended
September 30,
2010
|
|
|
Year ended
September 30,
2009
|
|
|
Growth
|
|
|
Year ended
September 30,
2010
|
|
|
Year ended
September 30,
2009
|
|
|
Growth
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid
Corn seeds*
|
|
|
421,420
|
|
|
|
411,405
|
|
|
|
2.44
|
%
|
|
|
49.65
|
%
|
|
|
40.60
|
%
|
|
|
22.29
|
%
|
Hybrid
Rice seeds*
|
|
|
82,375
|
|
|
|
125,135
|
|
|
|
(34.18
|
)%
|
|
|
36.96
|
%
|
|
|
16.50
|
%
|
|
|
124
|
%
|
Hybrid
Cotton seeds*
|
|
|
11,883
|
|
|
|
9,917
|
|
|
|
19.83
|
%
|
|
|
35.76.
|
%
|
|
|
49.90
|
%
|
|
|
(28.34
|
)%
|
Hybrid
Canola seeds*
|
|
|
38,106
|
|
|
|
42,747
|
|
|
|
(10.86
|
)%
|
|
|
63.05
|
%
|
|
|
41.99
|
%
|
|
|
50.16
|
%
|
Pesticides*
|
|
|
18,958
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
13.01
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Other
|
|
|
1,143
|
|
|
|
68
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
normal sales*
|
|
|
573,885
|
|
|
|
589,272
|
|
|
|
(2.62
|
)%
|
|
|
47.15
|
%
|
|
|
35.60
|
%
|
|
|
32.45
|
%
|
* exclusive of scrap
sales
**inclusive
of parental seed products, maize cob products, and unassociated seed
lots.
Cost
of Revenue
Our cost
of revenue for the year ended September 30, 2010 was RMB353.59 million (US$52.77
million), a decrease of 9.99% from September 30, 2009 which was RMB392.84
million (US$57.53 million), as consistent with the decrease in sales
volume.
Gross
profit
Our gross
profit for the year ended September 30, 2010 increased to RMB231.27 million
(US$34.51 million), an increase of 15.81% from September 30, 2009 with RMB199.70
million (US$29.24 million), given the increase in corn seed prices.
Operating
expenses
Operating
expenses for the year ended September 30, 2010 were RMB169.29 million (US$25.26
million), representing an increase of 9.96% from September 30, 2009 with
RMB153.95 million (US$22.55 million). The increase was due in part to
increase in salary expenses and grant of stock options as related to our
performance equity plans.
Selling
and marketing
Selling
and marketing expenses for the year ended September 30, 2010 were RMB52.23
million (US$7.79 million), representing a decrease of 6.15% from September 30,
2009 of RMB55.65 million (US$8.15 million), in part due to lower amount of
fertilizer subsidy expense.
General and
administrative
General
and administrative expenses for the year ended September 30, 2010 were RMB78.71
million (US$11.75 million), representing an increase of 21.41% from September
30, 2009 of RMB64.83 million (US$9.50 million). As mentioned earlier,
this increase was the main reason for the increase in operating expenses, and
this increase in general and administrative expense was due in part to increase
in salary and grant of stock options as related to our performance equity
plans.
Research
and development
Research
and development expenses for the year ended September 30, 2010 were RMB38.36
million (US$5.72 million), representing an increase of 14.61% from September 30,
2009 with RMB33.47 million (US$4.90 million). Again, the increase in our
research and development spending is a result of our commitment to further
efforts in the research and development of self-developed seed rights and the
further cooperation with universities and other research
institutes.
Income
from operations
As a
result of the impact of the components described above, income from operations
for the year ended September 30, 2010 were RMB61.98 million (US$9.25 million),
compared with the loss from operations from September 30, 2009 of RMB45.70
million (US$6.69 million).
Interest
expense
Interest
expenses for the year ended September 30, 2010 were RMB 8.54 million (US$1.27
million), representing a decrease of 49.11% from September 30, 2009 with
RMB16.78 million (US$2.46 million), in part due to the repurchase of our
convertible note.
Share
of net income of equity investments and Gain on disposal of an equity
investment
Shares of
net income in equity investment increased to RMB18.25 million (US$2.72 million)
in the year ended September 30, 2010 from RMB4.67 million (US$0.68 million) in
the year ended September 30, 2009. Of note, the net gain from the
sale of our minority investment of Biocentury Transgene is RMB8.88 million
(US$1.33 million).
Other
income
Other
income increased to RMB2.34 million (US$.35 million) for the year ended
September 30, 2010 as compared to RMB1.99 million (US$0.29 million) for the year
ended September 30, 2009.
Income
taxes
Income
taxes for the year ended September 30, 2010 were RMB9.32 million (US$1.39
million) as compared with September 30, 2009 income tax of RMB11.73 million
(US$1.72 million). During fiscal year 2010 we incurred a decrease in deferred
tax assets of RMB5.27 million (US$0.79 million), which is mainly due to the tax
losses of Beijing Origin and Denong were used during the year ended September
30, 2010. The deferred tax asset is composed primarily of net
operating loss carry forwards. The valuation allowance is based upon
management’s conclusions regarding, among other considerations and estimates of
future earnings based on information currently available. After adjusting the
one-time losses, it is management’s conclusion that it is more likely than not
that the future tax benefits related to the net operating loss carried forward
will be realized.
The
standard enterprise income tax rate is 25% for 2009 and 2010. However, some of
our PRC Operating Companies, such as Beijing Origin and Jilin Changrong, are
entitled to a preferential tax rate of 15.0%. For the year ended September 30,
2009 and 2010, the effect of the preferential tax treatment is 10%. The
effective income tax rate for the year ended September 30, 2009 and 2010 was
- -115% and 12% respectively.
Net
income
Our net
profit was RMB 49.05 million (US$7.32 million) for the year ended September 30,
2010 as compared to the net loss of RMB40.82 million (US$5.98 million) in the
year ended September 30, 2009.
Fiscal
Year Ended September 30, 2009 Compared To Fiscal Year Ended September 30,
2008
While our
results of operations were materially impacted during fiscal year 2008 by the
lingering effects of the industry reorganization of state seed enterprises and
other factors, the 2009 fiscal year results of operations were influenced by our
increased attention to proper management of our resources and reaction to
marketplace conditions. Our scrap sales only amounted to roughly
0.54% of our total revenues for the year ended 2009 as compared to 4.30% from
the fiscal year ended 2008. Excluding these scrap sales and the
impairment of inventory; our gross margins for the period were 35.60%
(unaudited) as compared to our 31.56% (unaudited) gross margins for the twelve
months ended September 30, 2008.
Revenues
& Gross Margin
Our
revenues for the year ended September 30, 2009 were RMB592.49 million (US$86.76
million), an increase of 15.38% from RMB513.49 million (US$75.63 million) in the
fiscal year ended September 30, 2008.
As a
regular course of our business and revenue yield management, a portion of our
seeds are liquidated and sold at greatly reduced prices as scrap sales for use
as animal feed rather than standard crop seed. This amount was much lower this
year as the revenue of the seeds sold as scrap accounted for revenue of RMB3.22
million (US$0.47 million), as compared to RMB22.06 million (US$3.25 million),
and a sales volume of 14.71 million kg, in fiscal year end
2008. Additionally, we wrote off a portion of our seed
inventory of RMB7.40 million (US$1.08 million), which was recorded as cost of
revenues, as compared during fiscal year 2008 when we wrote off a portion of our
seed inventory of RMB18.01 million (US$ 2.65 million). Excluding these temporary
scrap sales and the impairment of inventory, our gross margins for the period
were 35.60% (unaudited) as compared to our 31.56% (unaudited) gross margins for
the fiscal year ended September 30, 2008.
Exclusive
of the scrap sales, revenues from our hybrid corn seeds increased 15.60% to
RMB411.40 million (US$60.24million) in the fiscal year ended September 30, 2009
from RMB355.89 million (US$ 52.41 million) in the fiscal year ended 2008. Gross
margin of our corn products increased by 14.11% in fiscal year 2009, as compared
to the previous twelve month period. This was a result of an increase of corn
seed price as a result of improved management toward a reorganized product
portfolio. Revenues from our hybrid rice seeds increased 31.61% to RMB125.13
million (US$ 18.37 million) in the fiscal year ended September 30, 2009 from
RMB95.08 million (US$ 14.00 million) in the fiscal year ended 2008, exclusive of
scrap seed sales. This increase was a result of the rice seed prices, despite
increase in the unit cost of production of the rice seed. Gross margin of our
rice products decreased 2.54% in fiscal year 2009, as compared to the previous
twelve month period.
The
revenues resulting from non-scrap seed sales for the twelve months ended
September 30, 2009 as compared to that of the twelve months ended September 30,
2008 were as follows:
Items
|
|
Revenues
|
|
|
Gross Margin
|
|
|
|
Year ended
September 30,
2009
|
|
|
Year ended
September 30,
2008
|
|
|
Growth
|
|
|
Year ended
September 30,
2009
|
|
|
Year ended
September 30,
2008
|
|
|
Growth
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid
Corn seeds*
|
|
|
411,405
|
|
|
|
355,890
|
|
|
|
15.60
|
%
|
|
|
40.60
|
%
|
|
|
35.58
|
%
|
|
|
14.11
|
%
|
Hybrid
Rice seeds*
|
|
|
125,135
|
|
|
|
95,083
|
|
|
|
31.61
|
%
|
|
|
16.5
|
%
|
|
|
16.93
|
%
|
|
|
-2.54
|
%
|
Hybrid
Cotton seeds*
|
|
|
9,917
|
|
|
|
16,622
|
|
|
|
40.34
|
%
|
|
|
49.9
|
%
|
|
|
36.93
|
%
|
|
|
35.12
|
%
|
Hybrid
Canola seeds*
|
|
|
42,747
|
|
|
|
23,774
|
|
|
|
79.81
|
%
|
|
|
41.99
|
%
|
|
|
66.54
|
%
|
|
|
36.90
|
%
|
Others**
|
|
|
68
|
|
|
|
59
|
|
|
|
15.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
normal sales*
|
|
|
589,272
|
|
|
|
491,428
|
|
|
|
19.91
|
%
|
|
|
35.60
|
%
|
|
|
31.56
|
%
|
|
|
12.80
|
%
|
* exclusive of scrap
sales
**inclusive
of parental seed products, maize cob products, and unassociated seed
lots.
Cost
of Revenue
Our cost
of revenue for the year ended September 30, 2009 was RMB392.84 million (US$57.53
million), including the RMB7.40 million (US$1.08 million) inventory
write-down. This was a decrease of 2.95% from RMB404.80 million
(US$59.62 million), including the inventory write-down of RMB18.01 million
(US$2.65 million).
Gross
profit
Our gross
profit for the year ended September 30, 2009 increased to RMB199.70 million
(US$29.24 million) from RMB108.70 million (US$15.94 million) for the year ended
September 30, 2008. This represented an increase of 83.72% from the
fiscal year ended September 30, 2008.
Operating
expenses
Operating
expenses for the year ended September 30, 2009 were RMB153.95 million (US$22.55
million), representing an increase of 1.91% from RMB151.07 million (US$22.25
million) for the fiscal year ended September 30, 2008.
Selling
and marketing
Selling
and marketing expenses for the year ended September 30, 2009 were RMB55.65
million (US$8.15 million), representing an increase of 4.61% from RMB53.20
million (US$7.84 million) for the year ended September 30, 2008. The
percentage of sales are 9% and 10% for the years ended September 30, 2009 and
2008, respectively.
General and
administrative
General
and administrative expenses for the year ended September 30, 2009 were RMB64.83
million (US$9.50 million), representing a decrease of 11.63 % from RMB73.36
million (US$10.80 million) for the fiscal year ended September 30,
2008.
Research
and development
Research
and development expenses for the year ended September 30, 2009 were RMB33.47
million (US$4.90 million), representing an increase of 36.56 % from
RMB24.51million (US$3.61 million) for the fiscal year ended September 30,
2008. The increase in our research and development spending is a
result of the further efforts in the research and development of self-developed
seed rights and the further cooperation with universities and other research
institutes.
Income
from operations
As a
result of the impact of the components described above, we had income from
operations for the year ended September 30, 2009 of RMB45.70 million (US$6.69
million), compared with the loss from operations of RMB42.38 million (US$6.24
million) for the fiscal year ended September 30, 2008.
Interest
expense
Interest
expenses for the year ended September 30, 2009 were RMB16.78 million (US$2.46
million), representing a decrease of 54.58 % from RMB36.94 million (US$5.44
million) for the twelve months ended September 30, 2008.
Share
of net income of equity investments
Shares of
net income of equity investment from RMB4.67 million (US$0.68 million) in the
year ended September 30, 2009 from RMB7.7 million (US$1.13 million) for the
fiscal year ended September 30, 2008. The amount in both years was primarily due
to the investment in BioCentury Transgene.
Other
income
Other
income increased to RMB1.99 million (US$0.29 million) for the year ended
September 30, 2009 as compared to an income of RMB0.63 million (US$0.93 million)
for the fiscal year ended September 30, 2008.
Loss
on repurchase of convertible notes
This
expense was mainly a result of RMB51.10 million (US$7.48 million) charge in
other expense related to the repurchase of our convertible note from Citadel
Investment Group (CIG).
In the
second quarter of 2009, the company repurchased their outstanding convertible
notes from Citadel Investment Group (CIG) and which does affect our year-to-date
financial figures.
Income
taxes
Income
taxes for the year ended September 30, 2009 were an expense of RMB11.73 million
(US$1.72 million), as compared with an income of RMB4.00 million (US$0.59
million) for the fiscal year ended September 30, 2008. During fiscal year 2009
we incurred a decrease in deferred tax assets of RMB11.15million (US$1.63
million), which is mainly due to the tax losses of Beijing Origin and Denong
were used during the year ended September 30, 2009.
.
The
standard enterprise income tax rate is 25% for 2008 and 2009. However, some of
our PRC Operating Companies, such as Beijing Origin and Jilin Changrong, are
entitled to a preferential tax rate of 15.0%. For the year ended September 30,
2008 and 2009, the effect of the preferential tax treatment is 10%. The
effective income tax rate for the year ended September 30, 2008 and 2009 was 9%
and -115% respectively.
The
deferred tax asset is composed primarily of net operating loss carry forwards.
The recognition of carried forward losses of certain loss on sale of scrap seeds
and the restructuring cost of the Group during the fiscal year of 2007 and 2008.
The valuation allowance is based upon management’s conclusions regarding, among
other considerations and estimates of future earnings based on information
currently available. After adjusting the one-time losses, it is management’s
conclusion that it is more likely than not that the future tax benefits related
to the net operating loss carried forward will be realized.
Net
loss
Our net
loss was RMB40.82 million (US$5.98 million) in the year ended September 30,
2009, as compared to the net loss of RMB43.29 million (US$6.37 million) for the
fiscal year ended September 30, 2008. Excluding non-recurring charges
related to the convertible notes charged mainly in the second quarter of 2009,
net income for the fiscal year ended 2009 was RMB 10.3 million (US$1.50 million)
(unaudited), or US$0.45 per diluted share, as compared to a loss of US$0.27 per
share a year ago.
B. Liquidity
and Capital Resources.
As of
September 30, 2009 and 2010, we had approximately RMB121.26 million
(US$17.76 million) RMB299.67 million (US$44.72 million), respectively, in
cash and cash equivalents. Our cash and cash equivalents primarily consisted of
cash on hand and short term liquid investments with original maturities of three
months or less that is deposited with banks and other financial
institutions. We believe our working capital is sufficient to meet
our present requirements.
We
financed our operations together with the repayment of repurchasing the
convertible bond at December 31, 2009 through cash generated from operating
activities and short-term borrowings. At September 30, 2010, we had
total short-term borrowings of RMB85.90 million (US$12.82 million) which were
comprised of secured bank loans of RMB47.90 million and unsecured bank loans of
RMB38million, which is under Beijing Origin has been guaranteed by a subsidiary,
BioTech. The secured loans were secured by the Company’s land use rights of
RMB3.14 million and plant and equipment of RMB44.83million. The annual interest
rate ranged from 5.31% to 5.84%.
A portion
of our short-term borrowings (RMB45.90 million) is secured by our land use
rights and the office building, both of which are in the Zhongguancun Life
Science Park.
The
following table shows our cash flows with respect to operating activities,
investing activities and financing activities for the nine months ended
September 30, 2006, and the 12 months ended September 30, 2006 (unaudited), the
years ended September 30, 2007, September 30, 2008, September 30, 2009 and
September 30, 2010.
Item
|
|
Nine months
Ended
|
|
|
Twelve
months ended
|
|
|
Year ended September 30
|
(In thousands)
|
|
September 30
|
|
|
September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2006
(unaudited)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by
Operating
activities
|
|
|
(123,260
|
)
|
|
|
(78,973
|
)
|
|
|
(169,242
|
)
|
|
|
57,198
|
|
|
|
208,883
|
|
|
|
298,604
|
|
|
|
44,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(244,972
|
)
|
|
|
(268,612
|
)
|
|
|
(90,948
|
)
|
|
|
107,630
|
|
|
|
(15,981
|
) |
|
|
15,105
|
|
|
|
2,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in by financing activities
|
|
|
275,006
|
|
|
|
475,972
|
|
|
|
283,774
|
|
|
|
(212,025
|
)
|
|
|
(175,933
|
)
|
|
|
(136,359
|
)
|
|
|
(20,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(93,226
|
)
|
|
|
128,387
|
|
|
|
23,584
|
|
|
|
(47,197
|
)
|
|
|
17,059
|
|
|
|
177,350
|
|
|
|
26,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, Beginning of year
|
|
|
237,828
|
|
|
|
237,828
|
|
|
|
140,953
|
|
|
|
162,314
|
|
|
|
102,263
|
|
|
|
121,255
|
|
|
|
18,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(3,649
|
) |
|
|
(4,085
|
)
|
|
|
(2,223
|
)
|
|
|
(12,854
|
)
|
|
|
1,933
|
|
|
|
1,067
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents,
end
of year
|
|
|
140,953
|
|
|
|
362,130
|
|
|
|
162,314
|
|
|
|
102,263
|
|
|
|
121,255
|
|
|
|
299,672
|
|
|
|
44,720
|
|
Operating
activities. Net cash provided by operating activities was RMB298.61 million
(US$44.56 million) forthe year ended September 30, 2010 compared to net cash of
RMB208.88 million (US$30.59 million) for the year ended September 30,
2009. This increase was primarily due to increase in the net income
to RMB49.05 million (US$7.32 million) and the increase in the advances from
customers to RMB128.83 million (US$19.23 million).
Investing
activities. Net cash provided by investing activities was RMB15.11 million
(US$2.25 million) for the year ended September 30, 2010. Net cash
used in investing activities was RMB15.89 million (US$2.33 million) for the
year ended September 30, 2009. This increase in net cash provided was
in part due to the proceeds from disposal of equity investment of RMB50.0
million (US$7.46 million), more specifically in regards to the divestment in the
non-controlling interest of Biocentury Transgene.
Financing
activities. Net cash used in financing activities was RMB136.36 million
(US$20.35 million) for the year ended September 30, 2010. Net cash
used in financing activities was RMB175.93million (US$25.76 million) for the
year ended September 30, 2009. This was mainly due to the increase in
the proceeds from short term borrowings to RMB191.90 million (US$28.64 million)
though this figure was partially offset by our repurchase of the convertible
notes of RMB117.90 (US$17.59 million). There is also cash used in acquiring
additional equity interest from non-controlling shareholders amounted to
RMB24.20 million (US$3.61 million).
Due to
the cyclical nature of the cash flow inherent in our business, the majority of
cash flow from operations is received during the second half of the calendar
year, which corresponds to the fourth quarter and the subsequent first quarter
of our fiscal year. We use bridge loan financings and bank credit
facilities to cover operating expenses during low-revenue portions of the year,
which generally include July through December. We believe we can generate
sufficient cash flows from operating activities and can access sufficient
borrowing capacity from local banks to satisfy our seasonal liquidity
needs.
The
nature of our business involves cycles in expenses and revenues that are not
always in phase. Most often in the third calendar quarter of each year, we may
face costs that are in excess of our cash flow sources during that period.
Whether that occurs, and to what extent it occurs, depends on the amount of
deposits received from customers compared with the advanced payments made by us
to our seed producing farmers and the final payment for seed procurement. The
exact timing of these payments is determined by the Chinese lunar calendar,
which varies from one calendar year to the next. As a result, in some years our
working capital needs are greater than in others. This aspect of the business is
the reason we have customarily relied upon short term bridge loans to cover our
expenses pending receipt of cash payment from farmers at the time of seed
purchases. We, on a consolidated basis, have had access to sufficient financing
in the past to manage these cash flow cycles. As discussed above, we have
consistently repaid our short-term borrowings at or before
maturity.
Relevant
PRC laws and regulations permit payments of dividends by our PRC Operating
Companies only out of their retained earnings, if any, as determined in
accordance with PRC accounting standards and regulations. In addition, the
statutory general reserve fund requires that annual appropriations of 10% of net
after-tax income be set aside prior to payment of any dividends. As a result of
these and other restrictions under PRC laws and regulations, our PRC Operating
Companies are restricted in their ability to transfer a portion of their net
assets to us either in the form of dividends, loans or advances.
Even
though we currently do not require any such dividends, loans or advances from
our PRC Operating Companies, we may in the future require additional cash
resources from our PRC Operating Companies due to changes in business
conditions, to fund future acquisitions or developments, or merely to declare
and pay dividends or distributions to our shareholders, although we currently
have no intention to do so.
C. Research
and Development, Patents and Licenses, etc.
We focus
our research and development efforts on agro-biotechnology, crop breeding and
the development of new crop seeds. In November 2001, we established a new seed
research and development center in Tongzhou, Beijing, which conducts research
and development of crop commercial breeding. In September 2005, we established
the “Origin Life Science Research Center” in Zhong Guan Cun, Beijing, the
principal activities of which include crop gene engineering, molecular
marker-assisted breeding, and molecular identification. We also have sixteen
breeding stations located in different regions with seven being used for corn,
four for rice, two for cotton, two for canola and one winter nursery for these
different seed products.
We have
established technological cooperative relationships with five universities and
sixteen research institutes in China, including Beijing University, China
Agricultural University, and Chinese Academy of Sciences. We employ 150 full time research
personnel. Our research and development expenditures were $1.66 million,
$3.80 million,
$3.61 million, $4.9 million, and $5.72 million for the nine
months ended
December 31, 2006 and for the fiscal year ended September 30, 2007,
September 30,
2008, September 30, 2009 and September 30, 2010, respectively. Our
continued increase in our research and
development spending is a result of the further efforts in the research and
development of self-developed seed rights and biotechnology traits both through
joint development and in-house efforts.
D. Trend
Information.
Other
than as disclosed elsewhere in this Annual Report, we are not aware of any
trends, uncertainties, demands, commitments or events for the period from
October 1, 2009 to September 30, 2010 that are reasonably likely to have a
material effect on our net revenues, income, profitability, liquidity or capital
resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial conditions, or
that had the trends relating to the current-year increases in expenses and
reduction in revenues and profits.
E. Off-balance
Sheet Arrangements.
We do not
have any off-balance sheet guarantees, interest rate swap transactions or
foreign currency forward contracts or outstanding derivative financial
instruments. We do not engage in trading activities involving non-exchange
traded contracts.
F. Tabular
Disclosure of Commitments and Contingencies.
We have
various contractual obligations that will affect our liquidity. The
following table sets forth our contractual obligations as of September 30,
2010.
|
|
|
|
|
Payments due by September 30,
|
|
|
|
|
|
|
Within
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligations
|
|
|
15,479 |
|
|
|
2,655 |
|
|
|
1,688 |
|
|
|
2,113 |
|
|
|
1,520 |
|
|
|
1,513 |
|
|
|
5,993 |
|
Capital
Commitments (1)
|
|
|
16,823 |
|
|
|
16,823 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Purchase
Obligations (2)
|
|
|
27,083 |
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
2,083 |
|
Short-Term
Debt Obligations (3)
|
|
|
85,900 |
|
|
|
85,900 |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
145,285 |
|
|
|
110,378 |
|
|
|
6,688 |
|
|
|
7,113 |
|
|
|
6,520 |
|
|
|
6,513 |
|
|
|
8,076 |
|
|
(1)
|
Includes capital commitments for
purchase of plant, building construction, equipment, land use rights and
technology use rights.
|
|
(2)
|
On
March 6, 2006, Changrong entered into a contract with the Corn Research
Institution of Jilin Academy of Agricultural Science to pay RMB5 million
every year from 2006 to 2016 for R&D activities on behalf of
Changrong.
|
|
(3)
|
Represents
short term loans from China Construction Bank, Shangdi Branch, and
Agricultural Bank Of China Linze
Branch.
|
We
identified the existence of potential contingent tax liabilities arising from
our reverse merger in November 2005. We determined that these contingent tax
liabilities were more likely than not. As of December 31, 2005, we estimate such
contingent tax liabilities to be in the range of RMB39.06 million (US$4.84
million) to RMB64.22 million (US$7.96 million). Consequently, RMB39.06 million
(US$4.84 million) was included in income tax payable on our balance sheet and
was charged to equity because such liabilities were part of the recapitalization
in connection with our reverse merger. We did not expect to incur tax
liabilities at the higher end of the range based on our annual
assessment.
Last
year, we began a fresh review of the contingent tax position by requesting and
receiving alternate U.S. tax counsel on this matter. On September 23,
2010, the Company filed a revised 2005 tax return to the United States Internal
Revenue Service, or IRS in a way to rectify the previously filed tax return
regarding this tax liability. The IRS has not responded to the tax
filing either directly or with any paperwork as of the date of this filing.
While the timeline for the IRS to question on the tax return is generally
three years, this matter may take a prolonged period of time to
resolve depending on the return time for IRS and the necessity of future appeals
or re-evaluation.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT
AND EMPLOYEES
A.
Directors and Senior Management.
The
following table sets forth certain information regarding our directors and
executive officers as of December 31, 2010.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Gengchen
Han (1)
|
|
55
|
|
Chairman
of the Board
|
Liang
Yuan (2)
|
|
53
|
|
Director,
President and Chief Executive Officer
|
Yasheng
Yang (3)
|
|
48
|
|
Vice
Chairman of the Board
|
Bailiang
Zhang
|
|
69
|
|
Independent
Director
|
James
Kang (4)
|
|
51
|
|
Independent
Director
|
Min
Tang
|
|
57
|
|
Independent
Director
|
Yingqi
Xia (5)
|
|
57
|
|
Independent
Director
|
Michael
W. Trimble
|
|
53
|
|
Independent
Director
|
Remo
Richli
|
|
47
|
|
Independent
Director
|
Irving
Kau (6)
|
|
36
|
|
Acting
Chief Financial Officer
|
1.
|
Dr.
Gengchen Han relinquished his role as co-Chief Executive Officer,
effective January 1, 2009. Dr. Han continues in his
position as Chairman of the Board.
|
2.
|
Liang
Yuan was appointed as sole Chief Executive Officer, effective January 1,
2009.
|
3.
|
Yasheng
Yang resigned his position as Acting Chief Financial Officer effective
January 1, 2010, but continues as Vice Chairman of the
Board.
|
4.
|
James
Kang was appointed to be an independent director, effective January 1,
2010, upon the resignation of Dafang
Huang.
|
5.
|
Yingqia
Xia was appointed to be an independent director, effective January 1,
2010, upon the resignation of Seven
Urbach.
|
6.
|
Irving
Kau was appointed to be Acting Chief Financial Officer, effective January
1, 2010.
|
Gengchen
Han is the Chairman of the Board of Origin and Co-Chairman
of the Origin Strategic Advisory Committee. Dr. Han is also the Executive
Chairman of Beijing Origin and its affiliated companies, a position that he has
held since founding the business in 1997. Dr. Han was the Co-Chief
Executive Officer and Chief Executive Officer of the company from
its inception in 1997 until January 1, 2009. Dr. Han has more than 20
years of experience in research and development of hybrid seed products,
particularly corn seed. From 1982 until 1984, Dr. Han was a lecturer at the
Henan Agriculture University. From 1984 to 1987, Dr. Han received his Ph.D.
degree in Plant Breeding and Cytogenics from Iowa State University.
From 1989 until 1990 he worked for the International Maize and Wheat
Improvement Center, or CIMMYT, in Mexico. He worked for Pioneer Hi-bred
International from 1990 to 1996; his positions there included
Regional Technical Coordinator for Asia/Pacific and Regional
Supervisor for China Business.
Liang
Yuan is a director, President, and Chief Executive Officer of
Origin. Mr. Yuan previously served as Executive Vice Chairman of Origin from
2005 to 2007 and was Co-Chief Executive Officer from 2007 to December 31, 2008.
He has been an executive officer of Beijing Origin and its affiliated companies
since 1997, where he has been principally responsible for infrastructure and
public relations. Prior to joining Beijing Origin, Mr. Yuan was at
the Fujian Economic Research Institute from 1985 to 1997, where he was
in charge of the research and development of the regional economy in Fujian
province.
Yasheng
Yang is Vice Chairman of the Board. Mr. Yang previously served
as President, Vice Chairman, and Chief Operating Officer of Origin from 2005 to
2007. He is also an executive officer of each of our PRC Operating Companies
since 1998, where he is principally responsible for advertising and marketing,
and serves as President of BioCentury Transgene. Prior to joining Beijing
Origin, from 1995 to 1997, he worked in the Fujian province
government as an officer, where he specialized in the areas of technology,
medicine and education.
Bailiang
Zhang has been a director of Origin since November 2005. Mr. Zhang
has been a professor at Henan Agriculture University since 1985, and
he served as president from 1994 to 2003. He is also a representative of the
National People’s Congress. As a result of his work in the field of agriculture,
he has received numerous honors, including the 51 Labor Medal, one of the
highest awards given to Chinese citizens in recognition of significant
contributions to the welfare of the country.
Dr. Min
Tang has been a director of Origin since January
2009. Dr. Tang is currently the Founder, President, and Chief
Executive Officer of You Cheng, a social development and entrepreneurship
education initiative. Previously, Dr. Tang sat as the Deputy
Secretary of the China Development Research Foundation in charge
of financial reform, energy conservation, and social development for the
Development Research Center reporting to the State Council
of China. Previous to his position as the Deputy Secretary of
the foundation, Dr. Tang worked in Asia Development Bank for 18
years. From 2000-2007, he was the Chief
Economist of Asian Development Bank Resident Mission in China. Prior
to this, Dr. Tang received his masters and PhD. degree in Economics
from University of Illinois at Urbana Champaign, USA.
Michael W.
Trimble has been a director of Origin since May 2006. Dr. Trimble is
the founder of Trimble Genetics International LLC, or Trimble Genetics, and has
been the President of Trimble Genetics since 2001. Trimble Genetics is a plant
genetics research company that has expanded business and research relationships
to include activities in North America, South America, Asia, Europe,
the Middle East and Africa. Dr. Trimble is a leader in plant genetics
research with over thirty years of experience in crop breeding and the
agricultural seed industry. Dr. Trimble is an inventor of numerous patents
in the field of plant genetics. Dr. Trimble graduated with a Ph.D. degree from
the University of Minnesota and also completed graduate programs
at Purdue University and Iowa State University.
Remo
Richli has been a director of Origin since November 2005. He is a
Partner of Bridgelink AG, an international mergers and
acquisitions firm headquartered in Switzerland. His activities include the
acquisition and divestiture of companies as well as raising funds,
including private equity deals. He previously worked in the United States
as a financial expert at RP Associates in San Diego, a venture capital firm
focusing on corporate finance and financial structures. During his time with RP
Associates, Mr. Richli also served as chief financial officer of one
of its portfolio companies. From 1993 to 1999, Mr. Richli owned a
consulting firm engaged in corporate finance consultancy for mid-sized companies
and acted as the Chief Executive Officer of client companies on a consulting
basis. From 1991 to 1993, he was a director at the Department of Finance in
Switzerland. Mr. Richli also serves as a member of the board of directors of
A-Power Energy Generation Systems, a provider of distributed power generation
systems that is traded on the NASDAQ stock exchange. He studied in Switzerland
and in the United States and holds several degrees in Business and
Economics.
Dr. Yingqi
Xia has been a director of Origin since January 2010. Dr. Xia sits
as the Chairman of Beijing Expert Association, Previous to his position; Dr. Xia
worked as the Executive Deputy Director of Zhong Guan Cun Science
Park, the largest high-tech zone in China. as the Division Chief for
the World Bank Department in the Ministry of Finance in the
People’s Republic of China and in the Chinese Embassy to the United States.
Prior to this, Dr. Xia received his PhD. degree from University of Ottawa,
Canada.
Dr.
James Kang has been a
director of Origin since January 2010. Dr. Kang is a Professor
and Distinguished University Scholar in the Department
of Pharmacology and Toxicology at the University Of Louisville
School Of Medicine as well as a National One-Thousand Talents
Theme Professor and the Director of Regenerative Medicine Research Center
at Sichuan University West China Hospital in China. Dr. Kang has also
been serving as the President and CEO of InnoRem, Inc. and the President of
International Organization of Life Science and Biotechnology. Prior to this, Dr.
Kang received his PhD. Degree from Iowa State University and completed his
postdoctoral fellow training at Cornell University Medical College in
New York.
Mr. Irving H.
Kau has been Acting Chief Financial Officer of Origin
since January 2010. Mr. Kau has worked as Vice President of Finance for
Origin Agritech for the last four years, and previously worked with
Chardan Capital, Merriman Curhan Ford, and Strategic Growth Incorporated, where
he held senior management positions in invested portfolio companies.
He also completed course work at University of Southern
California towards a PhD. in Business Strategy. He has a
background in both finance and genetics while publishing several peer reviewed
academic papers. Mr. Kau received undergraduate degrees from Johns Hopkins
University and a graduate degree from Rice University, where he
received the Jones Partners Scholarship (merit-based) to attend.
B. Compensation.
The
aggregate cash compensation paid to our directors and executive officers as a
group was RMB 3.20 million (US$0.47 million) for the twelve months ended
September 30, 2010. Options Granted are stated in the chart
found below.
2005
Performance Equity Plan
A portion
of our outstanding options are granted under the 2005 Performance Equity Plan.
We adopted the Plan in November 2005, under which we could issue share options
with the right to purchase up to 1,500,000 ordinary shares to our directors,
officers, employees, individual consultants and advisors. We had outstanding
option awards and outstanding grants for 360,567ordinary shares under the Plan
at September 30, 2010. These values were subject to the adjustment as
of September 14, 2009 whereby grantees were allowed the right to exchange
existing options for options with the exercise price of $4.00/share or
restricted shares grants at no additional expense to the
company. While we granted no options under the Plan with the right to
purchase in fiscal year 2009, options granted to our officers and directors
remain in both the pools for the options granted in 2005 and 2008, as shown by
the aggregate table below.
2009
Performance Equity Plan
On April
22, 2010, our company adopted the 2009 Performance Equity Plan, under which we
are able to issue share options with the right to purchase up to 1,500,000
ordinary shares to our directors, officers, employees, individual consultants
and advisor. The main purpose of the plan was to provide an existing
structure and renewable benefit plan for senior management and
directors. We had outstanding option awards for 125,000 ordinary
shares under the Plan at September 30, 2010.
Name
|
|
Ordinary
Shares
Underlying
Outstanding
Option
|
|
|
Exercise
Price
|
|
Grant Date
|
|
Expiration Date
|
Gengchen
Han
|
|
|
34,500
|
|
|
$4.00/Share
|
|
November
8, 2005
|
|
November
8, 2010
|
|
|
|
20,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Liang
Yuan
|
|
|
13,800
|
|
|
$4.00/Share
|
|
November
8, 2005
|
|
November
8, 2010
|
|
|
|
20,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Yasheng
Yang
|
|
|
27,600
|
|
|
$4.00/Share
|
|
November
8, 2005
|
|
November
8, 2010
|
|
|
|
5,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Remo
Richli
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
$5.30/Share
|
|
March
28, 2008
|
|
March
27, 2013
|
|
|
|
5,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Bailiang
Zhang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
$5.30/Share
|
|
March
28, 2008
|
|
March
27, 2013
|
|
|
|
5,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Michael
Trimble
|
|
|
25,000
|
|
|
$5.30/Share
|
|
March
28, 2008
|
|
March
27, 2013
|
|
|
|
5,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Min
Tang
|
|
|
10,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Yingqi
Xia
|
|
|
5,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Y.
James Kang
|
|
|
5,000
|
|
|
$12.23/Share
|
|
January
4, 2010
|
|
January
3, 2015
|
Steven
Urbach
|
|
|
6,900
|
|
|
$4.00/Share
|
|
November
8, 2010
|
|
November 8,
2010
|
C.
Board
Practices.
Terms
of directors and executive officers
Our
directors are not subject to a term of office and hold office until the next
annual meeting of shareholders or until such director’s earlier resignation,
removal from office, death or incapacity. Any vacancy on the board of directors
resulting from death, resignation, removal or other cause and any newly created
directorship resulting from any increase in the authorized number of directors
between meetings of shareholders may be filled either by the affirmative vote of
a majority of all the directors then in office (even if less than a quorum) or
by a resolution of shareholders.
Our
officers are appointed by the board of directors and hold office until their
successors are duly elected and qualified, but may be removed at any time, with
or without cause, by resolution of directors. Any vacancy occurring in any
office may be filled by resolution of directors.
Employment
Agreements
Each of
Dr. Hanand Messrs. Yuan have entered into employment agreements with us. The
agreements have a term of three years commencing as of January 1, 2009. The
executives are entitled to insurance benefits, five weeks’ vacation, a car and
reimbursement of business expenses and, if necessary, relocation expenses. The
agreements are terminable by Origin for death, disability and cause. The
executive may terminate for good reason, which includes Origin’s breach, the
executive’s loss of his seat on the board of directors, and change of control.
In the event of termination for good reason or without cause, the executive will
receive compensation and benefits under his or her employment agreement through
the earlier of two years from the date of termination or through the term of the
agreement. The agreements contain provisions for the protection of confidential
information and a three-year non-competition period within China. In the
purchase agreement, there is an additional non-competition agreement applicable
to these persons for the greater of five years after consummation or two years
after employment that includes Hong Kong and Taiwan, in addition to
China.
Board
committees
Our board
of directors has established an Audit Committee, a Compensation Committee and a
Nominations Committee.
Audit Committee
The
members of our Audit Committee are Remo Richli (chairman), Yingqi Xia, and Min
Tang. Our board of directors has determined that all of our Audit
Committee members are independent directors within the meaning of Nasdaq
Marketplace Rule 4200(a)(15) and meet the criteria for independence set forth in
Rule 10A-3(b)(1) of the Securities Exchange Act of 1934.
The board
of directors has determined that each of Messrs. Remo Richli, Yingqi Xia, and
Min Tang has an understanding of generally accepted accounting principles and
financial statements, the ability to assess the general application of such
principles in connection with our financial statements, including estimates,
accruals and reserves, experience in analyzing or evaluating financial
statements of similar breadth and complexity as our financial statements, an
understanding of internal controls and procedures for financial reporting and an
understanding of Audit Committee functions.
The board
of directors believes that Mr. Richli qualifies as an “audit committee financial
expert” within the meaning of all applicable rules. The board of directors
believes that Mr. Richli has financial expertise from his degrees in business,
his activities as a chief executive officer and chief financial officer of
various companies, and his consulting activities in the areas of accounting,
corporate finance, capital formation and corporate financial
analysis.
We
adopted an Audit Committee charter, amended by the board of directors at the
board meeting held on August 16, 2007, under which the Audit Committee is
responsible for reviewing the scope, planning and staffing of the audit and
preparation of our financial statements. This includes consultation with
management, the auditors and other consultants and professionals involved in the
preparation of the financial statements and reports. The Audit Committee is
responsible for performing oversight of our relationship with our independent
auditor. The Audit Committee also has a general compliance oversight role in
assuring that our directors, officers and management comply with our code of
ethics, reviews and approves related party transactions, deals with complaints
regarding accounting, internal controls and auditing matters, and oversees
compliance with accounting and legal requirements applicable to us.
Pursuant
to the terms of its charter, as amended, the Audit Committee’s responsibilities
include, among other things:
|
¨
|
annually reviewing and
reassessing the adequacy of the Audit Committee’s formal
charter;
|
|
¨
|
reviewing our annual audited
financial statements with our management and our independent auditors and
the adequacy of our internal accounting
controls;
|
|
¨
|
reviewing analyses prepared by
management and independent auditors concerning significant financial
reporting issues and judgments made in connection with the preparation of
our financial statements;
|
|
¨
|
the engagement of the independent
auditor;
|
|
¨
|
reviewing the independence of the
independent auditors;
|
|
¨
|
reviewing our auditing and
accounting principles and practices with the independent auditors and
reviewing major changes to our auditing and accounting principles and
practices as suggested by the independent auditor or our
management;
|
|
¨
|
the appointment of the
independent auditor;
|
|
¨
|
approving professional services
provided by the independent auditors, including the range of audit and
non-audit fees; and
|
|
¨
|
reviewing all related party
transactions on an ongoing basis for potential conflicts of
interest.
|
The Audit
Committee makes pre-approval of the services to be provided by our independent
auditors. The Audit Committee also reviews and recommends to the board of
directors whether or not to approve transactions between us and any officer or
director that occurs outside the ordinary course of business.
Compensation
Committee
The
members of our Compensation Committee are Michael W. Trimble
(chairman), James Kang, and Min Tang. The Compensation Committee also
administers our stock option plan, including the authority to make and modify
awards under the 2005 and 2009 Performance Equity Plans. The current
charter of the Compensation Committee, which was adopted March 16, 2007,
provides that the committee is responsible for:
|
¨
|
reviewing and making
recommendations to our board of directors regarding our compensation
policies and forms of compensation provided to our directors, officers and
other senior employees;
|
|
¨
|
reviewing and determining
performance-based awards and compensation for our officers and other
employees;
|
|
¨
|
reviewing and determining
share-based compensation (including the 2005 and 2009 Performance Equity
Plan) for our directors, officers, employees and
consultants;
|
|
¨
|
administering our equity
incentive plans (including the 2005 and 2009 Performance Equity Plan) in
accordance with the terms thereof;
and
|
|
¨
|
such other matters that are
specifically delegated to the Compensation Committee by our board of
directors from time to time.
|
Nominating
Committee
Our
Nominating Committee consists of Min Tang, Remo Richli and Michael W.
Trimble. The Nominating Committee is responsible for overseeing the
selection of persons to be nominated to serve on our board of directors. The
Nominating Committee will identify, evaluate and recommend candidates to become
members of the Board of Directors with the goal of creating a balance of
knowledge and experience. The Nominating Committee is not a fully
independent committee.
Pursuant
to a vote by the board of directors taken at a board meeting held March 16,
2007, the Nominating Committee charter was amended. Pursuant to the terms of its
charter, as amended, the Nominating Committee’s responsibilities include, among
other things:
|
¨
|
actively seeking and evaluating
qualified individuals to become new directors as
needed;
|
|
¨
|
reviewing current directors’
suitability when their terms expire or one has a significant change in
status;
|
|
¨
|
making recommendations with
respect to succession planning for the co-chief executive officer and
other officers; and
|
|
¨
|
such other matters that are
specifically delegated to the Nominating Committee by our board of
directors from time to time.
|
Summary
of Significant Differences in Corporate Governance Practices for Purposes of
Rule 5615 of theNASDAQ Marketplace Rules
We are
incorporated under the laws of the British Virgin Islands. Our ordinary shares
are registered with the SEC and are listed on the NASDAQ Global Select Market.
As a result, our corporate governance framework is subject to laws of the
British Virgin Islands, or BVI, and the securities laws and regulations of the
United States.
Under
Rule 5615 of the Nasdaq Marketplace Rules, a foreign private issuer may follow
its home country practice in lieu of the requirements of the Nasdaq Marketplace
Rules. Rule 5605 requires U.S. domestic listed companies have a majority of
independent directors on its board of directors. We are not required to have a
majority of independent directors on our board of directors under BVI laws.
However, currently, five of our nine directors are independent directors under
applicable NASDAQ rules.
Under
Rule 5605 a U.S. domestic listed company is required to have a nominations
committee and compensation committee. We are not required to have
such committees under the BVI laws, however, we do have these two committees,
and follow the Nasdaq Marketplace rules in the independence
requirements.
Under
Rule 5620, a U.S. domestic issuer must solicit proxies and provide proxy
statements for all meetings of shareholders. There are no such mandatory
requirements under BVI laws. There were no specific items that our board of
directors requested the shareholders to vote on. We held a shareholders meeting
on September 17, 2010, for which we did not provide proxy
statements.
Under
Rule 5635, a US domestic listed company is required to obtain shareholder
approval of equity award plans and issuances of equity securities in excess of
certain amounts when at less than market or book value. There are no
such mandatory requirements under BVI law. We do not plan to get
shareholder approval for future increases in the 2005 Plan or any other equity
award plan approved by the directors in the future or for issuances of equity
securities that exceed 20% of the outstanding shares of the company if they are
sold at less than market or book value.
D. Employees.
We had
938, 874 and 974 employees as of December 31, 2008, 2009 and 2010,
respectively. We plan to hire additional employees as we expand. Substantially
all of our employees are located in China. The following table sets forth the
number of our employees categorized by our areas of operations and as a
percentage of our workforce as of December 31, 2010:
Areas of Operations
|
|
Number of
Employees
|
|
|
Percentage of
Total
|
|
Research
and Development
|
|
|
150
|
|
|
|
15.4
|
%
|
Sales
and Marketing
|
|
|
272
|
|
|
|
27.93
|
%
|
Production
|
|
|
247
|
|
|
|
25.36
|
%
|
Quality
Control
|
|
|
64
|
|
|
|
6.57
|
%
|
Others
|
|
|
241
|
|
|
|
24.74
|
%
|
Total
|
|
|
974
|
|
|
|
100.00
|
%
|
From time
to time, we also employ part-time employees, including independent contractors
to support our research and development and production activities, and other
temporary employees. During the fiscal year ended September 30, 2010, we had an
aggregate of 36 temporary employees.
We offer
our employees additional annual merit-based bonuses based on the overall
performance of our company, his or her department and the individual. We are
required by applicable PRC regulations to contribute amounts equal to 28%,
12%,24%, 1.2%, 0.8% and 0.8%, of our employees’ aggregate salary to a pension
contribution plan, a medical insurance plan, a housing fund, an unemployment
insurance plan, a personal injury insurance plan and a maternity insurance plan,
respectively, for our employees.
Our
employees are not covered by any collective bargaining agreement. We believe
that we have a good relationship with our employees.
E. Share
ownership.
The
following table sets forth information with respect to the beneficial ownership
of our ordinary shares as of December 31, 2010, by:
|
¨
|
each of our directors and
executive officers who beneficially own our ordinary shares;
and
|
|
¨
|
each person known to us to own
beneficially more than 5% of our ordinary
shares.
|
|
|
Shares Beneficially Owned
( * )
|
|
|
|
Number
|
|
|
Percentage of
Total
|
|
Directors
and Executive Officers:
|
|
|
|
|
|
|
Gengchen
Han
Chairman of the Board
(1) (2)
|
|
|
3,336,400
|
|
|
|
14.0
|
%
|
Liang
Yuan
Chief Executive Officer,
Director (1) (3)
|
|
|
3,336,400
|
|
|
|
14.0
|
%
|
Yasheng
Yang
Vice Chairman of the Board and
Director (1) (4)
|
|
|
1,136,980
|
|
|
|
4.8
|
%
|
Michael
W. Trimble
Director
(5)
|
|
|
9,332
|
|
|
|
0.03
|
%
|
Principal
Shareholders:
|
|
|
|
|
|
|
|
|
Fidelity
Investments (FMR, Inc.)
|
|
|
3,452,053
|
|
|
|
14.51
|
%
|
Guggenheim
Capital and Fund
|
|
|
1,900,143
|
|
|
|
7.99
|
%
|
Prescott
Group Capital Management
|
|
|
860,791
|
|
|
|
3.61
|
%
|
*
Beneficial ownership and percentage is determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended.
|
(1)
|
Unless otherwise indicated, the
business address of each of the individuals is c/o 21 Shengmingyuan Road,
Changping District, Beijing PRC 102206. See Item
6B. “Directors, Senior Management, and Employees –
Compensation” for discussion of option included in the table granted under
the 2005 and 2009 Performance Equity
Plan.
|
|
(2)
|
The shares reported in the above
table are held by Dr. Han through a personal holding company, Sinodream
Limited, a company formed under the laws of the British Virgin Islands of
which he is the sole shareholder, officer and director. Therefore, Dr. Han
will have voting and dispositive authority over all the shares. Excludes
54,500 shares that may be acquired under exercisable stock
options.
|
|
(3)
|
The shares reported in the above
table are held by Mr. Yuan through a personal holding company, Bonasmart
Limited, a company formed under the laws of the British Virgin Islands of
which he is the sole shareholder, officer and director. Therefore, Mr.
Yuan will have voting and dispositive authority over all the
shares. Excludes 33,800 shares that may be acquired under
exercisable stock options.
|
|
(4)
|
The shares reported in the above
table are held by Mr. Yang through a personal holding company, Leekdon
Limited, a company formed under the laws of the British Virgin Islands of
which he is the sole shareholder, officer and director. Therefore, Mr.
Yang will have voting and dispositive authority over all the
shares. Excludes 32,600 shares that may be acquired under
exercisable stock options.
|
|
(5)
|
The business address of Mr.
Trimble is 6159 Brandywine Drive, Johnston, IA 50131. Excludes 30,000
shares that may be acquired under exercisable stock
options.
|
None of
the above shareholders have voting rights that differ from the voting rights of
other shareholders.
ITEM 7. MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS
A. Major
shareholders.
Please
refer to Item 6.E “Directors, Senior Management and Employees — Share
Ownership.”
B. Related
party transactions.
Stock
Consignment Agreements
In order
to comply with PRC regulations, we operate our business in China through our PRC
Operating companies. We have entered into stock consignment agreements with our
PRC Operating Companies other than Origin Biotechnology. The following is a
summary of the material provisions of these agreements, which are also discussed
under Item 4.C of this Annual Report.
The stock
consignment agreements give the consignee corporation, State Harvest, control
over the shares of the three PRC Operating Companies. The agreements
give State Harvest the right to manage in all respects the shares held in title
by the shareholders, including all shareholder rights to call meetings of
shareholders, to submit shareholder proposals, to elect directors, to vote the
shares on all matters and to exercise all other rights of a shareholder in
respect of the consigned shares. More specifically, the consignment agreements
give State Harvest the right to select, replace and increase the number of the
directors, supervisors and recommend new director and supervisor persons, and to
exercise management rights, controlling rights and decision-making power over
the shares of the PRC Operating Companies. The shareholders agreed not to
interfere with State Harvest’s exercise of its rights and to cooperate fully and
promptly to permit State Harvest to exercise its authority over the consigned
shares. This includes all limitations on the ability of each consignee to
transfer or dispose of the shares other than to State Harvest, give guarantees
using the shares, consign the shares to another, alter their ownership
proportions in any way, dispose of any rights in the ownership of the shares,
agree to any debt, waive rights or restructure the shares. State Harvest has the
right to take all action in respect of the consigned shares to avoid any damage
or infringement of its rights, including in the event of the consigning
shareholder’s bankruptcy. State Harvest, under the consignment agreements, has
all rights in the consigned shares, including rights to profits, interest,
dividends, bonuses and residual assets. If in the future any stock subject to
the consignment agreements can be legally transferred to State Harvest, then
without further action or payment by State Harvest, it shall be transferred to
State Harvest in whole or in part for no additional consideration to the
consigning shareholder. The term of each consignment agreement is initially
three years, but is automatically renewed indefinitely until both consigners and
the consignee agree to terminate. For more information about the stock
consignment agreements, See Item 8.01 “Other Events” of our Form 8-K filed with
the Securities and Exchange Commission on August 8, 2005. Shares in
the PRC operating companies are pledged under these stock consignment
agreements.
Technical
Service Agreements
As part
of the reorganization of our PRC Operating Companies, all of the intellectual
property rights of Beijing Origin, Changchun Origin and Henan Origin have been
and will continue to be transferred to Origin Biotechnology pursuant to
technology service agreements dated December 25, 2004. The purpose of this was
to permit the better management and licensing of the intellectual property that
the three assignors have developed. Under the technology service agreements,
Origin Biotechnology will provide technical research and production and
distribution services for the seeds produced by the group. These services will
include support in the research and development of agricultural seeds, analysis
of breeding technologies, environment and feasibility suggestions, technical
tutorials and breeding field supervision, market analysis and seed promotion,
insect prevention and technical education to distributors and farmers. The
initial term is for three years, but the agreements are automatically renewed
unless both parties agree to a termination. The fees payable under the
agreements are variable, depending on differing formulae for different
categories of seeds. Generally, the fees will be as follows: RMB1.2 Yuan per
kilogram of corn sold by the party receiving the technical services; RMB6 Yuan
per kilogram of rice sold by the party receiving the technical service and RMB12
Yuan per kilogram of cotton sold by the party receiving the technical services.
The fees are to be confirmed and paid at the end of each growing season and only
charged fees on the sales related to the seed rights owned by Origin
Biotechnology.
Corn
Originator Agreement
Beijing
Origin entered into this agreement with Trimble Genetics International LLC, or
Trimble Genetics, a plant genetics research company. Michael W. Trimble, one of
our directors, is the founder and president of Trimble Genetics and currently
owns 100% of its equity interest. Under this agreement, Beijing Origin hires
Trimble Genetics as its agent to test, promote, license and collect research
fees on hybrids involving inbred lines of corn developed by Beijing Origin.
Trimble Genetics retains fifty percent of such research fees and pays the
remaining fifty percent to Beijing Origin. This agreement is immaterial in
amount or significance.
Corn
Inbred License Agreement
Beijing
Origin entered into this agreement with Trimble Genetics on August 26, 2002.
Under this agreement Trimble Genetics grants a non-exclusive license to Beijing
Origin to use, maintain or increase certain corn inbred lines, or inbreds.
Beijing Origin may, subject to express prior written approval of Trimble
Genetics, allow any person or entity to use, maintain or increase the inbreds.
Beijing Origin agrees to pay Trimble Genetics annual research fees on or before
August 31. Research fees payable under this agreement for each inbred is based
on a percentage of the full retail price. This agreement is immaterial in amount
or significance. Up to the date of this Annual Report, we have not made any
payment or incurred any payment liability to Trimble Genetics under this
agreement. Beijing Origin and Trimble Genetics approved an addendum on February
24, 2003 in connection with the provision of sweet corn inbreds and hybrids by
Trimble Genetics to Beijing Origin for production and marketing in
China.
Corn
Inbred and Hybrid Transfer and Use Agreement
Beijing
Origin entered into this agreement with Trimble Genetics on September 6, 2002.
Under this agreement, Trimble Genetics provides corn inbreds and hybrids to
Beijing Origin for experimental testing purposes. The agreement applies to all
corn inbreds and hybrids transferred from Trimble Genetics to Beijing Origin
previously, currently or in the future. If a hybrid from the testing proves to
be marketable, the parties will negotiate a license agreement. If for any
reason, it is not possible to conclude a license agreement, Beijing Origin
agrees to return all remnant inbred seed and to destroy any inbreds or hybrids
that may have originated from the material provided by Trimble
Genetics. Up to the date of this Annual Report, we have not made any
payment or incurred any payment liability to Trimble Genetics under this
agreement.
New
Corn Seed Liyu 35 Joint Development Agreement
Beijing
Origin entered into three Joint Development agreements with Liyu on March 30,
2006 to jointly develop a new hybrid corn seed, Liyu 35. The proprietary right
to the seed developed under this agreement belongs to Liyu but Beijing Origin
has exclusive production and marketing rights to this variety of seed. The
agreement has no fixed term or termination date, but the agreement automatically
terminates if the seeds produced by Beijing Origin are less than 3 million
kilograms for three consecutive years, subject to limited exceptions. The fees
payable by Beijing Origin represent a percentage of revenues from the sale of
the varieties and plus a flat fee.
Joint
Development Agreements
Beijing
Origin is a party to three joint development agreements with Corn Research
Institute of Li County in Hebei Province, China, to develop new hybrid corn
seeds. Corn Research Institute of Li County was incorporated as Liyu on May
2004, of which a 30% equity interest was owned by Yang Yasheng, one of our major
shareholders and directors. Yang Yasheng transferred his 30% interest to Beijing
Origin on September 2004. On March 11, 2004, Corn Research Institute of Li
County, Liyu and Beijing Origin entered into an agreement pursuant to which all
the rights and obligations of Corn Research Institute of Li County under the
three joint development agreements were assumed by Liyu after the dissolution of
Corn Research Institute of Li County. In accordance with these joint development
agreements, the parties agreed to jointly develop six varieties of new corn
hybrid seeds, Liyu 26, Liyu 16, Liyu 6, Liyu 15, Li 168, and Liyu 35. The
proprietary rights to the varieties of seeds developed under these agreements
belongs to Corn Research Institute of Li County, now Liyu but Beijing Origin has
exclusive right to production and marketing of these seeds. The fees payable by
Beijing Origin represent a percentage of revenues from the sale of the
varieties, and plus a flat fee with respect to Liyu 26 and Liyu 16. The
agreements have no fixed term or termination date. The agreements may be
terminated for breach by either party. We may terminate the agreements at any
time, in effect, by not producing seeds, without penalty.
Technology
Transfer Agreement
Beijing
Origin, or its predecessor, entered into this agreement with Henan Agriculture
University in 1998. Henan Agriculture University currently owns a 2.04% equity
interest in Beijing Origin. Under this agreement, the proprietary right to the
new variety of seed, Yuyu 22, belongs to Henan Agriculture University. Beijing
Origin has the right to propagate, produce and sell the new corn variety. The
fee payable under this agreement is RMB20 per mu (unit of area equivalent to
0.164 of an acre) of seed production area per year. There is no fixed term or
termination date of this agreement.
C. Interests
of experts and counsel.
Not
applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated
statements and other financial information.
We have
appended consolidated financial statements filed as part of this Annual Report.
See Item 18 “Financial Statements.”
Legal
Proceedings
In 2008,
a supplier lodged a legal lawsuit against Beijing Origin with a claim of
RMB5,730. The lawsuit was the dispute of ownership of the technology right for a
licensed seed which Beijing Origin purchased from this supplier. The court
concluded the lawsuit in favour of Beijing Origin. However, during 2010 the
plaintiff lodged an appeal to the court. The Company believes that the lawsuit
has no merit and considers the loss on the litigation is not
probable.
Dividend
Policy
We have
never declared or paid any dividends, nor do we have any present plan to pay any
cash dividends on our ordinary shares in the foreseeable future. We currently
intend to retain most, if not all, of our available funds and any future
earnings to operate and expand our business.
Our board
of directors may by resolution authorize payment of dividends if the directors
are satisfied, on reasonable grounds, that Origin will, immediately after the
distribution of dividends, satisfy the solvency test as stipulated in Section 56
of the BVI Business Companies Act and any of our applicable contractual
obligations. Even if our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem
relevant.
B. Significant
changes.
On
December 15, 2009, Beijing Origin acquired an additional 10% stake in Jilin
Changrong for RMB 24.00 million (US $3.58 million) bringing Beijing Origin’s
total direct ownership to 53.95% and our combined direct and indirect ownership
to 61.66%.
On April
22, 2010, our company adopted the 2009 Performance Equity Plan, under which we
are able to issue share options with the right to purchase up to 1,500,000
ordinary shares to our directors, officers, employees, individual consultants
and advisor. The main purpose of the plan was to provide an existing
structure and renewable benefit plan for senior management and
directors.
On May
27, 2010, Beijing Origin divested a 34% interest in Biocentury, a leading
company engaged in GM cotton research, seed production, and marketing in China,
for RMB60.0 million (US$8.95 million).
On June
12, 2010, Origin Biotechnology acquired 80% of the equity interest in Kunfeng
for RMB14,960. The financial statements of Kunfeng have been consolidated into
Agritech since that date. Kunfeng is engaged in production of agricultural
chemical producer in Shandong, PRC.
ITEM
9. THE OFFER AND LISTING
A. Offering
and listing details.
Our
ordinary shares traded on the OTC BB under the symbol CAQC as the common stock
of our predecessor, Chardan until November 8, 2005, when Chardan merged with
Origin for the purpose of redomestication out of the United States. On November
8, 2005, Origin’s ordinary shares were approved to be listed on the then Nasdaq
National Market under the ticker symbol of SEED. On June 26, 2007, Origin’s
ordinary shares were approved for listing on the NASDAQ Global Select Market,
where they continue to trade under the SEED ticker symbol.
The
following table provides the historical high and low trading prices for Origin’s
ordinary shares for the periods indicated below.
|
|
The OTCBB Price
per Common Stock
|
|
|
The OTCBB
Price per
Warrant
|
|
|
The OTCBB
Price per Unit
|
|
|
Nasdaq (2)
Price per Share
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Annual
Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
2005 (from November 8, 2005)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
13.80
|
|
|
|
8.75
|
|
Transition
period from January 1, 2006 through September 30, 2006)(1)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
18.35
|
|
|
|
9.31
|
|
Year
2007 (until September 30, 2007)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
15.12
|
|
|
|
6.54
|
|
Year
2008 (until September 30 2008)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
14.99
|
|
|
|
4.32
|
|
Year
2009 (until September 30 2009)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.46
|
|
|
|
1.70
|
|
Year
2010 (until September 30, 2010)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
15.02
|
|
|
|
4.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter 2008 ended December 31, 2007
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
14.99
|
|
|
|
5.23
|
|
Second
Quarter 2008 ended March 31, 2008
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
12.09
|
|
|
|
4.50
|
|
Third
Quarter 2008 ended June 30, 2008
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
7.65
|
|
|
|
5.10
|
|
Fourth
Quarter 2008 ended September 30, 2008
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.17
|
|
|
|
4.32
|
|
|
|
The OTCBB Price
per Common Stock
|
|
|
The OTCBB
Price per
Warrant
|
|
|
The OTCBB
Price per Unit
|
|
|
Nasdaq (2)
Price per Share
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First
Quarter 2009 ended December 31, 2008
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
5.39
|
|
|
|
1.76
|
|
Second
Quarter 2009 ended March 31, 2009
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3.52
|
|
|
|
1.70
|
|
Third
Quarter 2009 ended June 30, 2009
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.31
|
|
|
|
2.50
|
|
Fourth
Quarter 2009 ended September 30, 2009
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.46
|
|
|
|
3.75
|
|
First
Quarter 2010 ended December 31, 2009
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
14.57
|
|
|
|
4.40
|
|
Second
Quarter 2010 ended March 31, 2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
15.02
|
|
|
|
8.27
|
|
Third
Quarter 2010, ended June 30, 2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
10.83
|
|
|
|
6.63
|
|
Fourth
Quarter 2010 ended September 30, 2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
9.47
|
|
|
|
6.72
|
|
First
Quarter 2011 ended December 31, 2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
11.45
|
|
|
|
7.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly
Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8.59
|
|
|
|
6.83
|
|
August
2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
9.22
|
|
|
|
7.14
|
|
September 2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8.67
|
|
|
|
7.23
|
|
October
2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
9.35
|
|
|
|
8.01
|
|
November
2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
9.34
|
|
|
|
8.40
|
|
December
2010
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
10.97
|
|
|
|
8.83
|
|
As of
January 7, 2011, our stock price closed at US$10.77 on the Nasdaq Global Select
Market.
B. Plan of
distribution.
Not
applicable.
C. Markets.
See Item
9.A above.
D. Selling
shareholders.
Not
applicable.
E. Dilution.
Not
applicable.
F. Expenses
of the issue.
Not
applicable.
ITEM
10. ADDITIONAL INFORMATION
A. Share
capital.
Not
applicable.
B. Memorandum
and articles of association.
We
incorporate by reference into this Annual Report the description of our amended
and restated memorandum and articles of association contained in our 20-F annual
report, as amended, initially filed with the Commission on July 14,
2006.
C. Material
contracts.
We have
not entered into any material contracts other than in the ordinary course of
business and other than those described in Item 4, “Information on the Company,”
Item 7, “Major Shareholders and Related Party Transactions,” filed (or
incorporated by reference) as exhibits to this Annual Report or otherwise
described or referenced in this Annual Report.
D. Exchange
controls.
British
Virgin Islands
There are
no material exchange controls restrictions on payment of dividends, interest or
other payments to the holders of our ordinary or preferred shares or on the
conduct of our operations in the BVI, where we are incorporated. There are no
material BVI laws that impose any material exchange controls on us or that
affect the payment of dividends, interest or other payments to nonresident
holders of our ordinary or preferred shares. BVI law and our amended and
restated memorandum and articles of association impose no material limitations
on the right of non-residents or foreign owners to hold or vote our ordinary or
preferred shares.
China
China’s
government imposes control over the convertibility of Renminbi into foreign
currencies. Under the current unified floating exchange rate system, the China
Foreign Exchange Transaction Center, authorized by the People’s Bank of China,
publishes a daily exchange rate for Renminbi, or the PBOC Exchange Rate, based
on the weighted average of quotations from all the market makers in the
inter-bank foreign exchange market before open quotation. Financial institutions
authorized to deal in foreign currency may enter into foreign exchange
transactions at exchange rates within an authorized range above or below the
PBOC Exchange Rate according to market conditions.
Pursuant
to the Foreign Exchange Control Regulations issued by the State Council on
January 29, 1996 and effective as of April 1, 1996 (and amended on January 14,
1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange
Regulations which came into effect on July 1, 1996 regarding foreign exchange
control, or the Regulations, conversion of Renminbi into foreign exchange by
foreign investment enterprises for current account items, including the
distribution of dividends and profits to foreign investors of joint ventures, is
permissible upon the proper production of qualified commercial vouchers or legal
documents as required by the Regulations. Foreign investment enterprises are
permitted to remit foreign exchange from their foreign exchange bank account in
China upon the proper production of, inter alia, the board resolutions declaring
the distribution of the dividend and payment of profits. Conversion of Renminbi
into foreign currencies and remittance of foreign currencies for capital account
items, including direct investment, loans, and security investment, is still
subject to the approval of SAFE, or any authorized local branches, or the
Branches, in each such transaction. On January 14, 1997, the State Council
amended the Foreign Exchange Control Regulations and added, among other things,
an important provision as Article 5 which provides that the State shall not
impose restrictions on recurring international payments and transfers under
current accounts.
Under the
Regulations, foreign investment enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other
items). In addition, foreign investment enterprises may only buy, sell and/or
remit foreign currencies at those banks authorized to conduct foreign exchange
business upon the production of valid commercial documents and, in the case of
capital account item transactions, document approval from SAFE or the
Branches.
Currently,
foreign investment enterprises are required to apply to SAFE for “foreign
exchange registration certificates for foreign investment enterprises.” With
such foreign exchange registration certificates (which are granted to foreign
investment enterprises upon fulfilling specified conditions and which are
subject to review and renewal by SAFE or its Branches on an annual basis) or
with the foreign exchange sales notices from SAFE (which are obtained on a
transaction-by-transaction basis), FIEs may open foreign exchange bank accounts
(the advance examination and approval for the opening of foreign exchange
current accounts has been cancelled according to the Notice of SAFE on Adjusting
Policies Concerning the Administration of Foreign Exchange Current Accounts,
which came into effect on May 1, 2006) and enter into foreign exchange
transactions at banks authorized to conduct foreign exchange business to obtain
foreign exchange for their needs.
E. Taxation.
The following is a general summary
of certain material British Virgin Islands and U.S. federal income tax
considerations. The discussion is not intended to be, nor should it be construed as, legal
or tax advice to any particular prospective shareholder. The
discussion is based on laws and relevant interpretations thereof in effect as
of the date hereof, all of which are subject to change or different
interpretations, possibly with retroactive effect. The discussion does not
address United States state or local tax laws, or tax laws of jurisdictions other
than the British Virgin Islands and the United States.
British
Virgin Islands Taxation
The
British Virgin Islands, or BVI, does not impose a withholding tax on dividends
paid by us to holders of our ordinary or preferred shares, nor does the BVI levy
any capital gains or income taxes on us.
Further,
a holder of our ordinary or preferred shares who is not a resident of the BVI is
exempt from the BVI income tax on dividends paid with respect to the ordinary or
preferred shares. Holders of ordinary or preferred shares are not subject to the
BVI income tax on gains realized on the sale or disposition of the ordinary or
preferred shares.
Our
ordinary and preferred shares are not subject to transfer taxes, stamp duties or
similar charges in the BVI. However, as a business company, we are required to
pay the BVI government an annual license fee based on the number of shares we
are authorized to issue.
There is
no income tax treaty or convention currently in effect between the United States
and the BVI.
United
States federal income taxation
This
discussion describes the material U.S. federal income tax consequences of the
purchase, ownership and disposition of our ordinary shares. This discussion does
not address any aspect of U.S. federal gift or estate tax, or the state, local
or foreign tax consequences of an investment in our ordinary shares. This
discussion applies to you only if you hold and beneficially own our ordinary
shares as capital assets for tax purposes. This discussion does not apply to you
if you are a member of a class of holders subject to special rules, such
as:
|
¨
|
dealers
in securities or currencies;
|
|
¨
|
traders
in securities that elect to use a mark-to-market method of accounting for
securities holdings;
|
|
¨
|
banks
or other financial institutions;
|
|
¨
|
tax-exempt
organizations;
|
|
¨
|
partnerships
and other entities treated as partnerships for U.S. federal income tax
purposes or persons holding ordinary shares through any such
entities;
|
|
¨
|
persons
that hold ordinary shares as part of a hedge, straddle, constructive sale,
conversion transaction or other integrated
investment;
|
|
¨
|
U.S.
Holders (as defined below) whose functional currency for tax purposes is
not the U.S. dollar;
|
|
¨
|
persons
liable for alternative minimum tax;
or
|
|
¨
|
persons
who actually or constructively own 10% or more of the total combined
voting power of all classes of our shares (including ordinary shares)
entitled to vote.
|
This
discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which
we refer to in this discussion as the Code, its legislative history, existing
and proposed regulations promulgated thereunder, published rulings and court
decisions, all as currently in effect. These laws are subject to change,
possibly on a retroactive basis. In addition, this discussion relies on our
assumptions regarding the value of our shares and the nature of our business
over time.
You
should consult your own tax advisor concerning the particular U.S. federal
income tax consequences to you of the purchase, ownership and disposition of our
ordinary shares, as well as the consequences to you arising under the laws of
any other taxing jurisdiction.
For
purposes of the U.S. federal income tax discussion below, you are a “U.S.
Holder” if you beneficially own ordinary shares and are:
|
¨
|
a
citizen or resident of the United States for U.S. federal income tax
purposes;
|
|
¨
|
a
corporation, or other entity taxable as a corporation, that was created or
organized in or under the laws of the United States or any political
subdivision thereof;
|
|
¨
|
an
estate the income of which is subject to U.S. federal income tax
regardless of its source; or
|
|
¨
|
a
trust if (a) a court within the United States is able to exercise
primary supervision over its administration and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or
(b) the trust has a valid election in effect to be treated as a U.S.
person.
|
If you
are not a U.S. person, please refer to the discussion below under “Non-U.S.
Holders.”
For U.S.
federal income tax purposes, income earned through a foreign or domestic
partnership or other flow-through entity is attributed to its owners.
Accordingly, if a partnership or other flow-through entity holds ordinary
shares, the tax treatment of the holder will generally depend on the status of
the partner or other owner and the activities of the partnership or other
flow-through entity.
U.S.
Holders
Dividends on ordinary shares
We do not
anticipate paying dividends on our ordinary shares or indirectly on our ordinary
shares in the foreseeable future. See “Dividend policy.”
Subject
to the “Passive Foreign Investment Company” discussion below, if we do make
distributions and you are a U.S. Holder, the gross amount of any distributions
you receive on your ordinary shares will generally be treated as dividend income
if the distributions are made from our current or accumulated earnings and
profits, calculated according to U.S. federal income tax principles. Dividends
will generally be subject to U.S. federal income tax as ordinary income on the
day you actually or constructively receive such income. However, if you are an
individual and have held your ordinary shares for a sufficient period of time,
dividend distributions on our ordinary shares will generally constitute
qualified dividend income taxed at a preferential rate (generally 15% for
dividend distributions before January 1, 2011) as long as our ordinary shares
continue to be readily tradable on the NASDAQ Global Select Market and certain
other conditions apply. You should consult your own tax adviser as to the rate
of tax that will apply to you with respect to dividend distributions, if any,
you receive from us.
We do not
intend to calculate our earnings and profits according to U.S. tax accounting
principles. Accordingly, distributions on our ordinary shares, if any, will
generally be taxed to you as dividend distributions for U.S. tax purposes. Even
if you are a corporation, you will not be entitled to claim a dividends-received
deduction with respect to distributions you receive from us. Dividends generally
will constitute foreign source passive income for U.S. foreign tax credit
limitation purposes.
Sales and other dispositions of
ordinary shares
Subject
to the “Passive Foreign Investment Company” discussion below, when you sell or
otherwise dispose of ordinary shares, you will generally recognize capital gain
or loss in an amount equal to the difference between the amount realized on the
sale or other disposition and your adjusted tax basis in the ordinary shares,
both as determined in U.S. dollars. Your adjusted tax basis will generally equal
the amount you paid for the ordinary shares. Any gain or loss you recognize will
be long-term capital gain or loss if your holding period in our ordinary shares
is more than one year at the time of disposition. If you are an individual, any
such long-term capital gain will be taxed at preferential rates. Your ability to
deduct capital losses will be subject to various limitations.
Passive Foreign Investment
Company
If we
were a PFIC, in any taxable year in which you hold our ordinary shares, as a
U.S. Holder, you would generally be subject to adverse U.S. tax consequences, in
the form of increased tax liabilities and special U.S. tax reporting
requirements.
We will
be classified as a PFIC in any taxable year if either: (1) the average
percentage value of our gross assets during the taxable year that produce
passive income or are held for the production of passive income is at least 50%
of the value of our total gross assets or (2) 75% or more of our gross income
for the taxable year is passive income (such as certain dividends, interest or
royalties). For purposes of the first test: (1) any cash, cash equivalents, and
cash invested in short-term, interest-bearing debt instruments or bank deposits
that is readily convertible into cash, will generally count as producing passive
income or held for the production of passive income and (2) the average value of
our gross assets is calculated based on our market capitalization. We will be
treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own,
directly or indirectly, 25% or more (by value) of the stock.
We
believe that we were not a PFIC for the taxable year 2010. However, there can be
no assurance that we will not be a PFIC for the taxable year 2010 and/or later
taxable years, as PFIC status is re-tested each year and depends on the facts in
such year. For example, we would be a PFIC for the taxable year 2010 if the sum
of our average market capitalization, which is our share price multiplied by the
total number of our outstanding shares, and our liabilities over that taxable
year was not more than twice the value of our cash, cash equivalents, and other
assets producing passive income or held for production of passive income. We
could also be a PFIC for any taxable year if the gross income that we and our
subsidiaries earn from passive investments is substantial in comparison with the
gross income from our business operations.
If we
were a PFIC, you would generally be subject to additional taxes and interest
charges on certain “excess distributions” we make and on any gain realized on
the disposition or deemed disposition of your ordinary shares, regardless of
whether we continue to be a PFIC in the year in which you receive an “excess
distribution” or dispose of or are deemed to dispose of your ordinary shares.
Distributions in respect of your ordinary shares during a taxable year would
generally constitute “excess distributions” if, in the aggregate, they exceed
125% of the average amount of distributions in respect of your ordinary shares
over the three preceding taxable years or, if shorter, the portion of your
holding period before such taxable year.
To
compute the tax on “excess distributions” or any gain, (1) the “excess
distribution” or the gain would be allocated ratably to each day in your holding
period, (2) the amount allocated to the current year and any tax year before we
became a PFIC would be taxed as ordinary income in the current year, (3) the
amount allocated to other taxable years would be taxable at the highest
applicable marginal rate in effect for that year, and (4) an interest charge at
the rate for underpayment of taxes for any period described under (3) above
would be imposed with respect to any portion of the “excess distribution” or
gain that is allocated to such period. In addition, if we were a PFIC, no
distribution that you receive from us would qualify for taxation at the
preferential rate discussed in the “Dividends on ordinary shares” section
above.
If we
were a PFIC in any year, and if you are a U.S. Holder, you would be required to
make an annual return on IRS Form 8621 regarding your ordinary shares. However,
we do not intend to generate, or share with you, information that you might need
to properly complete IRS Form 8621. You should consult with your own tax adviser
regarding reporting requirements with regard to your ordinary
shares.
If we
were a PFIC in any year, you would generally be able to avoid the “excess
distribution” rules described above by making a timely so-called
“mark-to-market” election with respect to your ordinary shares provided our
ordinary shares are “marketable.” Our ordinary shares will be “marketable” as
long as they remain regularly traded on the NASDAQ Global Select Market. If you
made this election in a timely fashion, you would generally recognize as
ordinary income or ordinary loss the difference between the fair market value of
your ordinary shares on the first day of any taxable year and their value on the
last day of that taxable year. Any ordinary income resulting from this election
would generally be taxed at ordinary income rates and would not be eligible for
the reduced rate of tax applicable to qualified dividend income. Any ordinary
losses would be limited to the extent of the net amount of previously included
income as a result of the mark-to-market election, if any. Your basis in the
ordinary shares would be adjusted to reflect any such income or loss. You should
consult with your own tax adviser regarding potential advantages and
disadvantages to you of making a “mark-to-market” election with respect to your
ordinary shares. Separately, if we were a PFIC in any year, you would be able to
avoid the “excess distribution” rules by making a timely election to treat us as
a so-called “Qualified Electing Fund”, or QEF. You would then generally be
required to include in gross income for any taxable year (1) as ordinary
income, your pro rata share of our ordinary earnings for the taxable year, and
(2) as long-term capital gain, your pro rata share of our net capital gain
for the taxable year. However, we do not intend to provide you with the
information you would need to make or maintain a QEF election and you will,
therefore, not be able to make or maintain such an election with respect to your
ordinary shares.
Non-U.S.
Holders
If you
beneficially own ordinary shares and are not a U.S. Holder for U.S. federal
income tax purposes, or a Non-U.S. Holder, you generally will not be subject to
U.S. federal income tax or withholding on dividends received from us with
respect to ordinary shares unless that income is considered effectively
connected with your conduct of a U.S. trade or business and, if an applicable
income tax treaty so requires, as a condition for you to be subject to U.S.
federal income tax with respect to income from your ordinary shares, such
dividends are attributable to a permanent establishment that you maintain in the
United States. You generally will not be subject to U.S. federal income tax,
including withholding tax, on any gain realized upon the sale or exchange of
ordinary shares, unless:
|
¨
|
that
gain is effectively connected with the conduct of a U.S. trade or business
and, if an applicable income tax treaty so requires as a condition for you
to be subject to U.S. federal income tax with respect to income from your
ordinary shares, such gain is attributable to a permanent establishment
that you maintain in the United States;
or
|
|
¨
|
you
are a nonresident alien individual and are present in the United States
for at least 183 days in the taxable year of the sale or other disposition
and either (1) your gain is attributable to an office or other fixed
place of business that you maintain in the United States or (2) you have a
tax home in the United States.
|
If you
are engaged in a U.S. trade or business, unless an applicable tax treaty
provides otherwise, the income from your ordinary shares, including dividends
and the gain from the disposition of ordinary shares, that is effectively
connected with the conduct of that trade or business will generally be subject
to the rules applicable to U.S. Holders discussed above. In addition, if you are
a corporation, you may be subject to an additional branch profits tax at a rate
of 30% or any lower rate under an applicable tax treaty.
U.S. information
reporting and backup withholding rules
In
general, dividend payments with respect to the ordinary shares and the proceeds
received on the sale or other disposition of those ordinary shares may be
subject to information reporting to the IRS and to backup withholding (currently
imposed at a rate of 28%). Backup withholding will not apply, however, if you
(1) are a corporation or come within certain other exempt categories and, when
required, can demonstrate that fact or (2) provide a taxpayer identification
number, certify as to no loss of exemption from backup withholding and otherwise
comply with the applicable backup withholding rules. To establish your status as
an exempt person, you will generally be required to provide certification on IRS
Form W-9, W-8BEN or W-8ECI, as applicable. Any amounts withheld from payments to
you under the backup withholding rules will be allowed as a refund or a credit
against your U.S. federal income tax liability, provide that you furnish the
required information to the IRS.
HOLDERS
OF OUR ORDINARY SHARES SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE
APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS
AS WELL AS ANY TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING
OF THE ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS
OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT, AND
INHERITANCE LAWS.
F. Dividends
and paying agents.
Not
applicable.
G. Statement
by experts.
Not
applicable.
H. Documents
on display.
We have
filed this Annual Report on Form 20-F with the SEC under the Securities Exchange
Act of 1934, as amended, or the Exchange Act. Statements made in this Annual
Report as to the contents of any document referred to are not necessarily
complete. With respect to each such document filed as an exhibit to this Annual
Report, reference is made to the exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
We are
subject to the informational requirements of the Exchange Act as a foreign
private issuer and file reports and other information with the SEC. Reports and
other information filed by us with the SEC, including this Annual Report on Form
20-F, may be inspected and copied at the public reference room of the SEC at 450
Fifth Street N.W. Washington D.C. 20549.
You can
also obtain copies of this Annual Report on Form 20-F by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549, at
prescribed rates. Additionally, copies of this material may be obtained from the
SEC’s Internet site at http://www.sec.gov. The SEC’s telephone number is
1-800-SEC-0330.
I. Subsidiaries
information.
See Item
4. Information on the Company, Subpart C – Organizational
Structure.
ITEM 11. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest rate risk
Our
exposure to market rate risk for changes in interest rates relates primarily to
the interest income generated by excess cash invested in short term money market
accounts and certificates of deposit. We have not used derivative financial
instruments in our investment portfolio. Interest earning instruments carry a
degree of interest rate risk. We have not been exposed nor do we anticipate
being exposed to material risks due to changes in interest rates. However, our
future interest income may fall short of expectations due to changes in interest
rates.
Foreign currency risk
Substantially
all our revenues and expenses are denominated in Renminbi and a substantial
portion of our cash is kept in Renminbi, but a portion of our cash is also kept
in U.S. dollars. Although we believe that, in general, our exposure to foreign
exchange risks should be limited, the value of our shares will be affected by
the foreign exchange rate between U.S. dollars and Renminbi. For example, to the
extent that we need to convert U.S. dollars into Renminbi for our operational
needs and the Renminbi appreciates against the U.S. dollar at that time, our
financial position and the price of our shares may be adversely affected.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of declaring dividends on our shares or otherwise and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings in
China would be reduced.
We have
recorded RMB1.97 million (US$0.29 million) of foreign exchange gain in our net
income for the twelve months ended September 30, 2010, due to fluctuations in
the currency exchange rate. The PRC government may further readjust the current
rate at which Renminbi-U.S. dollar exchanges are exchanged, as well as
re-evaluate its policy of using a fixed-rate regime to a basket of currencies
govern foreign currency transactions, although the PRC government has not
committed itself to take any such action currently. Since we have not engaged in
any hedging activities, we may experience economic loss as a result of any
foreign currency exchange rate fluctuations.
In recent
years, China has not experienced significant inflation, and thus inflation has
not had a significant effect on our business during the past three years.
According to the China Statistical Bureau, China’s overall national inflation
rate, as represented by the general consumer price index, was
approximately 4.6%, 5.9%, -0.8% and 3.6% in fiscal year ended 2007, the
fiscal year ended September 30, 2008, 2009 and the year ended September 30, 2010
respectively. Sustained or increased inflation in China may have an adverse
impact on China’s economy, which could affect demand for our products or
services or increase our cost of services or operating expenses. As we have not
previously operated during a period of significant inflation, we cannot predict
with confidence the effect that such inflation may have on our business.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not
Applicable.
PART
II
ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not
Applicable.
ITEM
14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
The
rights of securities holders have not been materially changed during the period
covered by this Annual Report.
ITEM 15. CONTROLS AND
PROCEDURES
(a) Disclosure
Controls and Procedures: As of September 30, 2010 (the “Evaluation Date”), the
Company conducted an evaluation (under the supervision and participation of the
Company’s management including the Chief Executive Officer and the Acting Chief
Financial Officer), pursuant to Rule 13a-15 promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures. We have determined those controls are effective as of
September 30, 2010.
(b) Report of Origin’s Management on
Internal Control over Financial Reporting: Origin’s Board of Directors
and management are responsible for establishing and maintaining adequate
internal control over financial reporting as of September 30, 2010. The
Company’s internal control system was designed to provide reasonable assurance
to the Company’s management and Board of Directors regarding the reliability of
financial reporting and the preparation and fair presentation of its published
consolidated financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not
provide or detect misstatements and can only provide reasonable assurances with
respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
Origin’s
management assessed the effectiveness of the Company’s internal control over
financial reporting as of September 30, 2010. In making this assessment, it used
the criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Based
upon this evaluation, the management concluded that the Company’s internal
control over financial reporting were effective.
BDO
Limited, our independent registered public accounting firm, has issued an
attestation report which is included in Item 18 of this Annual Report on Form
20-F.
(c) Attestation report of the registered
public accounting firm. Included in this report on Form 20-F
is the attestation report of BDO Limited.
(d) Changes in internal control over
financial reporting: There were no changes to our internal control over
financial reporting that occurred during the period covered by this Form 20-F
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT.
The board
of directors believes that Remo Richli, a member of our Audit Committee, meets
the criteria for an “audit committee financial expert” as established by the SEC
and is an independent director.
Mr.
Remo Richli will not be deemed an “expert” for any purpose, including,
without limitation, for purposes of Section 11 of the Securities Act of 1933, as
amended, as a result of being designated or identified as an audit committee
financial expert. The designation or identification of Mr. Richli as an audit
committee financial expert does not impose on him any duties, obligations or
liability that are greater than the duties, obligations and liability imposed on
him as a member of our Audit Committee and board of directors in the absence of
such designation or identification. The designation or identification of
Mr. Richli as an audit committee financial expert does not affect the
duties, obligations or liability of any other member of our Audit Committee or
board of directors and Mr. Richli is independent.
ITEM
16B. CODE OF ETHICS.
On
January 18, 2007, our board of directors adopted a code of ethics for senior
executive and financial officers, including our chief executive officers and our
principal financial officer (i) to promote the honest and ethical conduct of our
senior executive and financial officers, including the ethical handling of
actual or apparent conflicts of interest between personal and professional
relationships, (ii) to promote full, fair, accurate, timely and understandable
disclosure in periodic reports required to be filed with or submitted to the SEC
and in other public communications by us; (iii) to promote compliance with all
applicable laws, rules and regulations that apply to us and our senior executive
and financial officers; (iv) to deter wrongdoing; and (v) to promote prompt
internal reporting of breaches of, and accountability for adherence to, this
code. A copy of the code of ethics is filed as an exhibit to this Annual Report
by incorporation by reference.
On
January 18, 2007, our board of directors also adopted a code of conduct for our
employees, including directors and officers. The purpose of this code of conduct
is to provide a summary of certain of our key policies and procedures and to
help ensure lawful and ethical conduct. A copy of the code of conduct is filed
as an exhibit to this Annual Report by incorporation by reference.
ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees.
The
aggregate fees billed for the fiscal year ended September 30, 2009 and 2010 for
professional services rendered by BDO Limited for the audit of internal control
system and the financial statements of the fiscal year ended September 30, 2009
and 2010 of Origin Agritech Limited were $0.5 million and $0.45 million respectively. The professional
services rendered by BDO Limited in preparing letters of consent for SEC
Registration Statements Form F-3 and Form S-8 were $0.02 million.
(b) Audit - Related
Fees
The
aggregate fees billed for the year ended September 30, 2009 and 2010 for
professional services rendered by BDO Limited for the performance of agree-upon
procedures for the quarterly financial statements during the year ended September 30, 2009 and 2010
were $0.08 million and $0.03 million
respectively.
(c) Tax Fees
We did
not enter into any engagement during the fiscal years ended September 30, 2009
or 2010 for professional services rendered by our principal accountant for tax
compliance, tax advice or tax planning.
(d) All Other Fees
No fees
were billed in either of the last two fiscal years for products and services
provided by our principal accountant, other than the services reported in
paragraphs (a) through (b) of this Item 16C for the fiscal years ended September
30, 2009 and 2010.
(e) Audit Committee Pre-Approval Policies
and Procedures.
Our Audit
Committee pre-approves all auditing services and permitted non-audit services to
be performed for us by our independent auditor, including the fees and terms
thereof (subject to the de minimums exceptions for non-audit services described
in Section 10A(i)(l)(B) of the Exchange Act that are approved by our Audit
Committee prior to the completion of the audit).
(f) Not
applicable.
ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
We have
not been granted an exemption from the applicable listing standards for the
Audit Committee of our board of directors.
ITEM
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
None.
PART
III
ITEM 17. FINANCIAL STATEMENTS
We have
elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The
consolidated financial statements for the Company and its subsidiaries are
included at the end of this Annual Report.
ITEM 19. EXHIBITS
Index to Exhibits
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
1.1
|
|
CEO
Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) (17 CFR
240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))
|
|
|
|
1.2
|
|
CFO
Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule
15d-1(a) (17 CFR 240.15d-14(a))
|
|
|
|
1.3
|
|
CEO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
1.4
|
|
CFO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
1.5
|
|
Consent
of BDO Limited to incorporation of its report on the Registrant's
consolidated financial statements into Registrant's Registration
Statements on Form
S-8
|
SIGNATURE
The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.
Date:
January 27, 2011
|
ORIGIN
AGRITECH LIMITED
|
|
|
|
/s/ Liang Yuan
|
|
Name:
|
Liang
Yuan
|
|
Title:
|
Chief
Executive Officer
|
ORIGIN
AGRITECH LIMITED
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
|
|
PAGE
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
F -
1
|
|
|
|
CONSOLIDATED
BALANCE SHEETS AS OF SEPTEMBER 30, 2009 AND 2010
|
|
F -
3
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED
SEPTEMBER 30, 2008, 2009 AND 2010
|
|
F -
4
|
|
|
|
CONSOLIDATED
STATEMENTS OF EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2008, 2009 AND
2010
|
|
F -
5
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2008, 2009 AND
2010
|
|
F -
6
|
|
|
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
F -
8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE
BOARD OF DIRECTORS AND SHAREHOLDERS OF
ORIGIN
AGRITECH LIMITED
We have
audited the accompanying consolidated balance sheets of Origin Agritech Limited
and its subsidiaries and variable interest entities (the “Company”) as of
September 30, 2009 and 2010 and the related consolidated statements of income
and comprehensive income, equity and cash flows for each of the three years in
the period ended September 30, 2010, all expressed in Renminbi. We have also
audited the Company’s internal control over financial reporting as of September
30, 2010, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Company’s management is responsible for
these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Item 15 (b)
Report of Origin’s Management on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an
opinion on the Company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. Our audits of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorisations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorised acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of September 30, 2009 and 2010 and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2010 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2010,
based on the COSO criteria.
BDO
Limited
Hong
Kong, January 27, 2011
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except number of share and per share data)
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
121,255 |
|
|
|
299,672 |
|
|
|
44,720 |
|
Restricted
bank deposits (note 13)
|
|
|
500 |
|
|
|
- |
|
|
|
- |
|
Accounts
receivable, less allowance for doubtful amounts of
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB842
as of September 30, 2009 and 2010
|
|
|
5,692 |
|
|
|
10,048 |
|
|
|
1,499 |
|
Due
from related parties (note 4)
|
|
|
7,004 |
|
|
|
5,107 |
|
|
|
762 |
|
Advances
to suppliers (note 5)
|
|
|
1,937 |
|
|
|
3,986 |
|
|
|
595 |
|
Advances
to growers
|
|
|
24,681 |
|
|
|
40,691 |
|
|
|
6,072 |
|
Inventories
(note 6)
|
|
|
341,770 |
|
|
|
283,174 |
|
|
|
42,258 |
|
Income
tax recoverable (note 19)
|
|
|
1,725 |
|
|
|
2,745 |
|
|
|
410 |
|
Other
current assets (note 7)
|
|
|
8,725 |
|
|
|
18,838 |
|
|
|
2,812 |
|
Total
current assets
|
|
|
513,289 |
|
|
|
664,261 |
|
|
|
99,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
use rights, net (note 8)
|
|
|
20,496 |
|
|
|
20,907 |
|
|
|
3,120 |
|
Plant
and equipment, net (note 9)
|
|
|
152,962 |
|
|
|
161,681 |
|
|
|
24,128 |
|
Equity
investments (note 10)
|
|
|
65,453 |
|
|
|
22,505 |
|
|
|
3,358 |
|
Goodwill
|
|
|
16,665 |
|
|
|
16,665 |
|
|
|
2,487 |
|
Acquired
intangible assets, net (note 11)
|
|
|
36,648 |
|
|
|
35,344 |
|
|
|
5,274 |
|
Deferred
income tax assets (note 19)
|
|
|
15,040 |
|
|
|
9,766 |
|
|
|
1,457 |
|
Other
assets (note 12)
|
|
|
3,991 |
|
|
|
3,882 |
|
|
|
579 |
|
Total
assets
|
|
|
824,544 |
|
|
|
935,011 |
|
|
|
139,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings (note 13)
|
|
|
80,290 |
|
|
|
85,900 |
|
|
|
12,819 |
|
Accounts
payable
|
|
|
13,938 |
|
|
|
8,960 |
|
|
|
1,337 |
|
Note
payable (note 14)
|
|
|
117,896 |
|
|
|
- |
|
|
|
- |
|
Due
to growers
|
|
|
9,619 |
|
|
|
42,186 |
|
|
|
6,295 |
|
Due
to related parties (note 4)
|
|
|
15,699 |
|
|
|
7,926 |
|
|
|
1,183 |
|
Advances
from customers
|
|
|
219,963 |
|
|
|
348,797 |
|
|
|
52,051 |
|
Deferred
revenues
|
|
|
18,280 |
|
|
|
23,111 |
|
|
|
3,449 |
|
Income
tax payable
|
|
|
39,661 |
|
|
|
44,075 |
|
|
|
6,577 |
|
Other
payables and accrued expenses (note 15)
|
|
|
31,476 |
|
|
|
35,656 |
|
|
|
5,321 |
|
Total
current liabilities
|
|
|
546,822 |
|
|
|
596,611 |
|
|
|
89,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities (note 16)
|
|
|
- |
|
|
|
9,426 |
|
|
|
1,407 |
|
Total
liabilities
|
|
|
546,822 |
|
|
|
606,037 |
|
|
|
90,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (note 23)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock (no par value; 1,000,000 shares authorized, none
issued)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock (no par value; 60,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
|
|
|
23,013,692
and 23,292,412 shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
as
of September 30, 2009 and 2010 respectively)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
391,620 |
|
|
|
387,052 |
|
|
|
57,759 |
|
Retained
earnings (deficit)
|
|
|
(125,507 |
) |
|
|
(76,454 |
) |
|
|
(11,409 |
) |
Treasury
stock at cost (498,851 shares) (note 18)
|
|
|
(29,377 |
) |
|
|
(29,377 |
) |
|
|
(4,384 |
) |
Accumulated
other comprehensive loss
|
|
|
(10,403 |
) |
|
|
(9,336 |
) |
|
|
(1,393 |
) |
Total
Origin Agritech Limited shareholders’ equity
|
|
|
226,333 |
|
|
|
271,885 |
|
|
|
40,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interests
|
|
|
51,389 |
|
|
|
57,089 |
|
|
|
8,519 |
|
Total
equity
|
|
|
277,722 |
|
|
|
328,974 |
|
|
|
49,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
|
824,544 |
|
|
|
935,011 |
|
|
|
139,531 |
|
The accompanying notes are an integral
part of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In
thousands, except number of share and per share data)
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
513,490 |
|
|
|
592,492 |
|
|
|
584,860 |
|
|
|
87,278 |
|
Cost
of revenues
|
|
|
(404,795 |
) |
|
|
(392,842 |
) |
|
|
(353,587 |
) |
|
|
(52,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
108,695 |
|
|
|
199,650 |
|
|
|
231,273 |
|
|
|
34,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
(53,203 |
) |
|
|
(55,648 |
) |
|
|
(52,227 |
) |
|
|
(7,794 |
) |
General
and administrative
|
|
|
(73,355 |
) |
|
|
(64,833 |
) |
|
|
(78,708 |
) |
|
|
(11,745 |
) |
Research
and development
|
|
|
(24,513 |
) |
|
|
(33,473 |
) |
|
|
(38,356 |
) |
|
|
(5,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
(151,071 |
) |
|
|
(153,954 |
) |
|
|
(169,291 |
) |
|
|
(25,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(42,376 |
) |
|
|
45,696 |
|
|
|
61,982 |
|
|
|
9,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(36,939 |
) |
|
|
(16,784 |
) |
|
|
(8,539 |
) |
|
|
(1,274 |
) |
Share
of net income of equity investments
|
|
|
7,702 |
|
|
|
4,669 |
|
|
|
9,370 |
|
|
|
1,398 |
|
Gain
on disposal of an equity investment
|
|
|
- |
|
|
|
- |
|
|
|
8,883 |
|
|
|
1,326 |
|
Interest
income
|
|
|
5,199 |
|
|
|
2,036 |
|
|
|
1,634 |
|
|
|
244 |
|
Loss
on repurchase of convertible notes (note 14)
|
|
|
- |
|
|
|
(51,101 |
) |
|
|
- |
|
|
|
- |
|
Other
income, net
|
|
|
628 |
|
|
|
1,991 |
|
|
|
2,340 |
|
|
|
349 |
|
Changes
in the fair value of embedded derivatives
|
|
|
20,229 |
|
|
|
3,300 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(45,557 |
) |
|
|
(10,193 |
) |
|
|
75,670 |
|
|
|
11,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax credit (expense) (note 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(9,369 |
) |
|
|
(580 |
) |
|
|
(4,046 |
) |
|
|
(604 |
) |
Deferred
|
|
|
13,364 |
|
|
|
(11,152 |
) |
|
|
(5,273 |
) |
|
|
(787 |
) |
Income
tax credit (expense)
|
|
|
3,995 |
|
|
|
(11,732 |
) |
|
|
(9,319 |
) |
|
|
(1,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(41,562 |
) |
|
|
(21,
925 |
) |
|
|
66,351 |
|
|
|
9,901 |
|
Less:
Net income attributable to non-controlling interests
|
|
|
1,724 |
|
|
|
18,892 |
|
|
|
17,298 |
|
|
|
2,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Origin Agritech Limited
|
|
|
(43,286 |
) |
|
|
(40,817 |
) |
|
|
49,053 |
|
|
|
7,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(41,562 |
) |
|
|
(21,925 |
) |
|
|
66,351 |
|
|
|
9,901 |
|
Foreign
currency translation difference
|
|
|
(1,143 |
) |
|
|
366 |
|
|
|
1,067 |
|
|
|
159 |
|
Comprehensive
income (loss)
|
|
|
(42,705 |
) |
|
|
(21,559 |
) |
|
|
67,418 |
|
|
|
10,060 |
|
Less:
Comprehensive income attributable to non-controlling
interests
|
|
|
1,724 |
|
|
|
18,892 |
|
|
|
17,298 |
|
|
|
2,581 |
|
Comprehensive
income (loss) attributable to Origin Agritech Limited
|
|
|
(44,429 |
) |
|
|
(40,451 |
) |
|
|
50,120 |
|
|
|
7,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Origin Agritech Limited per share – basic
(note 20)
|
|
RMB |
(1.88 |
) |
|
RMB |
(1.77 |
) |
|
RMB |
2.12 |
|
|
USD |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Origin Agritech Limited per share – diluted
(note 20)
|
|
RMB |
(1.88 |
) |
|
RMB |
(1.77 |
) |
|
RMB |
2.10 |
|
|
USD |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in calculating basic net income (loss) per share
|
|
|
22,987,270 |
|
|
|
23,013,692 |
|
|
|
23,189,464 |
|
|
|
23,189,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in calculating diluted net income (loss) per share
|
|
|
22,987,270 |
|
|
|
23,013,692 |
|
|
|
23,337,265 |
|
|
|
23,337,265 |
|
The accompanying notes are an integral
part of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF EQUITY
(In
thousands, except number of share and per share data)
|
|
Equity attributable to Origin Agritech Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Common stock
|
|
|
Paid-in
|
|
|
(Deficit)
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Note 21)
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
interest
|
|
|
Equity
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of October 1, 2007
|
|
|
22,974,059 |
|
|
|
- |
|
|
|
377,324 |
|
|
|
(41,404 |
) |
|
|
(9,626 |
) |
|
|
(29,377 |
) |
|
|
48,775 |
|
|
|
345,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(43,286 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,724 |
|
|
|
(41,562 |
) |
Issuance
of common stock upon exercise of share options
|
|
|
39,633 |
|
|
|
- |
|
|
|
1,432 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,432 |
|
Share-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
10,104 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,104 |
|
Dividend
paid to non-controlling interests
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(11,275 |
) |
|
|
(11,275 |
) |
Translation
adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,143 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2008
|
|
|
23,013,692 |
|
|
|
- |
|
|
|
388,860 |
|
|
|
(84,690 |
) |
|
|
(10,769 |
) |
|
|
(29,377 |
) |
|
|
39,224 |
|
|
|
303,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(40,817 |
) |
|
|
- |
|
|
|
- |
|
|
|
18,892 |
|
|
|
(21,925 |
) |
Share-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
2,760 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,760 |
|
Dividend
paid to non-controlling interests
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
(6,727 |
) |
|
|
(6,727 |
) |
Translation
adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
366 |
|
|
|
- |
|
|
|
- |
|
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2009
|
|
|
23,013,692 |
|
|
|
- |
|
|
|
391,620 |
|
|
|
(125,507 |
) |
|
|
(10,403 |
) |
|
|
(29,377 |
) |
|
|
51,389 |
|
|
|
277,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
49,053 |
|
|
|
- |
|
|
|
- |
|
|
|
17,298 |
|
|
|
66,351 |
|
Issuance
of common stock upon exercise of share options
|
|
|
278,720 |
|
|
|
- |
|
|
|
6,535 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,535 |
|
Acquisition
of additional equity interest in a subsidiary from non-controlling
interests
|
|
|
- |
|
|
|
- |
|
|
|
(15,971 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,229 |
) |
|
|
(24,200 |
) |
Share-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
4,868 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,868 |
|
Acquisition
of a subsidiary
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,538 |
|
|
|
3,538 |
|
Dividend
paid to non-controlling interests
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,907 |
) |
|
|
(6,907 |
) |
Translation
adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,067 |
|
|
|
- |
|
|
|
- |
|
|
|
1,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2010
|
|
|
23,292,412 |
|
|
|
- |
|
|
|
387,052 |
|
|
|
(76,454 |
) |
|
|
(9,336 |
) |
|
|
(29,377 |
) |
|
|
57,089 |
|
|
|
328,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
US$
|
|
|
|
|
|
|
- |
|
|
|
57,759 |
|
|
|
(11,409 |
) |
|
|
(1,393 |
) |
|
|
(4,384 |
) |
|
|
8,519 |
|
|
|
49,092 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(43,286 |
) |
|
|
(40,817 |
) |
|
|
49,053 |
|
|
|
7,320 |
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
22,298 |
|
|
|
21,266 |
|
|
|
21,712 |
|
|
|
3,240 |
|
Loss
(gain) on disposal of plant and equipment
|
|
|
823 |
|
|
|
457 |
|
|
|
(26 |
) |
|
|
(4 |
) |
Gain
on disposal of an equity investment
|
|
|
- |
|
|
|
- |
|
|
|
(8,883 |
) |
|
|
(1,326 |
) |
Gain
on disposal of debt securities
|
|
|
(3,845 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Change
in the fair value of embedded derivatives
|
|
|
(20,229 |
) |
|
|
(3,300 |
) |
|
|
- |
|
|
|
- |
|
Impairment
on receivables
|
|
|
(1,051 |
) |
|
|
26 |
|
|
|
- |
|
|
|
- |
|
Inventory
write down
|
|
|
18,005 |
|
|
|
7,395 |
|
|
|
14,971 |
|
|
|
2,234 |
|
Impairment
on intangible assets
|
|
|
1,962 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss
on repurchase of convertible note
|
|
|
- |
|
|
|
51,101 |
|
|
|
- |
|
|
|
- |
|
Interest
expense and amortisation of discount on convertible notes
|
|
|
18,824 |
|
|
|
3,799 |
|
|
|
- |
|
|
|
- |
|
Deferred
income tax assets
|
|
|
(13,364 |
) |
|
|
11,152 |
|
|
|
5,274 |
|
|
|
787 |
|
Non-controlling
interests
|
|
|
1,724 |
|
|
|
18,892 |
|
|
|
17,298 |
|
|
|
2,581 |
|
Share-based
compensation expense
|
|
|
10,104 |
|
|
|
2,760 |
|
|
|
4,868 |
|
|
|
726 |
|
Share
of net income of equity investments
|
|
|
(7,702 |
) |
|
|
(4,669 |
) |
|
|
(9,370 |
) |
|
|
(1,398 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(902 |
) |
|
|
(1,006 |
) |
|
|
(4,356 |
) |
|
|
(650 |
) |
Due
from related parties
|
|
|
3,251 |
|
|
|
3,538 |
|
|
|
1,897 |
|
|
|
283 |
|
Advances
to growers
|
|
|
(21,036 |
) |
|
|
20,807 |
|
|
|
(16,010 |
) |
|
|
(2,389 |
) |
Advances
to suppliers
|
|
|
(908 |
) |
|
|
- |
|
|
|
2,940 |
|
|
|
439 |
|
Inventories
|
|
|
43,468 |
|
|
|
38,569 |
|
|
|
45,783 |
|
|
|
6,832 |
|
Income
tax recoverable
|
|
|
63 |
|
|
|
(28 |
) |
|
|
(1,020 |
) |
|
|
(152 |
) |
Other
current assets
|
|
|
(1,803 |
) |
|
|
2,444 |
|
|
|
98 |
|
|
|
16 |
|
Other
assets
|
|
|
(295 |
) |
|
|
10,182 |
|
|
|
3,193 |
|
|
|
476 |
|
Accounts
payable
|
|
|
(6,441 |
) |
|
|
6,014 |
|
|
|
(5,137 |
) |
|
|
(767 |
) |
Due
to growers
|
|
|
(3,778 |
) |
|
|
(4,414 |
) |
|
|
32,567 |
|
|
|
4,860 |
|
Due
to related parties
|
|
|
11,438 |
|
|
|
16,856 |
|
|
|
(7,773 |
) |
|
|
(1,160 |
) |
Advances
from customers
|
|
|
56,617 |
|
|
|
81,159 |
|
|
|
128,834 |
|
|
|
19,226 |
|
Deferred
revenues
|
|
|
11,610 |
|
|
|
(16,568 |
) |
|
|
4,831 |
|
|
|
721 |
|
Income
tax payable
|
|
|
- |
|
|
|
602 |
|
|
|
4,414 |
|
|
|
659 |
|
Other
long-term liabilities
|
|
|
200 |
|
|
|
(3,658 |
) |
|
|
9,426 |
|
|
|
1,407 |
|
Other
payables and accrued expenses
|
|
|
(18,549 |
) |
|
|
(13,676 |
) |
|
|
4,020 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
57,198 |
|
|
|
208,883 |
|
|
|
298,604 |
|
|
|
44,561 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
received
|
|
|
1,200 |
|
|
|
4,600 |
|
|
|
1,200 |
|
|
|
179 |
|
Purchase
of plant and equipment
|
|
|
(19,662 |
) |
|
|
(18,804 |
) |
|
|
(15,839 |
) |
|
|
(2,364 |
) |
Purchase
of debt securities
|
|
|
(215,907 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Proceeds
from disposal of an equity investment
|
|
|
- |
|
|
|
- |
|
|
|
50,000 |
|
|
|
7,461 |
|
Repayment
of loan from shareholders of a subsidiary
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Proceeds
from disposal of plant and equipment
|
|
|
2,019 |
|
|
|
1,395 |
|
|
|
247 |
|
|
|
37 |
|
Proceeds
from disposal of acquired intangible assets
|
|
|
49 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Proceeds
from sale of debt securities
|
|
|
346,048 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Deposits
for purchase of acquired technology and land use rights
|
|
|
(6,732 |
) |
|
|
(2,650 |
) |
|
|
(39 |
) |
|
|
(6 |
) |
Deposits
for purchase of plant and equipment
|
|
|
(448 |
) |
|
|
(332 |
) |
|
|
(3,044 |
) |
|
|
(454 |
) |
Business
acquisition, net of cash acquired
|
|
|
- |
|
|
|
- |
|
|
|
(10,540 |
) |
|
|
(1,573 |
) |
Purchase
of intangible assets
|
|
|
(1,937 |
) |
|
|
(100 |
) |
|
|
(6,880 |
) |
|
|
(1,027 |
) |
Net
cash provided by/(used in) investing activities
|
|
|
107,630 |
|
|
|
(15,891 |
) |
|
|
15,105 |
|
|
|
2,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
bank deposits
|
|
|
- |
|
|
|
(500 |
) |
|
|
500 |
|
|
|
75 |
|
Proceeds
from short-term borrowings
|
|
|
283,000 |
|
|
|
134,850 |
|
|
|
191,900 |
|
|
|
28,637 |
|
Repayment
of short-term borrowings
|
|
|
(388,400 |
) |
|
|
(219,440 |
) |
|
|
(186,290 |
) |
|
|
(27,800 |
) |
Repayment
of third party loans
|
|
|
(1,208 |
) |
|
|
(4,560 |
) |
|
|
- |
|
|
|
- |
|
Repurchase
of convertible notes
|
|
|
(106,849 |
) |
|
|
(68,290 |
) |
|
|
(117,896 |
) |
|
|
(17,594 |
) |
Acquisition
of additional equity interest from non-controlling
shareholders
|
|
|
- |
|
|
|
- |
|
|
|
(24,200 |
) |
|
|
(3,612 |
) |
Dividends
paid to non-controlling interests
|
|
|
- |
|
|
|
(17,993 |
) |
|
|
(6,908 |
) |
|
|
(1,031 |
) |
Exercise
of share options
|
|
|
1,432 |
|
|
|
- |
|
|
|
6,535 |
|
|
|
975 |
|
Net
cash used in financing activities
|
|
|
(212,025 |
) |
|
|
(175,933 |
) |
|
|
(136,359 |
) |
|
|
(20,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(47,197 |
) |
|
|
17,059 |
|
|
|
177,350 |
|
|
|
26,464 |
|
Cash
and cash equivalents, beginning of year
|
|
|
162,314 |
|
|
|
102,263 |
|
|
|
121,255 |
|
|
|
18,095 |
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(12,854 |
) |
|
|
1,933 |
|
|
|
1,067 |
|
|
|
161 |
|
Cash
and cash equivalents, end of year
|
|
|
102,263 |
|
|
|
121,255 |
|
|
|
299,672 |
|
|
|
44,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
|
9,306 |
|
|
|
6 |
|
|
|
652 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
18,566 |
|
|
|
11,574 |
|
|
|
8,539 |
|
|
|
1,274 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
|
Origin
Agritech Limited (“Agritech”), incorporated under the laws of the British
Virgin Islands, and its subsidiaries and variable interest entities
(together, the “Company”) are principally engaged in hybrid crop seed
development, production and distribution. As of September 30, 2010 details
of the Company’s subsidiaries and variable interest entities are as
follows:
|
|
|
Date of
|
|
Place of
|
|
|
|
|
|
|
Incorporation
|
|
Incorporation
|
|
Percentage
|
|
Principal
|
Name
|
|
or establishment
|
|
or establishment
|
|
of ownership
|
|
Activity
|
|
|
|
|
|
|
|
|
|
Subsidiary:
|
|
|
|
|
|
|
|
|
State
Harvest Holdings
Limited
(“State Harvest”)
|
|
October
6, 2004
|
|
British
Virgin
Islands
|
|
100%
|
|
Investment
Holding
|
|
|
|
|
|
|
|
|
|
Beijing
Origin State Harvest
|
|
December
1, 2004
|
|
People’s Republic
|
|
100%
|
|
Hybrid
seed
|
Biotechnology
Limited
(“BioTech”)
|
|
|
|
of
China (“PRC”)
|
|
|
|
technology
development
|
|
|
|
|
|
|
|
|
|
Shandong
Kunfeng Biochemical Limited
(“Kunfeng”)
|
|
June
14, 2006
|
|
PRC
|
|
80%
|
|
Agricultural
chemical producer
|
|
|
|
|
|
|
|
|
|
Variable
interest entity:
|
|
|
|
|
|
|
|
|
Beijing
Origin Seed Limited
(note
(i)) (“Beijing Origin”)
|
|
December
26, 1997
|
|
PRC
|
|
-
|
|
Hybrid
crop seed
development,
|
|
|
|
|
|
|
|
|
production
and
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
|
|
|
|
|
|
|
Subsidiaries
held by Beijing Origin:
|
|
|
|
|
|
|
|
|
Henan
Origin Cotton Technology Development Limited (note (i))
(“Henan
Cotton”)
|
|
March
2, 2001
|
|
PRC
|
|
92.04%
|
|
Hybrid
crop seed
development,
production
and
distribution
|
|
|
|
|
|
|
|
|
|
Changchun
Origin Seed Technology Development Limited (note (i)) (“Changchun
Origin”)
|
|
April
29, 2003
|
|
PRC
|
|
99%
|
|
Hybrid
crop seed
development,
production
and
distribution
|
|
|
|
|
|
|
|
|
|
Jilin
Changrong Hi-Tech Seed Company Limited (“Changrong”)
|
|
January
24, 2006
|
|
PRC
|
|
53.95%
|
|
Hybrid
crop seed
development,
production
and
distribution
|
|
|
|
|
|
|
|
|
|
Denong
Zhengcheng Seed Limited (“Denong”)
|
|
June
21, 2000
|
|
PRC
|
|
97.87%
|
|
Hybrid
crop seed
development,
production
and
distribution
|
|
|
|
|
|
|
|
|
|
Linze
Origin Seed Limited
(note
(i))
|
|
November
18, 2008
|
|
PRC
|
|
100%
|
|
Hybrid
crop seed
development,
production
and
distribution
|
|
Note
(i):
|
Beijing
Origin Seed Limited, Henan Origin Cotton Technology Development Limited,
Changchun Origin Seed Technology Development Limited and Linze Origin Seed
Limited are collectively referred to as “Beijing
Origin”.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
Continued
|
The
Share Exchange Transaction
On
December 20, 2004, Chardan China Acquisition Corp. (“Chardan”) entered into a
Stock Purchase Agreement with State Harvest, and all the stockholders of State
Harvest for Chardan’s acquisition of State Harvest. For the acquisition, Chardan
formed its wholly owned subsidiary, Agritech. On November 8, 2005, the closing
date of the acquisition (the “Closing Date”), Chardan merged with and into
Agritech for the purpose of re-domestication out of the United States. The
re-domestication merger was achieved by a one-for-one exchange of all the
outstanding common shares of Chardan for common shares of Agritech and the
assumption of all the rights and obligations of Chardan by Origin Agritech,
including assumption of the outstanding warrants of Chardan. Immediately after
the re-domestication merger, Agritech acquired all the common stock of State
Harvest by the issuance of shares and payments of cash consideration to the then
shareholders of State Harvest (“State Harvest Shareholders”) or their designee,
making it a wholly owned subsidiary (the “Share Exchange Transaction”). State
Harvest Shareholders and their designee were paid an aggregate of US$10,000 in
cash, using the funds held in the trust account of Chardan, and was issued an
aggregate of 10,000,000 shares of Agritech common stock for all the outstanding
common stock of State Harvest. The Share Exchange Transaction was accounted for
as a reverse acquisition in which State Harvest was deemed to be the accounting
acquirer and Agritech the legal acquirer. The payments of the cash consideration
are accounted for as a deemed distribution.
Of the
cash portion of the purchase price, US$250 has been held back for one year by
Agritech to secure certain indemnification obligations of State Harvest
Shareholders and their designee. Other than the issuance of the above-mentioned
10,000,000 shares, Agritech has issued 200,000 shares to a financial advisor in
connection with the Share Exchange Transaction.
As a
result of the Share Exchange Transaction the historical consolidated financial
statements of the Company for the periods prior to the Closing Date are those of
State Harvest and its majority owned subsidiaries and its variable interest
entity, Beijing Origin and all references to the consolidated financial
statements of the Company apply to the historical consolidated financial
statements of State Harvest, its majority owned subsidiary and Beijing Origin
prior to the Closing Date and the consolidated financial statements of Agritech
and its majority owned subsidiaries and Beijing Origin subsequent to the Closing
Date. The Company’s equity components are stated in terms of State Harvest
before the Closing Date, with an adjustment to reflect the effects of the
reverse acquisition on the equity components at the Closing Date.
As
Chardan was a non-operating public shell company before the Share Exchange
Transaction, no goodwill has been recorded in connection with the Share Exchange
Transaction and the costs incurred in connection with such transaction have been
charged directly to equity as there was sufficient equity to absorb the costs.
The net book value of acquired assets and liabilities pursuant to the Share
Exchange Transaction is as follows:
|
|
RMB
|
|
Net
assets acquired:
|
|
|
|
Cash
|
|
|
163,517 |
|
Other
current assets
|
|
|
6,201 |
|
Due
to State Harvest Shareholders and their designee
|
|
|
(2,022 |
) |
Other
payables and accrued expenses
|
|
|
(965 |
) |
|
|
|
|
|
|
|
|
166,731 |
|
Less: Transaction
costs paid in cash
|
|
|
(14,431 |
) |
Tax
effect of the Share Exchange Transaction
|
|
|
(39,059 |
) |
|
|
|
|
|
|
|
|
113,241 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
Continued
|
Additional
purchase price payments would be made to State Harvest Shareholders and their
designee, up to an aggregate of US$15,000 if either of the following occurs
during any fiscal year of Agritech after the Closing Date until December 31,
2008 (or June 30, 2009 if the fiscal year is changed to a July 1−June 30 fiscal
year) from funds generated in the additional financing or from operational
earnings as described below:
|
(1)
|
If
Agritech receives at least US$40,000 in gross proceeds in additional
financing as a result (i) of the call of the issued and outstanding public
warrants assumed by Agritech at the closing; (ii) Agritech’s successful
completion of a follow-on offering; or (iii) a private investment into
Agritech by a strategic investor (“Financing Adjustment”), then Agritech
will pay an additional US$15,000 to State Harvest Shareholders and their
designee; or
|
|
(2)
|
If
Origin generates net positive cash flow of US$2,000 or more on a
consolidated basis (“Earnings Adjustment”), then State Harvest
Shareholders and their designee will be entitled to receive 75% of the net
positive cash flow up to a maximum of US$7,500 per fiscal year and
US$15,000 in the aggregate.
|
|
If
both an Earnings Adjustment and a Financing Adjustment occur, the maximum
aggregate amount to be paid to State Harvest Shareholders from one or both
adjustments is US$15,000.
|
As of
September 30, 2006, Agritech received US$40,218 (equivalent to approximately
RMB324,584) in gross proceeds as a result of the call of the issued and
outstanding warrants assumed by Agritech on the Closing Date. Accordingly,
Agritech paid an additional US$15,000 (equivalent to approximately RMB120,981)
to State Harvest Shareholders and their designee. The payments of the additional
purchase price are accounted for as a deemed distribution.
As a part
of the Share Exchange Transaction, Agritech assumed 4,025,000 shares of common
stock, 8,050,000 Redeemable Common Stock Purchase Warrants (“Warrants”) and
350,000 Unit Purchase Options (“UPO”) issued by Chardan. There was no
re-measurement required for these assumed Warrants and UPO because such
assumption is part of the recapitalization in connection with the Share Exchange
Transaction. All Warrants and UPO have been either exercised or expired. As of
September 30, 2009 and 2010, there were no UPO and warrants
outstanding.
As
further additional purchase price, certain State Harvest Shareholders and their
designee will be issued an aggregate of 1,500,000 shares of common stock of
Agritech for any of the next four years if, on a consolidated basis, Agritech
generates after-tax profits (excluding after-tax operating profits from any
subsequent acquisitions of securities that have a dilutive effect and before the
expenses of this transaction and director and employee option expense) of at
least the following amounts:
|
|
After-tax
profit
|
|
Twelve months ended June
30,
|
|
US$
|
|
2006
|
|
|
11,000 |
|
2007
|
|
|
16,000 |
|
2008
|
|
|
21,000 |
|
2009
|
|
|
29,000 |
|
Although
the outcome for the twelve months ended June 30, 2006 has been achieved, the
Board decided that the 1,500,000 shares of common stock will not be issued upon
a waiver signed by those certain State Harvest Shareholders and their designee
but they do not waive or modify in any respect other additional stock purchase
price.
The
management considered the after-tax profits has not been achieved for the twelve
months ended June 30, 2007, 2008 and 2009.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
Continued
|
Reorganization
of State Harvest prior to the Share Exchange Transaction
On
December 1, 2004, State Harvest established BioTech, a wholly foreign owned
enterprise under the laws of the PRC with an operating period of 20
years.
PRC
regulations restrict direct wholly foreign ownership of seed industry in the
PRC. In order to comply with these regulations while allowing foreign indirect
participation, State Harvest conducts substantially all of its business through
its variable interest entity, Beijing Origin.
Beijing
Origin entered into Technical Service Agreements with BioTech. Under these
agreements, BioTech shall provide, with its own technical research resource and
team, technical services for the production and distribution of agricultural
seeds during the period of the agreements. In return, Beijing Origin is required
to pay BioTech service fee calculated according to the weight of corn, rice and
cotton seeds sold by the Beijing Origin.
In
addition, State Harvest has been assigned 97.96% voting rights by the
shareholders of Beijing Origin through a consignment agreement which includes
the following terms: (1) The shares of Beijing Origin cannot be
transferred without the approval of State Harvest; (2) State Harvest has the
right to appoint all directors and senior management personnel of Beijing Origin
and (3) The shareholder rights including voting rights require the transfer of
the shares of Beijing Origin to State Harvest or any party designated by State
Harvest within three years upon the removal of the PRC legal
restriction.
Through
the consignment agreements described above, State Harvest is deemed the sole
beneficiary of Beijing Origin resulting in Beijing Origin being deemed a
subsidiary of State Harvest under the requirements of Financial Accounting
Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 810-10-05
(former Financial Interpretation 46 (Revised) “Consolidation of Variable
Interest Entities” (FIN 46(R)). The agreements described above provided for
effective control of Beijing Origin to be transferred to State Harvest at
December 25, 2004. Neither State Harvest nor BioTech had any operating activity
prior to entering into the consignment agreements with Beijing Origin. In
substance, State Harvest has substantially all the same shareholders of Beijing
Origin. This transaction has been accounted for on a basis similar to
reorganization between entities under common control. Accordingly, State
Harvest’s consolidated financial statements are prepared by including the
consolidated financial statements of Beijing Origin through December 24, 2004,
and subsequently the Company’s consolidated financial statements include the
financial statements of State Harvest, its majority owned subsidiary and Beijing
Origin through the date of the Share Exchange Transaction. The revenue of the
Company has been generated from Beijing Origin and its subsidiaries for the year
ended September 30, 2008, 2009 and 2010 are 100%, 100% and 97.96%, respectively.
Beijing Origin and its subsidiaries also account for 99% and 93% of the total
assets of the Company as at September 30, 2009 and 2010
respectively.
Further
acquisition of equity interest in Denong and Changrong during the
year
Denong
As at
September 30, 2009, Beijing Origin held the equity interest of 97.62% in Denong.
On January 20, 2010, Beijing Origin further acquired 0.25% of the equity
interest in Denong for RMB200. Upon completion of the acquisition from
non-controlling interests, the company held 97.87% equity interest in
Denong.
According
to ASC 810-10 “Consolidation”, these non-controlling interests acquisitions were
recognized as equity transactions, and the difference between the consideration
paid and the carrying amount of the 0.25% equity interest in Beijing Origin
amounted approximately to RMB391 was recorded in additional paid-in capital
during the year.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
Continued
|
Changrong
As at
September 30, 2009, Beijing Origin held the direct equity interest of 43.95% and
indirect ownership of 7.71%, constituting an effective control in Changrong. On
December 15, 2009, Beijing Origin acquired an additional 10% of the equity in
Jilin Changrong for RMB 24,000 bringing Beijing Origin’s total direct ownership
to 53.95% and a combined direct and indirect ownership to 61.66%. The results of
Changrong have been consolidated into the financial statements of the Company
since that date. As a result of the acquisition, the Company was able to improve
the efficiencies at its key business units in the northeast region of the
PRC.
According
to ASC 810-10 “Consolidation”, these non-controlling interests acquisitions were
recognized as equity transactions, and the difference between the consideration
paid and the carrying amount of the 10% equity interest in Beijing Origin
amounted approximately to RMB15,580 was recorded in additional paid-in capital
during the year.
Business
acquisition during the year
Acquisition of
Kunfeng
On June
12, 2010, BioTech acquired 80% equity interest of Kunfeng, which was principally
engaged in production of agricultural chemical, at a cash consideration of
RMB14,960, to increase the Company’s production line and extend the offerings
into agricultural chemicals. The fair value of the identifiable net assets of
the acquiree mainly consisted of cash and cash equivalents of RMB4,420, advances
to suppliers of RMB4,989, inventories of RMB2,157, plant and equipment of
RMB4,632 and acquired intangible assets of RMB2,409. The total net cash paid in
this acquisition was RMB10,540. The amounts of Kunfeng’s revenue and earnings
included in the Company’s consolidated statement of income for the year ended
September 30, 2010, and the revenue and earnings of Kunfeng had the acquisition
date been October 1, 2008, or October 1, 2009, are insignificant to the
Company’s result of operations.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of consolidation
The
consolidated financial statements of the Company are prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”); include the assets, liabilities, revenues, expenses and cash flows of
all subsidiaries and variable interest entities. Intercompany balances,
transactions and cash flows are eliminated on consolidation.
Convenience
translation into United States dollars
The
consolidated financial statements are presented in Renminbi. The translation of
Renminbi amounts into United States dollar amounts has been made for the
convenience of the reader and has been made at the exchange rate quoted by the
middle rate by the State Administration of Foreign Exchange in China on
September 30, 2010 of RMB6.7011 to US$1.00. Such translation amounts should
not be construed as representations that the Renminbi amounts could be readily
converted into United States dollar amounts at that rate or any other
rate.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
|
Use
of estimates
The
preparation of the consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Estimates
are adjusted to reflect actual experience when necessary. Significant accounting
estimates reflected in the Company’s consolidated financial statements include
inventory valuation, useful lives of plant and equipment and acquired intangible
assets, the valuation allowance for deferred income tax assets and the valuation
of embedded derivatives of the convertible notes. Actual results could differ
from those estimates.
Cash
and cash equivalents
Cash and
cash equivalents consist of cash on hand, cash accounts, interest bearing
savings accounts, time certificates of deposit and debt securities with a
maturities of three months or less when purchased.
Debt
securities
The
Company classifies its debt securities into held-to-maturity and available for
sales.
Held-to-maturity
securities are those securities in which the Company has positive intent and
ability to hold the security to maturity. Held-to-maturity securities are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts. Any decline in the market of any held-to-maturity
security below cost, that is deemed to be other than temporary, results in a
reduction in the carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the straight-line
method.
Available-for-sale
securities are measured at fair value and unrealized holding gains and losses
are excluded from earnings and reported as a net amount in a separate component
of shareholders’ equity until realized. Other than temporary impairments in
value of available-for-sale securities are included in earnings.
Inventories
Inventories
are stated at the lower of cost, determined by weighted-average method, or
market. Work-in-progress and finished goods inventories consist of raw
materials, direct labor and overhead associated with the manufacturing
process.
Other
current assets
Other
current assets consist principally of advance to staff and other miscellaneous
receivables.
Land
use rights, net
Land use
rights are recorded at cost less accumulated amortization. Amortization is
provided over the term of the land use right agreements on a straight-line basis
for the beneficial period.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
|
Plant
and equipment, net
Plant and
equipment are recorded at cost less accumulated depreciation and amortization.
Maintenance and repairs are charged to expense as incurred. Depreciation is
calculated on a straight-line basis over the following estimated useful
lives:
Plant
and building
|
20-40
years
|
Machinery
and equipment
|
10-15
years
|
Furniture
and office equipment
|
5-8
years
|
Motor
vehicles
|
5-10
years
|
Leasehold
improvements
|
Shorter
of the useful lives or the lease
term
|
The
Company constructs certain of its facilities. In addition to costs under
construction contracts, external costs directly related to the construction of
such facilities, including duty and tariff, and equipment installation and
shipping costs, are capitalized. Depreciation is recorded at the time assets are
placed in service.
Leases
Leases
are classified at the inception date as either a capital lease or an operating
lease. For the lessee, a lease is a capital lease if any of the following
conditions exist: a) ownership is transferred to the lessee by the end of the
lease term, b) there is a bargain purchase option, c) the lease term is at least
75% of the property’s estimated remaining economic life or d) the present value
of the minimum lease payments at the beginning of the lease term is 90% or more
of the fair value of the leased property to the lessor at the inception date. A
capital lease is accounted for as if there was an acquisition of an asset and an
incurrence of an obligation at the inception of the lease. All other leases are
accounted for as operating leases. The Company has no capital leases for any of
the periods presented.
Goodwill
Goodwill
represents the excess of aggregate purchase price over the fair value
of net assets acquired in a business combination. Goodwill is not amortized, but
instead tested for impairment at least annually or more frequently if certain
circumstances indicate a possible impairment may exist. The Company adopted FASB
ASC 350-10 (former Statement of Financial Accounting Standards (“SFAS”) No. 142
“Goodwill and Other Intangible Assets”) and performs its annual impairment
review of goodwill on September 30 of each year. Management evaluates the
recoverability of goodwill using a two-step impairment test approach at the
reporting unit level, which is determined to be the enterprise level. In the
first step, the fair value of the reporting unit is compared to its carrying
value including goodwill. Second, if the carrying amount of the reporting unit
exceeds its fair value, an impairment loss is recognised for any excess of the
carrying amount of the goodwill over the implied fair value of the goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a business combination.
The
carrying amount of the goodwill at September 30, 2009 and 2010 represents the
cost arising from the business combinations in previous years and no impairment
on goodwill was recognised for any of the periods presented for the
Company.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
|
Acquired
intangible assets, net
Acquired
intangible assets primarily consist of purchased technology rights and
distribution network and are stated at cost less accumulated amortization.
Amortization is calculated on a straight-line basis over the estimated useful
lives of these assets and recorded in operating expenses. Amortization is
calculated on a straight-line basis over the following estimated useful lives
for the main acquired intangible assets.
Technology
rights for licensed seeds
|
3-20
years
|
Distribution
network
|
6-14
years
|
Trademark
|
Indefinite
|
Valuation
of long-lived asset
The
Company reviews the carrying value of long-lived assets to be held and used,
including other intangible assets subject to amortization, when events and
circumstances warrants such a review. The carrying value of a long-lived asset
is considered impaired when the anticipated undiscounted cash flow from such
asset is separately identifiable and is less than its carrying value. In that
event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset and intangible assets.
Fair market value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on long-lived
assets and intangible assets to be disposed are determined in a similar manner,
except that fair market values are reduced for the cost to dispose.
Embedded
derivatives
On July
25, 2007, the Company issued US$40,000 of guaranteed senior secured convertible
notes (the “Notes”) which were originally due on July 25,
2012. According to the Notes Purchase Agreement, the Company is
required to redeem part of the principal of the Notes if the conversion price is
below a certain threshold. Whenever the Company redeems the Note, the Company
has to pay interest which is calculated at the annual interest rate of 16% on
the redeemed principal amount. Pursuant to FASB ASC 815-10 (former
SFAS No. 133 “Accounting For Derivative Instruments And Hedging Activities” and
Emerging Issues Task Force (“EITF”) Issue No. 00-19 “Accounting For Derivative
Financial Instruments Indexed To And Potentially Settled In A Company’s Own
Stock”), the Company bifurcates the redemption feature from the Notes as the
redemption feature is determined to be not clearly and closely related to the
host contract. The redemption feature is recorded at fair value, mark-to-market
at each reporting period, and are carried a separate line of the accompanying
balance sheet.
Revenue
recognition
The
Company derives its revenue primarily from the sale of various branded
conventional seeds, branded seeds with biotechnology traits and branded
agricultural chemical products.
Revenue
is recognized when pervasive evidence of an arrangement exists, products have
been delivered, the price is fixed or determinable, collectability is reasonably
assured and the right of return has expired. The Company generally determines
the final selling price after a period the goods are delivered to the customers.
Accordingly, the Company defers revenue recognition until the selling price has
been finalized with the customers.
The
estimated amounts of revenues billed in excess of revenues recognized are
recorded as deferred revenues.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
|
Government
subsidies
A
government subsidy is not recognized until there is reasonable assurance that:
(a) the enterprise will comply with the conditions attached to the grant; and
(b) the grant will be received.
The
Company receives government subsidies in the form of funds for research and
development activities. No government subsidies were recognized for
the year ended September 30, 2008, government subsidies recognized for the year
ended September 30, 2009 and September, 2010 were RMB3,658 and RMB 1,362
respectively.
When the
Company received the government subsidies but the conditions attached to the
grants have not been fulfilled, such government subsidies are recorded under
other liabilities. The reclassification of short-term or long-term liabilities
is depended on the management’s expectation of when the conditions attached to
the grant can be fulfilled.
Cost
of revenues
Cost of
revenues consists of expenses directly related to sales, including the purchase
prices and development costs for seeds and agricultural chemical products,
depreciation and amortization, impairment of inventory, shipping and handling
costs, salary and compensation, supplies, license fees, and rent.
Research
and development costs
Research
and development costs relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
Advertising
costs
Advertising
costs are expensed when incurred and included in selling and marketing
expenses. For the years ended September 30, 2008, 2009 and 2010,
advertising costs were RMB3,663,RMB2,184 and
RMB1,560, respectively.
Shipping
and handling cost
The
Company includes shipping and handling costs as either cost of goods sold or
selling and administrative expenses depending on the nature of the expenses.
Shipping and handling costs which relate to transportation of products to
customers’ locations is charged to selling and marketing expenses and shipping
and handling which relate to the transportation of goods to factories from
suppliers and from one factory to another is charged to cost of
revenues.
For the
years ended September 30, 2008, 2009 and 2010, shipping and handling cost
included in selling and marketing expenses were RMB8,209, RMB10,737 and
RMB12,164 respectively.
Allowance
for doubtful account
The
Company regularly monitors and assesses the risk of not collecting amounts owed
to the Company by customers. This evaluation is based upon a variety of factors
including: an analysis of amounts current and past due along with relevant
history and facts particular to the customer. Based upon the results of this
analysis, the Company records an allowance for uncollectible accounts for this
risk.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
|
Income
taxes
Deferred
income taxes are recognized for the future tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the consolidated financial statements, net of operating loss carry
forwards and credits. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Current income taxes are
provided for in accordance with the laws of the relevant tax
authorities.
The
Company adopted FASB ASC 740-10 (former FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”
(“FIN48”)). The Company’s policy on classification of all interest and penalties
related to unrecognized tax benefits, if any, as a component of income tax
provisions.
Foreign
currency translation
The
functional currency of the Company excluding Agritech and State Harvest is
Renminbi. Monetary assets and liabilities denominated in currencies other than
Renminbi are translated into Renminbi at the rates of exchange ruling at the
balance sheet date. Transactions in currencies other than Renminbi are converted
into Renminbi at the applicable rates of exchange prevailing the transactions
occurred. Transaction gains and losses are recognized in the consolidated
statements of operations.
The
functional currency of Agritech and State Harvest are maintained in United State
dollars. Assets and liabilities are translated at the exchange rates at the
balance sheet date, equity accounts are translated at historical exchange rates
and revenues, expenses, gains and losses are translated using the average rate
for the period. Translation adjustments are reported as cumulative translation
adjustments and are shown as a separate component of other comprehensive
(loss)/income. The Company has chosen Renminbi as its reporting
currency.
Comprehensive
income
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Comprehensive income for the
years has been disclosed within the Consolidated Statements of Income and
Comprehensive income for presentational purpose of the disclosure of
comprehensive income attributable to Agritech and the non-controlling interests
respectively.
Income
per share
Basic
income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the years. Diluted income per share
gives effect to all dilutive potential common shares outstanding during the
years. The weighted average number of common shares outstanding is adjusted to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued. In computing the
dilutive effect of potential common shares, the average stock price for the
period is used in determining the number of treasury shares assumed to be
purchased with the proceeds from the exercise of options.
Share-based
compensation
The
Company adopts FASB ASC 718-10 (former SFAS No. 123 (revised 2004) (“SFAS No.
123(R)”), ‘‘Share-based Payment’’). ASC 718-10 requires that
share-based payment transactions with employees, such as share options, be
measured based on the grant-date fair value of the equity instrument issued and
recognized as compensation expense over the requisite service period, with a
corresponding addition to equity. Under this method, compensation cost related
to employee share options or similar equity instruments is measured at the grant
date based on the fair value of the award and is recognized over the period
during which an employee is required to provide service in exchange for the
award, which generally is the vesting period.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
|
Fair
value measurement
On
October1, 2008, the Company adopted FASB ASC 820-10 (former SFAS No.157, “Fair
Value Measurements”), and which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. ASC 820-10 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information.
ASC
820-10 establishes a three-level valuation hierarchy of valuation techniques
based on observable and unobservable inputs, which may be used to measure fair
value and include the following:
Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
Level 2 -
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 -
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
Classification
within the hierarchy is determined based on the lowest level of input that is
significant to the fair value measurement.
Recently
issued accounting pronouncements
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140, which is codified as ASC
860-10-65. ASC 860-10-65 seeks to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. ASC 860-10-65 is applicable for annual
reporting periods that begins after November 15, 2009 and interim periods
therein and thereafter. The Company is currently evaluating the effect of ASC
860-10-65 and does not expect it to have a material impact on its financial
position and results of operation.
In June
2009, the FASB issued SFAS No.167, “Amendments to FASB Interpretation No.46(R)”,
which is codified as ASC 810-10-65. ASC 810-10-65 requires an
enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a Variable
Interest Entity (“VIE”). Under ASC 810-10-65, an enterprise has a
controlling financial interest when it has (a) the power to direct the
activities of a VIE that most significantly impact the entity’s economic
performance and (b) the obligation to absorb losses of the entity or the right
to receive benefits from the entity that could potentially be significant to the
VIE. ASC 810-10-65 also requires an enterprise to assess whether it has an
implicit financial responsibility to ensure that a VIE operates as designed when
determining whether it has power to direct the activities of the VIE that most
significantly impact the entity’s economic performance. ASC 810-10-65
also requires ongoing assessments of whether an enterprise is the primary
beneficiary of a VIE, requires enhanced disclosures and eliminates the scope
exclusion for qualifying special-purpose entities. ASC 810-10-65
shall be effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. ASC
810-10-65 is effective for the Company in the first quarter of fiscal 2011. The
Company is currently evaluating the effect of ASC 810-10-65 and does not expect
it to have a material impact on its financial position and results of
operation.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
|
Recently issued accounting
pronouncements - Continued
In
January 2010, the FASB issued ASU No. 2010-02 Consolidation (Topic 810)
Accounting and Reporting for Decreases in Ownership of a Subsidiary (“ASU No.
2010-02”). This pronouncement is an authoritative guidance to clarify the scope
of accounting and reporting for decreases in ownership of a subsidiary. The
objective of this guidance is to address implementation issues related to
changes in ownership provisions. This guidance clarifies certain conditions,
which need to apply to this guidance, and it also expands disclosure
requirements for the deconsolidation of a subsidiary or derecognition of a group
of assets. ASU No. 2010-02 is effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The Company does not
expect the adoption of ASU No. 2010-02 would have a significant effect on the
Company’s financial position, result of operations and cash flow.
In
January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements
(“ASU No. 2010-06”). This pronouncement is an authoritative guidance to improve
disclosures about fair value measurements. This guidance amends previous
guidance on fair value measurements to add new requirements for disclosures
about transfers into and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurement on
a gross basis rather than on a net basis as currently required. This guidance
also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. ASU No.
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of ASU No. 2010-06 on the Company’s
consolidated financial statements, but does not expect it to have a material
impact.
In July
2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
The amendments in this Update are effective as of the first interim or annual
reporting period ending on or after December 15, 2010. The Company does not
expect the provisions of ASU 2010-20 to have a material effect on the financial
position, results of operations or cash flows of the Company.
The gross
realized gains on the sale of debt securities, which consist of investments in
US Government Agencies and Corporate bonds, were RMB893, RMB nil and RMB
nil for the years ended September 30, 2008, 2009 and 2010,
respectively
4.
|
RELATED
PARTY BALANCES AND TRANSACTIONS
|
|
(1)
|
Related party
relationships
|
Name of related parties
|
|
Relationship
|
Shenzhen
Biocentury Transgene (China) Limited (“Biocentury”)
|
|
Being
an equity investment of the Company which disposed on May 27, 2010 (note
10)
|
Jinong
|
|
Being
an equity investment of the Company (note 10)
|
Liyu
|
|
Being
an equity investment of the Company (note 10)
|
Henan
Agriculture University
|
|
Being
non-controlling interests of Beijing
Origin
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
4.
|
RELATED
PARTY BALANCES AND TRANSACTIONS -
Continued
|
|
(2)
|
Amounts due from related
parties
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Jinong
(note (i))
|
|
|
- |
|
|
|
6 |
|
Holding
company of Jinong (note (ii))
|
|
|
2,084 |
|
|
|
- |
|
Liyu
|
|
|
- |
|
|
|
3,094 |
|
Non-controlling
interests of Denong
|
|
|
- |
|
|
|
7 |
|
Non-controlling
interests of Changrong
|
|
|
4,920 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
7,004 |
|
|
|
5,107 |
|
|
Note (i):
|
The
balance as of September 30, 2010 represented the temporary loan to Jinong,
which was payable on demand with interest
free.
|
|
Note (ii):
|
The
balance represents repayment to the holding company of Jinong for research
and development activities to be carried out within one
year.
|
|
(3)
|
Amounts due to related
parties
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Non-controlling
interests of Denong (note (i))
|
|
|
113 |
|
|
|
113 |
|
Non-controlling
interests of Beijing Origin
|
|
|
108 |
|
|
|
68 |
|
Companies
controlled by the Company’s directors
|
|
|
1,598 |
|
|
|
1,461 |
|
Ex-shareholders
of State Harvest
|
|
|
150 |
|
|
|
147 |
|
Biocentury
|
|
|
6 |
|
|
|
- |
|
Jinong
|
|
|
13,832 |
|
|
|
6,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
15,699 |
|
|
|
7,926 |
|
|
Note (i):
|
This
is the amount temporarily funded by non-controlling interests of Denong.
The amount is payable on demand with interest
free.
|
|
(4)
|
Transactions with related
parties
|
(a) Sales
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Biocentury
|
|
|
448 |
|
|
|
- |
|
|
|
- |
|
Jinong
|
|
|
409 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
857 |
|
|
|
- |
|
|
|
- |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
4.
|
RELATED
PARTY BALANCES AND TRANSACTIONS -
Continued
|
|
(4)
|
Transactions with related
parties - Continued
|
(b) Purchases
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Biocentury
|
|
|
19,256 |
|
|
|
116 |
|
|
|
116 |
|
Liyu
|
|
|
- |
|
|
|
- |
|
|
|
240 |
|
Jinong
|
|
|
1,609 |
|
|
|
- |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,865 |
|
|
|
116 |
|
|
|
372 |
|
(c) Technology usage
fees
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Liyu
|
|
|
9,573 |
|
|
|
5,752 |
|
|
|
5,471 |
|
Henan
Agriculture University
|
|
|
320 |
|
|
|
108 |
|
|
|
68 |
|
Non-controlling
interests of Denong
|
|
|
- |
|
|
|
566 |
|
|
|
599 |
|
Biocentury
|
|
|
300 |
|
|
|
300 |
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,193 |
|
|
|
6,726 |
|
|
|
6,444 |
|
The above
amounts relate to technology usage fees paid to certain related party research
centres for the exclusive right to use certain seed technologies.
(d) Sales of plant
and equipment
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interests of Denong
|
|
|
- |
|
|
|
8 |
|
|
|
- |
|
Jinong
|
|
|
- |
|
|
|
640 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
648 |
|
|
|
- |
|
(e) Purchases of
plant and equipment
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
- |
|
|
|
- |
|
|
|
150 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
4.
|
RELATED
PARTY BALANCES AND TRANSACTIONS -
Continued
|
|
(4)
|
Transactions with related
parties - Continued
|
(f) Interest
income
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interests of Changrong
|
|
|
334 |
|
|
|
261 |
|
|
|
- |
|
(g) Rental expense
paid for plant and equipment
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
1,928 |
|
|
|
1,687 |
|
|
|
935 |
|
(h) Research &
Development expenses
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Holding
company of Jinong
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Biocentury
|
|
|
- |
|
|
|
3,400 |
|
|
|
|
Liyu
|
|
|
1,200 |
|
|
|
1,200 |
|
|
|
1,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200 |
|
|
|
4,600 |
|
|
|
1,200 |
|
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
- |
|
|
|
4,020 |
|
|
|
5,025 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
Advances
to suppliers consist of the following:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Purchases
of materials
|
|
|
949 |
|
|
|
1,471 |
|
Prepayments
for advertisement
|
|
|
35 |
|
|
|
10 |
|
Prepayments
for transportation fee
|
|
|
70 |
|
|
|
518 |
|
Prepayments
for operating lease
|
|
|
12 |
|
|
|
290 |
|
Prepayments
for testing fee
|
|
|
223 |
|
|
|
106 |
|
Utility
deposit
|
|
|
- |
|
|
|
270 |
|
Others
|
|
|
648 |
|
|
|
1,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,937 |
|
|
|
3,986 |
|
Advances
to suppliers mainly represent deposits paid but related materials and services
have not been provided to the Company.
Inventories
consist of the following:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Work
in progress and supplies
|
|
|
203,833 |
|
|
|
172,389 |
|
Finished
goods
|
|
|
137,937 |
|
|
|
110,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
341,770 |
|
|
|
283,174 |
|
As of
September 30, 2009 and 2010, goods already delivered to customers but still
recorded in finished goods, amounted to RMB17,313 and RMB10,080, respectively.
As the Company does not recognize revenue until the selling prices of respective
goods have been finalized with the customers, goods delivered to customers as
mentioned above will only be transferred to cost of revenues when related
revenue is recognized.
The
Company made allowances of RMB28,859 and RMB22,026 against the cost of
inventories as of September 30, 2009 and 2010 respectively based on the
assessment of the lower of cost or the market.
Other
current assets consist of the following:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Advances
to staff for business use
|
|
|
5,512 |
|
|
|
6,428 |
|
Refundable
deposit for a cancelled project
|
|
|
741 |
|
|
|
441 |
|
Receivable
from a private investor arising from a sale of equity
investment
|
|
|
- |
|
|
|
10,000 |
|
Others
|
|
|
2,472 |
|
|
|
1,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
8,725 |
|
|
|
18,838 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
Land use
rights, net consist of the following:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Land
use rights
|
|
|
22,980 |
|
|
|
23,880 |
|
Accumulated
amortization
|
|
|
(2,484 |
) |
|
|
(2,973 |
) |
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
|
20,496 |
|
|
|
20,907 |
|
Land use
rights with net values of RMB11,715 and RMB3,136 have been pledged as collateral
for bank loans of Beijing Origin and Henan Cotton as of September 30, 2009 and
2010, respectively.
Amortization
expenses for the years ended September 30, 2008, 2009 and 2010 were RMB498,
RMB499 and RMB489 respectively.
9.
|
PLANT
AND EQUIPMENT, NET
|
Plant and
equipment, net consist of the following:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Plant
and building
|
|
|
125,310 |
|
|
|
133,874 |
|
Machinery
and equipment
|
|
|
34,347 |
|
|
|
41,677 |
|
Furniture
and office equipment
|
|
|
12,662 |
|
|
|
12,309 |
|
Motor
vehicles
|
|
|
17,379 |
|
|
|
20,082 |
|
Leasehold
improvements
|
|
|
1,299 |
|
|
|
1,299 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
190,997 |
|
|
|
209,241 |
|
Accumulated
depreciation
|
|
|
(47,073 |
) |
|
|
(55,643 |
) |
Construction
in progress
|
|
|
9,038 |
|
|
|
8,083 |
|
|
|
|
|
|
|
|
|
|
Plant
and equipment, net
|
|
|
152,962 |
|
|
|
161,681 |
|
Included
in plant and building, with net values of RMB44,130 and RMB44,830 have been
pledged for bank loans of Beijing Origin as of September 30, 2009 and 2010,
respectively. As a note, the pledged loans are solely for Beijing
Origin as of September 30, 2010. The depreciation expenses for the
years ended September 30, 2008, 2009 and 2010 were RMB11,121, RMB9,360, and
RMB11,531 respectively.
Construction
in progress refers to production facilities under construction by the
Company.
Equity
investments consist of the following:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Equity
method investment
|
|
|
65,453 |
|
|
|
22,505 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
10.
|
EQUITY
INVESTMENTS - Continued
|
Liyu
The
Company owns 30% equity interest in Liyu and accounts for the investment in Liyu
under the equity method. For the years ended September 30, 2008, 2009 and 2010,
the Company recorded its pro-rata share of earnings in Liyu of RMB1,757, RMB297
and RMB497 respectively. The Company also received dividends of RMB1,200,
RMB1,200 and RMB1,200 respectively from Liyu for each of the years ended
September 30, 2008, 2009 and 2010. The dividend received was accounted for as a
reduction in equity investments.
The
Company owns 34% equity interest in Biocentury and accounts for the investment
in Biocentury under the equity method. For the years ended September 30, 2008,
2009 and 2010, the Company recorded its pro-rata share of earnings in Biocentury
of RMB8,619, RMB2,632 and RMB7,650, respectively. The Company also received
dividends of RMBnil, RMB3,400 and RMBnil from Biocentury for the
years ended September 30, 2008, 2009 and 2010. On May 27, 2010, The Company
disposed its 34% interest in Biocentury for a cash consideration
of RMB60,000. A gain on disposal of RMB8,883 was recorded in the
statement of income.
The
Company owns 23% equity interest in Jinong and accounts for the investment in
Jinong under the equity method. For the years ended September 30,
2008, 2009 and 2010 the Company recorded its pro-rata share of earnings (losses)
in Jinong of RMB(2,657), RMB1,755 and RMB1,215,
respectively.
Jilin
Changji Seed Limited (“Changji”)
The
Company owns 35% equity interest in Changji and accounts for the investment in
Changji under the equity method. For the years ended September 30, 2008, 2009
and 2010, the Company recorded its pro-rata share of earnings (losses) in
Changji of RMB(17), RMB(15) and RMB7, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
11.
|
ACQUIRED
INTANGIBLE ASSETS, NET
|
Acquired
intangible assets, net consist of the following:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Technology
rights for licensed seeds
|
|
|
68,854 |
|
|
|
74,265 |
|
Distribution
network
|
|
|
6,975 |
|
|
|
6,975 |
|
Trademark
and certificates
|
|
|
1,764 |
|
|
|
3,394 |
|
Others
|
|
|
1,519 |
|
|
|
4,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
79,112 |
|
|
|
89,164 |
|
Accumulated
amortization
|
|
|
(38,150 |
) |
|
|
(49,506 |
) |
Impairment
provision
|
|
|
(4,314 |
) |
|
|
(4,314 |
) |
|
|
|
|
|
|
|
|
|
Acquired
intangible assets, net
|
|
|
36,648 |
|
|
|
35,344 |
|
Amortization
expenses for the years ended September 30, 2008, 2009 and 2010 were RMB10,678,
RMB11,407 and RMB9,692 respectively.
Impairment
provision charged for the years ended September 30, 2008, 2009 and 2010 were
RMB1,962, RMB nil and RMB nil, respectively. It related to seed
rights for which no active market existed.
Amortisation
expense on these intangible assets for each of the next five years is as
follows:
Year ending September 30,
|
|
RMB
|
|
|
|
|
|
2011
|
|
|
9,350 |
|
2012
|
|
|
5,553 |
|
2013
|
|
|
3,330 |
|
2014
|
|
|
2,241 |
|
2015
|
|
|
1,499 |
|
|
|
|
|
|
Total
|
|
|
21,973 |
|
The
Company enters into technology transfer and usage agreements with strategic
partners and pays up-front fees for the exclusive rights to certain seed
technologies. Technology rights amortized over an average usage period of 5
years and charged to general and administrative expenses.
Other
assets consist of the following:
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
Prepaid
lease
|
|
|
|
951 |
|
|
|
778 |
|
Deposits
for purchase of acquired intangible assets
|
Note (i)
|
|
|
2,350 |
|
|
|
40 |
|
Deposits
for purchase of plant and equipment
|
|
|
|
650 |
|
|
|
3,044 |
|
Others
|
|
|
|
40 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,991 |
|
|
|
3,882 |
|
|
Note(i):
|
The
Company entered into new technology transfer agreements with certain
investors of new seed products and paid
deposits.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
80,290 |
|
|
|
85,900 |
|
As of
September 30, 2010, short-term borrowings were comprised of secured bank loans
of RMB47,900 and unsecured bank loans of RMB38,000, which is under
Beijing Origin and has been guaranteed by a subsidiary, BioTech. The secured
loans were secured by the Company’s land use rights of RMB3,136 (note 8) and
plant and equipment of RMB44,830 (note 9). The annual interest rate ranged from
5.31% to 5.84%.
As of
September 30, 2009, short-terrn borrowings were comprised of secured bank loans
of RMB67,350, and unsecured bank loans of RMB12,940, of which
RMB12,000 under Beijing Origin has been guaranteed by a subsidiary, BioTech. The
secured loans were secured by the Company’s land use rights of RMB11,715 (note
8), plant and equipment of RMB44,130 (note 9) and bank deposits of RMB500. The
annual interest rate ranged from 2.4% to 6.66%.
Interest
expense and weighted average interest rate for the years ended September 30,
2008, 2009 and 2010 were RMB11,932 and 7.28 %, RMB11,574 and 5.98%, and RMB8,539
and 5.70% respectively.
On July
25, 2007, the Company issued US$40,000 of guaranteed senior secured convertible
notes (the “Notes”) which were due on July 25, 2012. The Notes are secured by
the shares of certain of the Company’s subsidiaries. The Notes bear
interest at the rate of 1% per annum, payable semi-annually in arrears whereas
the effective interest rate is 13% per annum. According to the
original indenture agreement, the Notes were convertible into shares of common
stock of the Company at an initial conversion price of US$11.50 per share, and
the conversion price is subject to adjustment in certain circumstances,
including semi-annual reset (the “Reset Date”) of the conversion price as at
June 30 or December 31 of any year, commencing with December 31, 2008 and upon
occurrence of certain dilutive events, in each case subject to certain
conditions. Upon the specific occurrences such as, but not limited to, specified
asset sale or termination of trading, the Notes holders may require the Company
to repurchase all or a portion of their Notes. Also, according to the original
indenture agreement, at maturity date, the Company shall be required to redeem
any outstanding principal at the redemption amount determined so that it
represents for the Note holders a gross yield of 16% on a semi-annual
basis.
On July
28, 2008, the Company and the Notes holder entered into a Notes Repurchase
Agreement (1st NRA) to repurchase the principal amount of US$18,700 of the Notes
for a total repurchase price of US$20,000 payable in cash. The Notes repurchase
would be completed in two tranches, with the first tranche to repurchase
US$14,000 in principal amount of the Notes for a repurchase price of US$15,000
payable on July 28, 2008 and the second tranche to repurchase US$4,700 in
principal amount of the Notes for a repurchase price of US$5,000 payable by end
of 2008. As of September 30, 2008, the first tranche was paid and the
outstanding principal of the Notes was US$26,000. In connection with
the 1st NRA, the Notes holder has agreed to waive past noncompliance by the
Company through June 30, 2008 under certain financial covenants, and to amend a
covenant, contained in the indenture for the Notes. The Notes holder
has not agreed to waive any future defaults under the Note
indenture.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
14.
|
CONVERTIBLE
NOTES - Continued
|
On
January 19, 2009, the Company and the Notes holder entered into a Second Notes
Repurchase Agreement (2nd NRA). Pursuant to the 2nd NRA, the Company
will repurchase from the Notes holder remaining principal amount of US$21,300
for a total repurchase price of US$22,264 payable in cash in two tranches. In
the first tranche, the Company will repurchase US$4,700 in principal amount of
the Notes for a repurchase price of US$5,000. In the second tranche, the Company
will repurchase the remaining US$16,600 principal amount of the Notes for a
repurchase price of US$104 for each principal amount of US$100 of such Notes on
a date to be mutually agreed upon by the Company and the Notes holder but not
later than December 31, 2009. The Notes holder will also not be entitled to any
interest payable on the repurchased Notes in respect of any record date prior to
the repurchase. In connection with the 2nd NRA, the Notes holder has
agreed to eliminate the existing conversion rights on the Notes. The
Notes holder has also agreed to eliminate certain financial covenants, and to
amend other covenants, contained in the indenture for the Notes. The
Note holder has also agreed to waive all defaults or events of default or their
consequences, if any, on the part of the Company for failure to duly observe and
perform this covenant through December 31, 2008, provided that the waiver will
terminate if the Company defaults on its obligations under the 1st NRA. The
Company has been in compliance with the covenants since the expiration of the
waiver.
In
compliance with the 1st NRA and 2nd NRA, the Company paid a total amount of
US$10,000 to repurchase US$9,400 in principal amount of the Notes on February
19, 2009.
Pursuant
to FASB ASC 815-10, the redemption feature mentioned above is treated as an
embedded derivative and is separately presented as a non-current liability in
the consolidated balance sheet. The fair value of the
redemption feature at July 25, 2007 (the issuance date of the Notes), September
30, 2007, July 28, 2008 (1st NRA), September 30, 2008 and January 19, 2009
(2nd
NRA) were RMB99,858, RMB 86,937, RMB 55,808, RMB33,580 and RMB30,334,
respectively.
As of
September 30, 2009 and 2010, the Company did not have any derivatives or
financial liabilities that are measured at fair value.
The
tables below provide a summary of the changes in fair value, including net
transfers, of all financial liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the year ended
September 30, 2009 and 2010:
|
|
Derivative Liabilities -
Redemption Feature
|
|
|
|
As of September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
33,580 |
|
|
|
- |
|
Total
realized and unrealized (gains) or losses
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
(3,300 |
) |
|
|
- |
|
Included
in other comprehensive income
|
|
|
- |
|
|
|
- |
|
Purchases,
issuances, and (settlements)
|
|
|
(30,334 |
) |
|
|
- |
|
Exchange
difference recognized
|
|
|
54 |
|
|
|
- |
|
Balance,
end of year
|
|
|
- |
|
|
|
- |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
14.
|
CONVERTIBLE
NOTES - Continued
|
The fair
values of the redemption feature were estimated by using binomial model based on
following assumptions:
|
|
As of
July 25,
2007
|
|
|
As of
September
30, 2007
|
|
|
As of
July 28,
2008
|
|
|
As of
September
30, 2008
|
|
|
As of
January 19,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
rate of return
|
|
|
4.78 |
% |
|
|
4.24 |
% |
|
|
3.12 |
% |
|
|
2.63 |
% |
|
|
1.28 |
% |
Time
to expiration
|
|
5
years
|
|
|
4.82
years
|
|
|
3.49
years
|
|
|
3.82
years
|
|
|
3.57
years
|
|
Volatility
rate
|
|
|
49.12 |
% |
|
|
49.12 |
% |
|
|
77.00 |
% |
|
|
76.00 |
% |
|
|
82.20 |
% |
Dividend
yield
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
At the
issuance date of the Notes, the value of the beneficial conversion features
amounted to RMB31,230 was recorded under additional paid-in
capital.
The
discount associates with the issuance of the convertible notes amounted to
RMB131,087 was amortized over the life of the convertible notes, using the
effective interest method. Amortization of the Note discount for the years ended
September 30, 2008, 2009 and 2010 were RMB18,824, RMB3,350 and nil respectively,
which as reflected in the interest expenses.
The
interest expenses for the Notes for the years ended September 30, 2008, 2009 and
2010 were RMB2,611, RMB449 and RMBnil, respectively.
According
to FASB ASC 470-50 (former EITF 96-19 “Debtor’s Accounting for a Modification or
Exchange of Debt Instruments”), the amendment made under 1st NRA is
determined as a modification of debt. As a result, the Company
repurchased the principal amount of US$18,700 of the Notes at a premium of
RMB29,516 (US$4,329). This represents the repurchase price of
US$20,000 in excess of carrying value of the Notes of RMB80,759 (US$11,845) plus
the fair value of the redemption features of RMB26,090 (US$3,826) at July 28,
2008. The premium was amortized using the effective interest method
over the remaining term of the Notes.
According
to ASC 470-50, the amendment made under 2nd NRA is
determined as an extinguishment of debt. As a result, the Company repurchased
the Notes at a loss of RMB51,101 (US$7,483). This represents the
repurchase price of US$22,263 in excess of its carrying value, which included
the present value of the Notes, the discount associated with the issuance and
the premium resulted from 1st NRA, of
RMB70,600 (US$10,338) plus the fair value of the redemption features of
RMB30,334 (US$4,442) at January 19, 2009. The loss on extinguishment
of debt was expensed to the consolidated statements of operations.
As at
September 30, 2009, the outstanding balance of the Notes amounted to RMB117,896
(US$17,264) was classified to Notes payable under current
liabilities. As of December 30, 2010, the Note payable was fully
repaid.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
15.
|
OTHER
PAYABLES AND ACCRUED EXPENSES
|
Other
payables and accrued expenses consist of:
|
|
|
|
September 30,
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
Payable
for purchase of plant and equipment
|
|
|
|
|
437 |
|
|
|
99 |
|
Payable
for purchase of land use rights
|
|
|
|
|
620 |
|
|
|
1,050 |
|
Payable
for purchase of construction-in-progress
|
|
|
|
|
2,635 |
|
|
|
1,276 |
|
Professional
fee payable
|
|
|
|
|
4,108 |
|
|
|
3,653 |
|
Salaries
payable
|
|
|
|
|
7,725 |
|
|
|
12,633 |
|
Accrued
staff bonus
|
|
|
|
|
1,757 |
|
|
|
1,757 |
|
Accrued
interest
|
|
|
|
|
2,071 |
|
|
|
1,813 |
|
Accrued
compensation expenses
|
|
|
|
|
296 |
|
|
|
177 |
|
Accrued
other expenses
|
|
|
|
|
2,123 |
|
|
|
1,361 |
|
Other
taxes payable
|
|
|
|
|
635 |
|
|
|
517 |
|
Deposits
from growers
|
|
|
|
|
2,199 |
|
|
|
1,733 |
|
Payable
for labor union and education expenses
|
|
|
|
|
1,490 |
|
|
|
721 |
|
Loans
from employees of Denong
|
|
Note
(i)
|
|
|
310 |
|
|
|
310 |
|
Loans
from third parties
|
|
Note
(ii)
|
|
|
3,600 |
|
|
|
3,600 |
|
Payable
to former owners of Kunfeng
|
|
|
|
|
- |
|
|
|
2,660 |
|
Others
|
|
|
|
|
1,470 |
|
|
|
2,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,476 |
|
|
|
35,656 |
|
|
Note
(i):
|
RMB310
was borrowed from employees of Denong with interest of 12.5% per annum at
the years ended September 30, 2009 and
2010.
|
|
Note
(ii):
|
RMB3,600
was borrowed from third party companies with interest free, unsecured and
have no fixed repayment terms at the years ended September 30, 2009 and
2010.
|
16.
|
OTHER
LONG-TERM LIABILITIES
|
During
the year, the Company received government subsidies from local PRC government
for research and development projects. The management expects that the
conditions attached to the government subsidies will not be fulfilled within one
year. Such government subsidies are recorded as other long-term liabilities and
the amount as of September 30, 2009 and 2010 are RMBnil and RMB9,426
respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
On
November 8, 2005, the Company adopted the 2005 Performance Equity Plan (the
“Plan”) which allows the Company to offer a variety of incentive awards to
employees. Options to purchase 1,500,000 ordinary shares are authorized under
the Plan. On the same day, options to purchase 974,000 ordinary shares at the
price of US$8.75 per share were granted under the terms of the Plan (“Tranche
1”). All such options expire 5 years from the date of grant and vest over a
period of 3 to 5 years.
Under the
terms of the plan, on October 22, 2007 the Company granted its employees options
to purchase 20,000 ordinary shares at the price of US$9.27 (“Tranche 2”); on
March 28, 2008 the Company granted its employees options to purchase 381,000
ordinary shares at the price of US$5.30 (“Tranche 3”); on June 16, 2008 the
Company granted its employees options to purchase 10,000 ordinary shares at the
price of US$6.64 (“Tranche 4”); and on January 4, 2010 the Company granted its
employees options to purchase 125,000 ordinary shares at the price of
US$12.23(“Tranche 5”). All the options expire 5 years from the date
of grant and vest immediately or over a period of 1 to 5 years.
On
September 14, 2009, the compensation committee of the Board of Directors has
approved both re-pricing of outstanding option grants for reduced awards from
US$8.75 per share to US$4.00 per share or the substitution of restricted stock
for outstanding grants under Tranche 1 that no longer offer the kind of
incentive opportunity originally sought for valued employees. The revised
terms of the stock options were accounted for as a modification in accordance
with ASC 718-10. For the purpose of determining the amount of any
incremental share-based compensation cost that may have resulted from the
modification of the exercise prices, the Company compared the fair value of
modified awards and that of the original awards, both estimated at the date of
the modification and determined that none of the modifications required the
recognition of additional share-based payment expense. The weighted average fair
value at the modification date of US$2.66 is estimated using the Black-Scholes
Option Pricing Model. As of September 14, 2009, there are modified awards
outstanding covering a total of 214,120 ordinary shares which included the
restricted awards for 89,300 shares.
After the
adjusted awards, all the option awards have an exercise price of $4.00 to $12.23
and expire 5 years from the date of grant and vest immediately or over a period
of 1 to 5 years.
On April
22, 2010, the Company adopted the 2009 Performance Equity Plan and authorised to
issue share options with the right to purchase up to 1,500,000 ordinary shares
to the Company’s directors, officers, employees, individual consultants and
advisor. The main purpose of the plan was to provide an existing
structure and renewable benefit plan for senior management and
directors.
During
the year ended September 30, 2009 and 2010, nil and 278,720 options have been
exercised.
For the
options outstanding at September 30, 2010, the weighted average remaining
contractual lives are 3.8 years.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
17.
|
SHARE
OPTION PLAN - Continued
|
A summary
of the share option activity under the Plan is as follows:
|
|
Tranche 1
|
|
|
Tranche 2
|
|
|
Tranche 3
|
|
|
Tranche 4
|
|
|
Tranche 5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date
|
|
November 8,
2005
|
|
|
October 22,
2007
|
|
|
March 28,
2008
|
|
|
June 16,
2008
|
|
|
January 4,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
outstanding as of October 1, 2008
|
|
|
748,748 |
|
|
|
20,000 |
|
|
|
337,408 |
|
|
|
10,000 |
|
|
|
- |
|
Options
cancelled/ forfeited/ expired
|
|
|
(36,749 |
) |
|
|
- |
|
|
|
(22,241 |
) |
|
|
- |
|
|
|
- |
|
Options
modified on September 14, 2009
|
|
|
(497,879 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding as of September 30, 2009
|
|
|
214,120 |
|
|
|
20,000 |
|
|
|
315,167 |
|
|
|
10,000 |
|
|
|
- |
|
Number
of options granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
125,000 |
|
Options
exercised
|
|
|
(124,720 |
) |
|
|
- |
|
|
|
(154,000 |
) |
|
|
- |
|
|
|
- |
|
Options
cancelled/ forfeited/ expired
|
|
|
(25,000 |
) |
|
|
(15,000 |
) |
|
|
(5,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of September 30, 2010
|
|
|
64,400 |
|
|
|
5,000 |
|
|
|
156,167 |
|
|
|
10,000 |
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2009
|
|
|
177,387 |
|
|
|
11,667 |
|
|
|
315,167 |
|
|
|
10,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2010
|
|
|
64,400 |
|
|
|
- |
|
|
|
156,167 |
|
|
|
10,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value at the grant date (USD)
|
|
|
2.69 |
|
|
|
4.55 |
|
|
|
2.69 |
|
|
|
3.42 |
|
|
|
7.20 |
|
The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes Option Pricing Model:
|
|
Tranche 1#
|
|
|
Tranche 2
|
|
|
Tranche 3*
|
|
|
Tranche 4
|
|
|
Tranche 5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
price (USD)
|
|
|
8.75 |
|
|
|
9.27 |
|
|
|
5.30 |
|
|
|
6.64 |
|
|
|
12.23 |
|
Average
risk-free interest rate
|
|
|
4.47 |
% |
|
|
4.08 |
% |
|
|
2.51 |
% |
|
|
3.73 |
% |
|
|
1.66 |
% |
Expected
option life (year)
|
|
|
3.5 |
|
|
|
3.8 |
|
|
|
2.7 |
|
|
|
2.9 |
|
|
|
3 |
|
Volatility
rate
|
|
|
30.79 |
% |
|
|
60.86 |
% |
|
|
78.17 |
% |
|
|
77.27 |
% |
|
|
92.81 |
% |
Dividend
yield
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
#
|
Tranche
1 had been modified on September 14, 2009. The exercise price modified to
USD 4.00 and the fair value was USD 2.66 at the modified
date.
|
|
*
|
Tranche
3 consists of different vesting structures. The expected option
life and fair value presented above are weighted average
numbers.
|
The
aggregate intrinsic value as of September 30, 2009 and 2010 is USDnil and USD465
respectively.
The
Company recorded share-based compensation expense of RMB10,104, RMB2,760 and
RMB4,868 for the years ended September 30, 2008, 2009 and 2010
respectively. As of September 30, 2009 and 2010, there were RMB1,127
and RMB1,655 of total unrecognized compensation expense related to non-vested
share-based compensation arrangement under the Plan. The unrecognized
compensation expense is expected to be recognized over a weighted-average period
of 0.31 year.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
During
the year ended September 30, 2007, the Company repurchased 498,851 common stock
of the Company with a total cost of RMB29,377 under the approval of the Board of
Directors. The Company recorded the entire purchase price of the treasury stock
as a reduction of equity. The Company has made no additional
purchases of common stock during the years ended September 30, 2009 and
2010.
Agritech
and its subsidiary, State Harvest are incorporated in the British Virgin Islands
and are subject to taxation under the British Virgin Islands. State
Harvest’s subsidiary and State Harvest’s variable interest entity, Beijing
Origin and its majority owned subsidiaries (together, the “PRC entities”) were
incorporated in the PRC and governed by the PRC laws.
The
applicable tax rate of the PRC Enterprise Income Tax (“EIT”) was changed from
33% to 25% on January 1, 2008, according to the Corporate Income Tax
Law. The preferential tax rate previously enjoyed by the PRC entities
is gradually transitioned to the new standard rate of 25% over a five-year
transitional period. In addition, article 28 of the new tax law
stated that the income tax rate of the “high technology” company (high-tech
status) is remained at 15%.
Preferential
tax treatment of Beijing Origin as “high technology” company (High-tech Status)
has been agreed with the relevant tax authorities. Beijing Origin is
entitled to a preferential tax rate of 15% which is subject to annual
review. As a result of these preferential tax treatments, the
reduced tax rates applicable to Beijing Origin Seed Limited for 2008, 2009 and
2010 are 15%.
According
to the document Ji Ke Ban Zi (2008) No.125, Changrong is recognized as a “high
technology” company, thus entitled to a preferential tax rate of 15% for the
years ended September 30, 2008, 2009 and 2010.
Had all
the above tax holidays and concessions not been available, the tax charges would
have been higher by RMB8,194, RMB3,450 and RMB7,648, and the basic net income
(loss) per share would have been lower (higher) by RMB(0.36), RMB
(0.15) and RMB0.33 for the years ended September 30, 2008, 2009 and
2010, respectively. The diluted net income (loss) per share for the years ended
September 30, 2008, 2009 and 2010 would have been lower (higher) by RMB(0.36),
RMB(0.15) and RMB 0.33, respectively.
The
Company’s liability for income taxes includes the liability for unrecognized tax
benefits, interest and penalties which relate to tax years still subject to
review by taxing authorities. Audit periods remain open for review until the
statute of limitations has passed. The completion of review or the expiration of
the statute of limitations for a given audit period could result in an
adjustment to the Company’s liability for income taxes. Any such adjustment
could be material to the Company’s results of operations for any given quarterly
or annual period based, in part, upon the results of operations for the given
period. Until September 30, 2010, the management considered that the Company had
no uncertain tax positions affected its consolidated financial position and
results of operations or cash flow except for the contingent US tax liabilities
mentioned under note 23. The Company will continue to evaluate for the uncertain
position in future. The estimated interest costs have been provided
in the Company’s financial statements up to the year ended September 30, 2010.
The Company’s uncertain tax positions are related to tax years that remain
subject to examination by the relevant tax authorities and the major one is the
China tax authority. The open tax years for examinations in China are 5
years.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
19.
|
INCOME
TAXES - Continued
|
The
provision for income taxes expenses consists of the following:
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
9,369 |
|
|
|
580 |
|
|
|
4,046 |
|
Deferred
|
|
|
(13,364 |
) |
|
|
11,152 |
|
|
|
5,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,995 |
) |
|
|
11,732 |
|
|
|
9,319 |
|
The
principal components of the deferred income tax assets are as
follows:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
Non-current
deferred tax assets:
|
|
|
|
|
|
|
Net
operating loss carry forward
|
|
|
38,269 |
|
|
|
18,091 |
|
Impairment
on inventory
|
|
|
5,865 |
|
|
|
3,935 |
|
Others
|
|
|
3,975 |
|
|
|
3,290 |
|
|
|
|
|
|
|
|
|
|
Non-current
deferred income tax assets
|
|
|
48,109 |
|
|
|
25,316 |
|
Valuation
allowances
|
|
|
(33,069 |
) |
|
|
(15,550 |
) |
|
|
|
|
|
|
|
|
|
Net
non-current deferred income tax assets
|
|
|
15,040 |
|
|
|
9,766 |
|
The
Company did not have any significant temporary differences relating to deferred
tax liabilities as of September 30, 2009 and 2010.
A
significant portion of the deferred tax assets recognized relates to net
operating loss and credit carry forwards. The Company operates through the PRC
entities and the valuation allowance is considered on each individual
basis.
The net
operating loss attributable to those PRC entities can only be carried forward
for a maximum period of five years. Tax losses of non-PRC entities
can be carried forward indefinitely. The expiration period of unused
tax losses is as follows:
|
|
Year ended
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
Calendar year ending,
|
|
|
|
|
|
|
2009
|
|
|
7,076 |
|
|
|
- |
|
2010
|
|
|
- |
|
|
|
- |
|
2011
|
|
|
7,935 |
|
|
|
- |
|
2012
|
|
|
58,674 |
|
|
|
11,694 |
|
2013
|
|
|
79,326 |
|
|
|
53,698 |
|
2014
|
|
|
18,516 |
|
|
|
- |
|
2015
|
|
|
- |
|
|
|
10,400 |
|
Tax
losses that can be carried forward indefinitely
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
171,527 |
|
|
|
75,792 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
19.
|
INCOME
TAXES - Continued
|
Reconciliation
between total income tax expenses and the amount computed by applying the
statutory income tax rate to income before taxes is as follows:
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
rate
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Effect
of preferential tax treatment
|
|
|
(6 |
) |
|
|
34 |
|
|
|
(10 |
) |
Effect
of different tax jurisdiction
|
|
|
(16 |
) |
|
|
(157 |
) |
|
|
4 |
|
Permanent
book-tax difference
|
|
|
16 |
|
|
|
25 |
|
|
|
- |
|
Effect
of changes of applicable tax rate
|
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
Change
in valuation allowance
|
|
|
(2 |
) |
|
|
(80 |
) |
|
|
(5 |
) |
Under
(over) provision in prior year
|
|
|
1 |
|
|
|
38 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
9 |
|
|
|
(115 |
) |
|
|
12 |
|
20.
|
INCOME
(LOSS) PER SHARE
|
The
following table sets forth the computation of basic and diluted income (loss)
per share for the years indicated:
|
|
Year ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) (numerator), basic and diluted
|
|
|
(43,286 |
) |
|
|
(40,817 |
) |
|
|
49,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock outstanding
|
|
|
23,013,692 |
|
|
|
23,013,692 |
|
|
|
23,292,412 |
|
Weighted
average common stock outstanding used in computing basic income per
share
|
|
|
22,987,270 |
|
|
|
23,013,692 |
|
|
|
23,189,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Share
options
|
|
|
- |
|
|
|
- |
|
|
|
147,801 |
|
Weighted
average common stock outstanding used in computing diluted income per
share
|
|
|
22,987,270 |
|
|
|
23,013,692 |
|
|
|
23,337,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share-basic
|
|
RMB |
(1.88
|
) |
|
RMB |
(1.77
|
) |
|
RMB |
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share-diluted
|
|
RMB |
(1.88
|
) |
|
RMB |
(1.77
|
) |
|
RMB |
2.10
|
|
As
disclosed in note 1, the Share Exchange Transaction during 2005 provides for
additional purchase price payments in the form of common stock, the issuance of
which is contingent upon attainment of certain amounts of earnings and such
issuance of common stock has been waived by the potential share owners.
Accordingly, the above diluted income per share calculations have excluded these
contingently issuable shares for 2008 and 2009.
As of
September 30, 2010, the effect of conversion and exercise of the Company’s
outstanding options are included as their effect is dilutive. In
previous years, the effect of the outstanding options was
anti-dilutive.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
21.
|
EMPLOYEE
BENEFIT PLAN AND PROFIT
APPROPRIATION
|
Full time
employees of the PRC entities participate in a government mandated
multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees. Chinese labor regulations require
the Company to accrue for these benefits based on certain percentages of the
employees’ salaries. The total provisions for such employee benefits were
RMB7,900, RMB9,454, and RMB10,494 for the years ended September 30, 2008, 2009
and 2010, respectively.
Pursuant
to the laws applicable to the PRC, domestic PRC entities must make
appropriations from after-tax profit to non-distributable reserves funds
including: (i) the statutory surplus reserve and; (ii) the statutory public
welfare fund. Subject to the limits of 50% of the entity’s registered capital,
the statutory surplus reserve fund requires annual appropriations of 10% of
after-tax profit (as determined under accounting principles generally accepted
in the PRC (“PRC GAAP”) at each year-end). The Company’s wholly foreign owned
subsidiary, BioTech, however subject to the law applicable to foreign invested
enterprises in the PRC, was required annual appropriation of the general reserve
fund, no less than 10% of after-tax profit (as determined under PRC GAAP at each
year-end). These reserve funds can only be used for specific purposes of
enterprise expansion and staff welfare and are not distributable as cash
dividends. No appropriation has been made for the years ended
September 30, 2008, 2009 and 2010.
22.
|
COMMITMENTS
AND CONTINGENCIES
|
As of
September 30, 2009 and 2010, capital commitments for the purchase of long-term
assets are as follows:
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
231 |
|
|
|
5,251 |
|
Plant
and building construction
|
|
|
167 |
|
|
|
5,362 |
|
Technology
use right
|
|
|
1,700 |
|
|
|
1,210 |
|
Project
of gene modification
|
|
|
3,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,098 |
|
|
|
16,823 |
|
The
Company acquired certain land use rights for seed development and office
premises under non-cancellable leases. Rental expenses under operating leases
for the years ended September 30, 2008, 2009 and 2010 were RMB8,939, RMB6,029,
and RMB3,614respectively.
As of
September 30, 2010, the Company was obligated under operating leases requiring
minimum rental as follows:
|
|
RMB
|
|
Year ending September 30,
|
|
|
|
|
|
|
|
2011
|
|
|
2,655 |
|
2012
|
|
|
1,688 |
|
2013
|
|
|
2,113 |
|
2014
|
|
|
1,520 |
|
2015
|
|
|
1,513 |
|
Thereafter
|
|
|
5,990 |
|
|
|
|
|
|
|
|
|
15,479 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
22.
|
COMMITMENTS
AND CONTINGENCIES - Continued
|
|
(c)
|
On
March 6, 2006, Changrong entered into a contract with the Corn Research
Institution of Jilin Academy of Agricultural Science to pay RMB5,000 every
year from 2006 to 2016 for research and development
activities.
|
|
(d)
|
Contingent
tax liabilities
|
The
Company assesses the contingent tax liabilities that may arise from the Share
Exchange Transaction (note 1) and considers such contingent tax liabilities are
more-likely-than-not. As of September 30, 2009 and 2010, contingent tax
liabilities of RMB39,059 including late payment penalty and interest was
included in the income tax payable in the accompanying consolidated balance
sheet. The contingent tax was charged to the equity because the assumption of
such liabilities by the Company was part of the recapitalisation in connection
with the Share Exchange Transaction. The Company does not expect to incur tax
liabilities at the higher end of the range which were estimated to be in the
range RMB39,059 to RMB64,218, based on the information currently
available.
During
2009, the Company began a fresh review of the contingent tax position by
requesting and receiving alternate U.S. tax counsel on the above
matter. On September 23, 2010, the Company filed a revised 2005 tax
return to the United States Internal Revenue Service, or IRS in a way to rectify
the previously filed tax return regarding this tax liability. The IRS has not
responded to the tax filing either directly or with any paperwork as of the date
of this filing. While the timeline for the IRS to question on the tax
return is generally three years, this matter may take a prolonged period of time
to resolve depending on the return time from IRS and the necessity of future
appeals or re-evaluation.
|
(e)
|
Outstanding
legal lawsuit
|
In 2008,
a supplier lodged a legal lawsuit against Beijing Origin with a claim of
RMB5,730. The lawsuit was the dispute of ownership of the technology right for a
licensed seed which Beijing Origin purchased from this supplier. The court
concluded the lawsuit in favour of Beijing Origin. However, during 2010 the
plaintiff lodged an appeal to the court. The Company believes that the lawsuit
has no merit and considers the loss on the litigation is not
probable.
On
November 29, 2010, Origin Agritech Limited entered into an agreement with Rodman
& Renshaw, LLC, as selling agent, for the sale of ordinary shares from time
to time under a Continuous Offering Program Agreement. The agreement
covers up to 2,000,000 shares that may be sold at a discount to the market price
on the date of sale, pursuant to a notice from the company to the selling
agent. The selling agent will be paid 1.8% of the gross proceeds from
each sale. The agreement provides for an initial sale period ending
on June 11, 2011.
The
ordinary shares to be sold under the Continuous Offering Program Agreement will
be registered under the company’s current shelf registration statement on Form
F-3. The company will be filing a prospectus supplement to that
registration statement after certain blue sky and NASDAQ filings have been made
and completed. The company will not be selling any such securities
until all regulatory filings have been made and completed. The company also has
entered into two financial services agreements with Chardan Capital Markets, LLC
and Global Hunter Securities, LLC under which it will pay to each of them a fee
equal to 0.60% of the gross proceeds raised from the sale of ordinary shares
under the Continuous Offering Program Agreement. No assurance can be
given that the company will be able to sell any securities under the Continuous
Offering Program Agreement. Sales will depend on the market
conditions and the minimum price set by the company for the number of shares it
wishes to sell. If any funds are raised, the net proceeds will be
used for working capital.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED SEPTEMBER 30, 2008, 2009 AND 2010
(In
thousands, except number of share, per share data and unless otherwise
stated)
24.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The
carrying amounts of cash and cash equivalents, accounts receivable and accounts
payable are reasonable estimates of their fair value. All the financial
instruments are for trade purposes. No level 2 or 3 fair value assessment has
been made.
25.
|
SEGMENT
AND GEOGRAPHIC INFORMATION
|
The
Company’s main products include hybrid corn, rice and cotton seeds, which have
been organized as one reporting segment since they have similar nature and
production procedures, with similar economic characteristics. The Company’s
chief operating decision maker, the Chief Executive Officer, receives and
reviews the result of the operation for all products as a whole when making
decisions about allocating resources and assessing performance of the Company.
In accordance with FASB ASC 280-10 (former SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information”), the Company is not required
to report the segment information for the products.
All of
the Company’s sales and all of the Company’s long-lived assets are located in
the PRC.
The
Company had no customers which accounted for 10% or more of the Company’s
revenues for any of the years presented in the consolidated financial
statements.
Concentrations
of credit risk
Financial
instruments that subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents. The Company maintains its cash and cash
equivalents with high-quality institutions. Deposits placed with banks may
exceed the amount of insurance provided on such deposits. Generally these
deposits may be redeemed upon demand and therefore bear minimal
risk.
Country
risk
The
Company has significant investments in PRC. The operating results of the Company
may be adversely affected by changes in the political and social conditions in
PRC and by changes in Chinese government policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods taxation, among other things. There can be no
assurance, however, those changes in political and other conditions will not
result in any adverse impact.