S-1/A 1 v355552_s1a.htm AMENDMENT TO FORM S-1

 

As filed with the Securities and Exchange Commission on September 23, 2013

Registration No. 333-187604

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

PRE-EFFECTIVE AMENDMENT NO. 1 TO

 

FORM S-1

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

SINO AGRO FOOD, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada   2020   33-1219070
         

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

 

Sino Agro Food, Inc.

Room 3801, Block A, China Shine Plaza

No. 9 Lin He Xi Road

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

(860) 20 22057860

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

 

Solomon Lee

Chief Executive Officer

Sino Agro Food, Inc.

Room 3801, Block A, China Shine Plaza

No. 9 Lin He Xi Road

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

(860) 20 22057860

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

 

Copies to:

Marc Ross, Esq.

Henry Nisser, Esq.

Sichenzia Ross Friedman Ference, LLP

61 Broadway, 32nd Floor

New York, New York 10006

Telephone: (212) 930-9700

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on the Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x

 

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

 

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

 

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

 

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

 

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

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to Be Registered
  Amount to Be
Registered (1)
    Proposed Maximum
Offering Price Per Share
    Proposed Maximum
Aggregate Offering
Price
    Amount Of Registration
Fee
 
                         
Common stock, par value $0.001 per share (2)     26,250,000     $ 1.00 (3)   $ 26,250,000.00     $ 3,580.50  
                                 
Total     26,250,000     $ 1.00     $ 26,250,000.00     $ 3,580.50 (4)

 

(1)         In the event of a stock split, stock dividend, or similar transaction involving the common stock, the number of shares registered shall automatically be increased to cover the additional shares of common stock issuable pursuant to Rule 416.

 

(2)         Represents shares of the Registrant’s common stock being offered pursuant to the Registrant’s public offering.

 

(3)         Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended.

 

(4)         Previously paid.

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

 
 

 

PRELIMINARY PROSPECTUS

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 2013

 

SINO AGRO FOOD, INC.

 

Up to 26,250,000 Shares of Common Stock

 

This prospectus related to a direct public offering by Sino Agro Food, Inc. of a maximum of 26,250,000 shares of our common stock at a price of $1.00 per share for maximum aggregate gross proceeds of $26,250,000.  The shares offered by us will be offered at a fixed price of $1.00 per share for a period not to exceed 180 days from the date of this prospectus. This price represents approximately 250% of the market price of the shares of our common stock as of September 20, 2013. There is no minimum number of shares that must be sold in the offering nor do we intend to establish an escrow or similar account. We will retain the proceeds from the sale of any of the offered shares, and funds will not be returned to investors. As a result, it is possible that no proceeds will be received by us or that if any proceeds are received, that such proceeds will not be sufficient to cover the costs of the offering. The shares are offered directly through our officers and directors.  No commission or other compensation related to the sale of the shares will be paid to our officers and directors. Our officers and directors will not register as a broker-dealer with the Securities and Exchange Commission in reliance on Rule 3a4-1 of the Securities Exchange Act of 1934, as amended.  The intended methods of communication include, without limitation, telephone and personal contact. For more information, see the section titled “Plan of Distribution” herein. Our officers, directors, control persons and affiliates of same do not intend to purchase any shares in this offering.

 

The direct public offering will terminate on the earlier of (i) the date when the sale of all 26,250,000 shares is completed or (ii) 180 days from the date of this prospectus. In addition, if we abandon the offering for any reason prior to 180 days from the date of this prospectus, we will terminate the offering.

 

Our common stock is eligible for quotation on the Over-the-Counter Bulletin Board under the symbol “SIAF.” On September 20, 2013, the last reported price of our common stock was $0.405 per share.

 

No underwriter or person has been engaged to facilitate the sale of shares of our common stock in this offering. There are no underwriting commissions involved in this offering. We have agreed to pay all the costs of this offering other than customary brokerage and sales commissions.

 

Investing in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described under the heading “Risk Factors” beginning on page 4 of this prospectus before making a decision to purchase our common stock.

 

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

 

The date of this prospectus is _____, 2013

 

 
 

 

TABLE OF CONTENTS

 

 

  Page
PROSPECTUS SUMMARY 1
   
RISK FACTORS 4
   
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 20
   
USE OF PROCEEDS 21
   
DILUTION 22
   
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS 23
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS 24
   
BUSINESS 61
   
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 95
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 98
   
PLAN OF DISTRIBUTION 99
   
TERMS  OF THE OFFERING 100
   
PROCEDURES FOR AND REQUIREMENTS FOR SUBSCRIBING 100
   
DESCRIPTION OF SECURITIES 100
   
EXPERTS 1 02
   
LEGAL MATTERS 1 02
   
WHERE YOU CAN FIND MORE INFORMATION 1 02
   
INDEX TO FINANCIAL STATEMENTS F-1

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

 
 

 

PROSPECTUS SUMMARY

 

The following summary highlights information contained elsewhere in this prospectus. It may not contain all the information that may be important to you. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis or Plan of Operations,” and our historical financial statements and related notes included elsewhere in this prospectus.

 

In this prospectus, unless the context requires otherwise, references to the “Company,” “Sino Agro” “we,” “our company,” “our” and “us,” refer to Sino Agro Food, Inc., a Nevada corporation together with its subsidiaries.

 

Business Overview

We are a consulting, engineering and technology based company operating in the agriculture and aquaculture sectors with a vertically integrated business model as a developer, producer and distributor of organic agriculture and aquaculture produce and products through our operating subsidiaries in China.

 

Activities in 2011 concentrated on the building out of primary production activities in our feedstock, fertilizer fishery and cattle farm businesses leading into the initiation of basic infrastructure developed for our pre-wholesale and wholesale operations.

 

2012 was characterized by a marked expansion and continuation of our primary production activities and the development of wholesale operations, many delivering product sales, and by the build-out of the distribution network including import-export, as well as the start of retail operations.

 

We divide our operations into five standalone business divisions or units but in this section we will cover it as four divisions as follows: (1) fishery, (2) beef cattle, (3) fertilizer, enzymes and livestock feed, (4) Dragon Fruit (“HU”) flower plantation and (5) Corporate. The commonality between the divisions is that each operates in a comparatively slow growth consolidating market; our strategy is targeting niches of these markets with our products.

 

Corporate Structure

 

The table below shows our corporate structure:

 

 

 
 

 

Company History

Our company, which was formerly known as Volcanic Gold, Inc. and A Power Agro Agriculture Development, Inc., was incorporated on October 1, 1974 in the State of Nevada. We were engaged in the mining and exploration business but ceased our mining and exploring business on October 14, 2005. On August 24, 2007, we entered into a Merger and Acquisition Agreement with Capital Award Inc., a Belize corporation and its subsidiaries Capital Stage Inc. and Capital Hero Inc. Effective the same date, Capital Award completed a reverse merger transaction with us. We acquired all the outstanding common stock of Capital Award from Capital Adventure, a shareholder of Capital Award, for 32,000,000 shares of our common stock.

 

On August 24, 2007 we changed our name from Volcanic Gold, Inc. to A Power Agro Agriculture Development, Inc. On December 8, 2007, we changed our name to Sino Agro Food, Inc. Our principal executive office is located at Room 3801, 38 th Floor, Block A, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, Guangdong Province, PRC, 510610.

 

Cross-Listing on First North

We have taken steps to have our shares of common stock quoted (no new shares will be issued) on NASDAQ OMX First North in Stockholm, Sweden (“First North”). First North is an alternative market, operated by the different exchanges within NASDAQ OMX (the “Exchange”). It does not have the legal status as an EU-regulated market. Companies trading on First North are subject to the rules of First North and not the legal requirements for admission to trading on a regulated market. The risk in such an investment may be higher than on the main market.

 

Before trading in our shares of common stock can commence, an application must be submitted to the Exchange for approval. We have engaged Erik Penser Bankaktiebolag (“EPB”) to act as our financial adviser in connection with our efforts to have our shares of common stock quoted on First North. EPB, a privately held independent bank based in Stockholm, is assisting us in the application process. Trading on First North is subject to a number of conditions including affiliation of our shares to Euroclear Sweden, sufficient shareholder distribution in Sweden and the approval of NASDAQ OMX. Our shares are currently eligible for quotation on the OTC BB in the United States and we expect them to continue to be traded on the OTC BB. There can be no assurance that our shares of common stock will trade on First North.

 

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completions of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act” and references herein to “emerging growth company” shall have the meaning associated with it in the JOBS Act.

 

As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

only two years of audited consolidated financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” disclosure;

 

reduced disclosure about our executive compensation arrangements;

 

no requirement that we hold non-binding advisory notes on executive compensation or golden parachute arrangements; and

 

exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

 

We have taken advantage of some of these reduced burdens, and thus the information we provide stockholders may be different from what you might receive from other public companies in which you hold shares.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

2
 

 

THE OFFERING

 

Securities Being Offered:   26,250,000 shares of common stock, par value $0.001 per share.
     
Offering Price per Share:   $1.00
     
Offering Period:   The shares are being offered for a period not to exceed 180 days.
     
Gross Proceeds to our Company:   $0 if no shares are sold, $6,562,500 if 25% of the maximum number of shares are sold, $13,125,000 if 50% of the maximum number of shares are sold, $19,687,500 if 75% of the maximum number of shares are sold and $26,250,000 if the maximum number of shares are sold.
     
Use of Proceeds*:   General working capital and capital for development purposes.
     
Number of Shares Outstanding Before the Offering:   127,713,766 as of the date of this prospectus.
     
Stock Symbol:   SIAF
     
Number of Shares Outstanding After the Offering**:   127,713,766, if no shares are sold, 134,276,266 if 25% of the maximum number of shares is sold, 140,838,766 if 50% of the maximum number of shares is sold, 147,401,266 if 75% of the maximum number of shares is sold and 153,963,966 if 100% if the maximum number of shares are sold.
     
Risk Factors:   An investment in our common stock involves a high degree of risk. You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page 4 of this prospectus before deciding whether or not to invest in shares of our common stock.

 

* We will retain the proceeds from the sale of any of the offered shares, and funds will not be returned to investors. It is possible that no proceeds will be received by the Company or that if any proceeds are received, that such proceeds will not be sufficient to cover the costs of the offering. See “Use of Proceeds” below for further information.

 

** There is no minimum number of shares that must be sold in the offering and the issue is not underwritten. Assumes no shares are issued between the date of this prospectus and the consummation of the offering.

 

3
 

 

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Potential investors should consider carefully the risks and uncertainties described below together with all other information contained in this prospectus before making investment decisions with respect to our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and our future growth prospects would be materially and adversely affected. Under these circumstances, the trading price and value of our common stock could decline resulting in a loss of all or part of your investment. The risks and uncertainties described in this prospectus are the only material risks and uncertainties that we presently know to be facing our company.

 

This prospectus contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our customers’ or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. ”Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as other sections in this prospectus, discuss the important factors that could contribute to these differences.

 

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

This prospectus also contains market data related to our business and industry. This market data includes projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our common stock.

 

Our current business operations are conducted in the PRC.  Because China’s economy and its laws, regulations and policies are different from those typically found in the West and are continually changing, we face certain risks, which are summarized below.

 

Risks Related to Our Company

 

The current global economic and credit environment could have an adverse effect on demand for certain of our products and services, which would in turn have a negative impact on our results of operations, our cash flows, our financial condition, our ability to borrow and our stock price.

Since 2008, global market and economic conditions have been disrupted and volatile.  Concerns over increased energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market sub-prime collapse and a declining residential real estate market in the U.S. have contributed to this increased volatility and diminished expectations for the economy and the markets going forward.  These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated a global recession.  It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and which of our products, if not all of them, will be adversely affected.  These conditions, if they continue, could cause a material decrease in our sales, net income and an increase in the prices we pay for raw materials used in producing our primary produce and products and our development cost and, thus, materially affect our operating results and financial condition.

 

We may be unable to maintain an effective system of internal control over financial reporting, and as a result we may be unable to accurately report our financial results.

Our reporting obligations as a public company place a significant strain on our management, operational and financial resources and systems.  If we fail to maintain an effective system of internal control over financial reporting, we could experience delays or inaccuracies in our reporting of financial information, or non-compliance with the SEC, reporting and other regulatory requirements. This could subject us to regulatory scrutiny and result in a loss of public confidence in our management, which could, among other things, cause our stock price to drop.

 

Because we will require additional financing to expand our vertically integrated operation in accordance with our business plan and growing strategy, our failure to obtain necessary financing will impair our growth strategy; in addition, the risk of vertical integration is significant.

As of June 30, 2013, we had working capital of $145,332,475, including cash and cash equivalents of $9,391,449.  Our capital requirements in connection with our planned vertically integrated development and growth plan of our business are significant.

 

4
 

 

In most of the developed countries, risks of agriculture operations are shared to a certain degree by different sectors in the industry, for example the following:

 

Research and development are at times initiated and supported by government departments;
The primary producers are mainly concerned with the growing risks of the produce;
There are marketing companies that assume the risks of marketing the produce;
There are trading houses conduct the sales of the produce and assume the credit risks of the sales; and
There are logistic companies that assume the risks of transporting the produce.

 

However, as a vertically integrated operator, we shall have to cover all the mentioned risks. China is a developing country and currently its agriculture industry has not been fully developed similarly to other developed nations. As a result, management believes that it is essentially important for us to be able to develop our business operation in a vertically integrated manner in order to be able to achieve reasonable profit margins for our products. Although we also believe that the multiple layers of profits generated through the multiple operations may compensate to some degree for the variety of risks that we face through the multiple operations, nevertheless, the overall risks are much greater. At the same time, the full module of our vertically integrated developments has not been completed and these vertically integrated developments may require significant capital expenditures and management resources. Failure to implement these vertically integrated developments could hurt our ability to manage our growth and our financial position.

 

The estimated costs for this and other projects that are part of our growth strategy in the future will cost us an estimated $500 million in the aggregate and will be undertaken in phases of our 5 year-plan that was initiated in March of 2010, depending on the funds available to us including internal capital and external capital. We intend to use a significant part of the net proceeds from this offering to fund part of the estimated costs of its final phase. However, we will need approximately $118 million in 2013 to accomplish our longer term objectives, including but not limited to the approximately $26 million in gross proceeds intended to be raised from this offering. See “Use of Proceeds” on page 21 for more information.

 

As of June 30, 2013, the Company believed itself to be approximately $16.5 million short of its requirements, assuming the full $26 million in net proceeds of this offering is raised. As a result, it has commenced a bond offering in order to make up the shortfall in which it hopes to raise an additional amount of approximately $16.9 million; however, there can be no assurance that this amount, or any amount, will be raised in the bond offering. The Company has expended $79.5 million of the $118 million and has cash on hand of approximately $9 million as well as working capital as of June 30, 2013 of approximately $145 million.

 

We may at a certain point in time determine to use some or even all of remaining net proceeds of this offering, which we presently expect to allocate to working capital, to begin implementing these longer term objectives. However, even if we did so we would only have available a small portion of what we would need.

 

To accomplish the objectives discussed above and to execute our business strategy, we need access to capital on appropriate terms. We currently have no commitments with any third party to obtain such additional financing and we cannot assure you that we will be able to obtain the requisite additional financing on any terms and, if we are able to raise additional funds, it may be necessary for us to sell our securities at a price which is at a significant discount from the market price and on other terms which may be disadvantageous to us. In connection with any such financing, we may be required to provide registration rights to the investors and pay damages to the investors in the event that the registration statement is not filed or declared effective by specified dates. The price and terms of any financing which would be available to us could result in both the issuance of a significant number of shares and significant downward pressure on our stock price. We cannot assure you that our business objectives, particularly over the longer term, will be met on a timely basis, if at all. Consequently, we may be unable to meet fixed obligations and expenses that will be generated in the operation of our business, whether as presently in existence or as proposed. Any failure to obtain requisite financing on acceptable terms could have material and adverse effect on our business, financial condition and future prospects.

 

No assurance of successful expansion of operations.

Our significant increase in the scope and the scale of our product launch, including the hiring of additional personnel, has resulted in significantly higher operating expenses. As a result, we anticipate that our operating expenses will continue to increase. Expansion of our operations may also cause a significant demand on our management, finances and other resources. Our ability to manage the anticipated future growth, should it occur, will depend upon a significant expansion of our accounting and other internal management systems and the implementation and subsequent improvement of a variety of systems, procedures and controls. There can be no assurance that significant problems in these areas will not occur. Any failure to expand these areas and implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with our business could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that our attempts to expand our marketing, sales, manufacturing and customer support efforts will be successful or will result in additional sales or profitability in any future period. As a result of the expansion of our operations and the anticipated increase in our operating expenses, as well as the difficulty in forecasting revenue levels, we expect to continue to experience significant fluctuations in its results of operations.

 

5
 

 

We may be unable to successfully expand our production capacity, which could result in material delays, quality issues, increased costs and loss of business opportunities, which may negatively impact our product margins and profitability.

Part of our future growth strategy is to increase our production capacity to meet increasing demand for our existing goods. Assuming we obtain sufficient funding to increase our production capacity, any projects that we undertake to increase such capacity may not be constructed on the anticipated timetable or within budget.  We may also experience quality control issues as we implement these production upgrades.  Any material delay in completing these projects, or any substantial increase in costs or quality issues in connection with these projects, could materially delay our ability to bring our products to market and adversely affect our business, reduce our revenue, income and available cash, all of which could result in harming our financial condition.

 

Our business and operations are experiencing rapid growth. If we fail to effectively manage our growth, our business and operating results could be harmed.

We have experienced, and may continue to experience, rapid growth in our operations, which has placed, and may continue to place, significant demands on our management, operational and financial infrastructure.  If we do not effectively manage our growth, the quality of our products and services could suffer, which could negatively affect our operating results.  To effectively manage this growth, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures.  These systems enhancements and improvements may require significant capital expenditures and management resources. Failure to implement these improvements could hurt our ability to manage our growth and our financial position.

 

If the Chinese government were to change its presently favorable policy toward the agriculture industry, we would no longer enjoy our present tax-related privileges, which would materially and adversely impact our sales performance, margins, and net profit and our costs structure.

As producers active in the agriculture industry, our subsidiaries are presently exempt from income tax and enjoy various incentive grants and subsidies given by the China Government. If the Chinese government were to change its presently favorable policy toward the agriculture industry, we would no longer enjoy our present tax-related privileges, which would materially and adversely impact our sales performance, margins, and net profit and our costs structure. We have experienced, and may continue to experience, quick changes of policies by the Chinese government. If we do not effectively and efficiently manage our growth on time due to lack of capital, we could suffer adversely from the consequences of any such policy changes.

 

Our intellectual property rights are valuable, and any inability to adequately protect, or uncertainty regarding validity, enforceability or scope of them could undermine our competitive position and reduce the value of our products, services and brand, and litigation to protect our intellectual property rights may be costly.

We attempt to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements.  As a result, our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets to us.  Various events outside of our control pose a threat to our intellectual property rights as well as to our products and services.  For example, effective intellectual property protection may not be available in China and other countries in which our products are sold.  Also, although we have registered our trademark in China, the efforts we have taken to protect our proprietary rights may not be sufficient or effective.  Any significant impairment of our intellectual property rights could harm our business or our ability to compete and adversely affect our results of operation. Also, protecting our intellectual property rights is costly and time consuming.  Policing the unauthorized use of our proprietary technology can be difficult and expensive.  Litigation might be necessary to protect our intellectual property rights.  But due to the relative unpredictability of the Chinese legal system and potential difficulties of enforcing a court’s judgment in China, there is no guarantee that litigation would result in an outcome favorable to us. Furthermore, any such litigation may be costly and may divert our management’s attention away from our core business.  An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation.  Although currently we are not aware of any of such litigation, we have no insurance coverage against the litigation costs so we would be forced to bear all litigation costs if we cannot recover them from other parties in the future.  All of the foregoing factors could harm our business, financial condition and results of operations.  Any increase in the unauthorized use of our intellectual property in the future could make it more expensive for us to do business and harm our operating results.

 

We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely against us, could adversely affect our business and subject us to significant liability to third parties.

Our success mainly depends on our ability to use and develop our technology and product designs without infringing upon the intellectual property rights of third parties.  We may be subject to litigation involving claims of patent infringement or violations of other intellectual property rights of third parties.  The holders of patents and other intellectual property rights potentially relevant to our product offerings may be unknown to us, which may make it difficult for us to acquire a license on commercially acceptable terms.  There may also be technologies licensed to us and that we rely upon that are subject to infringement or other corresponding allegations or claims by third parties which may damage our ability to rely on such technologies.  In addition, although we endeavor to ensure that companies that work with us possess appropriate intellectual property rights or licenses, we cannot fully avoid the risks of intellectual property rights infringement created by suppliers of components used in our products or by companies we work with in cooperative research and development activities.  Our current or potential competitors may have obtained or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products.  The defense of intellectual property claims, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming, and may significantly divert the efforts and resources of our technical personnel and management.  These factors could effectively prevent us from pursuing some or all of our business operations and result in our customers or potential customers deferring, canceling or limiting their purchase or use of our products, which may have a material adverse effect on our business, financial condition and results of operations.

 

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We rely on highly skilled personnel and the continuing efforts of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our business may be severely disrupted.

Our performance largely depends on the talents, knowledge, skills and know-how and efforts of highly skilled individuals and in particular, the expertise held by our chief executive officer, Solomon Lee. His absence, were it to occur, could impact the development and implementation of the projects and businesses. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization.  Our continued ability to compete effectively depends on our ability to attract new technology developers and to retain and motivate our existing contractors. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all.  Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers.  In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers.

 

Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and other catastrophes.

Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and other catastrophes.  For example, in early 2003, several economies in Asia, including China, were affected by the outbreak of severe acute respiratory syndrome, or SARS.  During May and June of 2003, many businesses in China were closed by the PRC government to prevent transmission of SARS.  Our business could be materially and adversely affected by the effects of H1N1 flu (swine flu), avian flu, severe acute respiratory syndrome or other epidemics or outbreaks.  In April 2009, an outbreak of H1N1 flu first occurred in Mexico and quickly spread to other countries, including the U.S. and China.  In the last decade, China has suffered health epidemics related to the outbreak of avian influenza and severe acute respiratory syndrome.  Any prolonged occurrence or recurrence of H1N1 flu (swine flu), avian flu, SARS or other adverse public health developments in China may have a material adverse effect on our business and operations.  These health epidemics could result in severe travel restrictions and closures that would restrict our ability to ship our products.  Potential outbreaks could also lead to temporary closure of our manufacturing facilities, our suppliers’ facilities and/or our end-user customers’ facilities, leading to reduced production, delayed or cancelled orders, and decrease in demand for our products.  Any future health epidemic or outbreaks that could disrupt our operations and/or restrict our shipping abilities may have a material adverse effect on our business and results of operations.

 

Insofar as we do not encounter any epidemic in our aquaculture fishery farms in districts of the Guangdong Province or cattle farms in Huangyuan District of the Qinghai Province, however in the event of epidemics, we expect that our marine animals and our cattle will be quarantined until such time as a sanitary certificate for clean bill of health will be obtained before any of our products will be sold. Alternatively, in an extreme situation where our products would fail to obtain the sanitary certificate, they will be destroyed subject to the direction of the Inspection Authorities of the Agriculture Department of China. There is compensation granted by the Chinese Government for the destruction of our products but only for a fraction of our cost of production; as such the Company will bear virtually all losses under such circumstances.

 

Furthermore, the 2008 Sichuan earthquake also had a negative impact on many businesses in the region.  Losses caused by epidemics, adverse weather conditions, natural disasters and other catastrophes, including SARS, avian flu, swine flu, earthquakes or typhoons, will adversely affect our operations.

 

If we make any acquisitions, they may disrupt or have a negative impact on our business.

Although we have no present plans for any specific acquisitions, in the event that we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own.  In addition, the key personnel of the acquired business may not be willing to work for us.  We cannot predict the effect expansion may have on our core business.  Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses.  In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:

 

the difficulty of integrating acquired products, services or operations;

 

the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;

 

the difficulty of incorporating acquired rights or products into our existing business;

 

difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities;

 

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difficulties in maintaining uniform standards, controls, procedures and policies;

 

the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;

 

the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;

 

the effect of any government regulations which relate to the business acquired;

 

potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition.

 

Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.

 

We face significant competition, including changes in pricing.

The markets for our products are both competitive and price sensitive. Many of our competitors have significant financial, operations, sales and marketing resources and experience in research and development and compete with us by offering lower prices. Competitors could develop new technologies that compete with our products on achieving a lower unit price. If a competitor develops superior technology or cost-effective alternatives to our products and services, our business could be seriously harmed as they may achieve a lower price for the same quality.

 

The markets for some of our products are also subject to specific competitive risks because these markets are highly price competitive. Our competitors have competed in the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This would reduce sales revenues and increase losses. Failure to anticipate and respond to price competition may also impact sales and aggravate losses.

 

Many of our competitors are larger and have greater financial and other resources than we do.

Our products compete and will compete with similar if not identical products produced by our competitors. These competitive products could be marketed by well-established, successful companies that possess greater financial, marketing, distributional, personnel and other resources than we possess. Using these resources, these companies can implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts by competitors, and enter into new markets more rapidly to introduce new products. In certain instances, competitors with greater financial resources also may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale of products that compete with our products or present cost features that consumers may find attractive.

 

Risks Related to our Industry

 

Our agricultural assets are situated in three provinces in China and crop disease, severe weather, natural disasters and other conditions affecting the environment, including the effects of climate change, could result in substantial losses and weaken our financial condition.

Our agricultural operations are situated in Qinghai Province, Hunan and Guangdong Province. Qinghai Province in particular is subject to occasional periods of drought. Crops require water in different quantities at different times during the growth cycle. The limited water resource at any given point can adversely impact production. In Qinghai our cropping and pasture land presently comprises over 5,000 acres, an area too big and too costly to afford drip irrigation systems for our crops. In Hunan, the district of Linli where we have over 300 acres of crop and pasture land may from time to time be subject to flooding that could affect our agriculture production. In Enping, Guangdong, our HU Plants are very susceptible to dry and wet seasonal variation that could also affect our agriculture production.

 

Crop disease, severe weather conditions, such as floods, droughts, windstorms and hurricanes, and natural disasters, may adversely affect our supply of one or more products, reduce our sales volumes, increase our unit production costs or prevent or impair our ability to ship products as planned. Since a significant portion of our costs are fixed and contracted in advance of each operating year, volume declines due to production interruptions or other factors could result in increases in unit production costs, which could result in substantial losses and weaken our financial condition. We may experience crop disease, insect infestation, severe weather and other adverse environmental conditions from time to time. Severe weather conditions may occur with higher frequency or may be less predictable in the future due to the effects of climate change.

 

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An occurrence of such an event might result in material disruptions to our operations, to the operations of our customers or suppliers, resulting in a decline in the agriculture industry. There can be no assurance that our facilities or products will not be affected by any such occurrence in the future, which occurrence may lead to adverse conditions to our operations and financial results.

 

Prices of agricultural products are subject to supply and demand, a market condition of which is not predictable.

Because our agricultural products are commodities, we are not able to predict with certainty what price we will receive for our products. Additionally, the growth cycle of such products in many instances dictates when such products must be marketed to achieve the maximum profitability. Excessive supplies tend to cause severe price competition and lower prices throughout the industry affected. Conversely, shortages may drive the prices higher. Shortages often result from adverse growing conditions which can reduce the availability of the agricultural products affected. Since multiple variables can affect supply and demand, we cannot accurately predict or control from year to year what prices, either favorable or unfavorable, it will receive from the market.

 

In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, some of our agricultural products which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.

 

We could realize losses and suffer liquidity problems due to declines in sales prices for our agriculture products.

Sales prices for agricultural products are difficult to predict. It is possible that sales prices for our products will decline in the future, and sales prices for other agricultural products may also decline. In recent years, there has been increasing consolidation among food retailers, wholesalers and distributors. A significant portion of our costs is fixed, so that fluctuations in the sales prices have an immediate impact on our profitability. Our profitability is also affected by our production costs, which may increase due to factors beyond our control.

 

We are subject to the risk of product contamination and product liability claims.

The sales of our products may involve the risk of injury to consumers. Such injuries may result from tampering by unauthorized personnel, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, or residues introduced during the growing, packing, storage, handling or transportation phases. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, including internal product safety policies, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our brand image. We do not maintain product liability insurance.

 

We may not be successful in the implementation of our new technologies and new products, and our new products may be not widely accepted.

Our new technologies such as our drip irrigation system for precision agriculture or the introduction, testing and promotion of new agricultural varieties, must be able to adapt to local conditions. The term “drip irrigation” refers to a system whereby the exact amount of water is supplied to the plants’ roots at the correct moment. On the one hand, there exists the failure risk due to not being suitable for the local environment and market conditions; on the other hand, there are risks of loss of competitive advantages due to the rising of producing similar products enterprises and other enterprises that follow to produce the similar products.

 

We are a holding company whose subsidiaries are given certain degree of independency and our failure to integrate our subsidiaries may adversely affect our financial condition.

According to the specific characteristics of agricultural production in China, we have given our subsidiary companies and their farms a certain degree of independency in decision-making. On one hand, this independency increases the sense of ownership at all levels, on the other hand it has also increased the difficulty of the integration of operation and management, which has resulted in increased difficulty of management integration. In the event we are not able to successfully manage our subsidiaries this will result in operating difficulties and have a negative impact on our business.

 

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One or more of our distributors could engage in activities that are harmful to our brand and to our business.

Our products are sold primarily through distributors, and those distributors are responsible for ensuring that our products have the appropriate licenses to be sold to farmers in their provinces and be kept at the right temperature to be fresh and meet shelf life terms. If those distributors do not obtain the appropriate licenses, their sales of our products in those provinces may be illegal, and we may be subject to government sanctions, including confiscation of illegal revenues and a fine of between two and three times the amount of such illegal revenues. Unlicensed sales in a province may also cause a delay for our other distributors in receiving a license from the authorities for their provinces, which could further adversely impact our sales. In addition, distributors may sell our products under another brand licensed in a particular province if our product is not licensed there. If our products are sold under another brand, the purchasers will not be aware of our brand name, and we will be unable to cross-market other seed varieties or other products as effectively to these purchasers. Moreover, our ability to provide appropriate customer service to these purchasers will be negatively affected, and we may be unable to develop our local knowledge of the needs of these purchasers and their environment. Furthermore, if any of our distributors sell inferior seeds produced by other companies under our brand name, our brand and reputation could be harmed, which could make marketing of our branded seeds more difficult. As of the date of this prospectus, we are not aware of the occurrence of any of the potential violations by our distributors described above.

 

The PRC agricultural market is highly competitive and our growth and results of operations may be adversely affected if we are unable to compete effectively.

The agricultural market in China is highly fragmented, largely regional and highly competitive, and we expect competition to increase and intensify within the sector. We face significant competition in our lines of business. Many of our competitors have greater financial, research and development and other resources than we have. Competition may also develop from consolidation within our industry in China or the privatization of producers that are currently operated by local governments in China. Our competitors may be better positioned to take advantage of industry consolidation and acquisition opportunities than we are. The reform and restructuring of state-owned equity in enterprises involved primarily in producing sectors will likely lead to the reallocation of market share in the agriculture industry, and our competitors may increase their market share by participating in the restructuring of state-owned agriculture companies. Such privatization would likely result in increased numbers of market participants with more efficient and commercially viable business models. As competition intensifies, our margins may be compressed by more competitive pricing and we may lose our market share and experience a reduction in our revenues and profit.

 

We may not possess all of the licenses required to operate our business, or we may fail to maintain the licenses we currently hold. This could subject us to fines and other penalties, which could materially adversely affect our results of operations.

We are required to hold a variety of permits and licenses to conduct business in China. We may not possess all of the permits and licenses required for each of our business segments. In addition, the approvals, permits or licenses required by governmental agencies may change without substantial advance notice, and we could fail to obtain the approvals, permits or licenses required to expand our business. If we fail to obtain or to maintain such permits or licenses, or if renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality of the products that we could offer. As a result, our business, results of operations and financial condition could be materially and adversely affected.

 

Risks Related to Doing Business in China

 

Under PRC law, we are required to obtain and retain permits and business licenses, and our failure to do so would adversely impact our ability to conduct business in China.

We hold various permits, business licenses, and approvals authorizing our operations and activities, which are subject to periodic review and reassessment by the Chinese authorities.  Standards of compliance necessary to pass such reviews change from time to time and differ from jurisdiction to jurisdiction, leading to a degree of uncertainty.  If renewals, or new permits, business licenses or approvals required in connection with existing or new facilities or activities, are not granted or are delayed, or if existing permits, business licenses or approvals are revoked or substantially modified, we may not be able to continue to operate our facilities which would have a material adverse effect on our operations.  If new standards are applied to renewals or new applications, it could prove costly for us to meet these new standards.

 

The PRC economic cycle may negatively impact our operating results.

We believe that the rapid growth of the PRC economy before 2008 generally led to higher levels of inflation.  We believe that the PRC economy has more recently experienced a decrease in its growth rate.  We believe that a number of factors have contributed to this deceleration, including appreciation of the RMB, the currency of China, which has adversely affected China’s exports.  In addition, we believe the deceleration has been exacerbated by the recent global crisis in the financial services and credit markets, which has resulted in significant volatility and dislocation in the global capital markets.  It is uncertain how long the global crisis in the financial services and credit markets will continue and the significance of the adverse impact it may have on the global economy in general or the Chinese economy in particular.  Slowing economic growth in China could result in weakening growth and demand for our products which could reduce our revenues and income.  In the event of a recovery in the PRC, renewed high growth levels may again lead to inflation.  The government’s attempts to control inflation may adversely affect the business climate and growth of private enterprise.  In addition, our profitability may be adversely affected if prices for our products rise at a rate that is insufficient to compensate for the rise in inflation.

 

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Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi, or RMB, into foreign currencies and, if the RMB were to decline in value, reducing our revenue in U.S. dollar terms.

The exchange rate of the RMB is currently managed by the Chinese government. On July 21, 2005, the People's Bank of China, or the People's Bank, with the authorization of the State Council of the PRC, announced that the RMB exchange rate would no longer be pegged to the U.S. Dollar and would float based on market supply and demand with reference to a basket of currencies. According to public reports, the governor of the People's Bank has stated that the basket is composed mainly of the U.S. Dollar, the European Union Euro, the Japanese Yen and the South Korean Won. Also considered, but playing smaller roles, are the currencies of Singapore, the United Kingdom, Malaysia, Russia, Australia, Canada and Thailand. The weight of each currency within the basket has not been announced.

 

The initial adjustment of the RMB exchange rate was an approximate 2% revaluation from an exchange rate of 8.28 RMB per U.S. Dollar to 8.11 RMB per U.S. Dollar. The People's Bank also announced that the daily trading price of the U.S. Dollar against the RMB in the inter-bank foreign exchange market would be allowed to float within a band of 0.3% around the central parity published by the People's Bank, while the trading prices of the non-U.S. Dollar currencies against the RMB would be allowed to move within a certain band announced by the People's Bank. The People's Bank has stated that it will make adjustments of the RMB exchange rate band when necessary according to market developments as well as the economic and financial situation. In a later announcement published on May 18, 2007, the band was extended to 0.5%. Since July 2008, the RMB has traded at 6.83 RMB per U.S. Dollar. Recent reports indicate an upward revaluation in the value of the RMB against the U.S. Dollar may be allowed. The People's Bank announced on June 19, 2010 its intention to allow the RMB to move more freely against the basket of currencies, which increases the possibility of sharp fluctuations in the value of the RMB in the near future and thus the unpredictability associated with the RMB exchange rate.

 

Despite this change in its exchange rate regime, the Chinese government continues to manage the valuation of the RMB. The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and the RMB.  Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

 

The income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

Uncertainties with respect to the PRC legal system could adversely affect us and we may have limited legal recourse under PRC law if disputes arise under our contracts with third parties.

Since 1979, we believe PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China.  However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China.  In particular, because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties.  In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect.  As a result, sometimes we may not be aware of our violation of these policies and rules until sometime after violation.

 

The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable.  The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.  Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring.  The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

 

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Under the PRC EIT Law, we may be classified as a “resident enterprise” of the PRC. Such classification could result in tax consequences to us and our non-PRC resident shareholders.

On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008.  Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises.  An enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign company on a case-by-case basis.

 

If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow.  First, we could be subject to the enterprise income tax at a rate of 25 percent on our worldwide taxable income, as well as PRC enterprise income tax reporting obligations.  Second, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from enterprise income tax.  As a result, if we are treated as a PRC “qualified resident enterprise,” all dividends paid from our Chinese subsidiaries to us would be exempt from PRC tax.

 

Finally, the new “resident enterprise” classification could result in a situation in which a 10% PRC tax is imposed on dividends we pay to our non-PRC stockholders that are not PRC tax “resident enterprises” and gains derived by hem from transferring our common stock, if such income is considered PRC-sourced income by the relevant PRC authorities.  In such event, we may be required to withhold a 10% PRC tax on any dividends paid to non-PRC resident stockholders.  Our non-PRC resident stockholders also may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our common stock in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain.

 

Moreover, the State Administration of Taxation (“SAT”) released Circular Guoshuihan No. 698 (“Circular 698”) on December 15, 2009 that reinforces the taxation of non-listed equity transfers by non-resident enterprises through overseas holding vehicles.  Circular 698 addresses indirect share transfers as well as other issues.  Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a foreigner (non-PRC resident) who indirectly holds shares in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers equity interests in a PRC resident enterprise by selling the shares of the offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5 percent or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant information within 30 days of the transfer.  The tax authorities in charge will evaluate the offshore transaction for tax purposes.  In the event that the tax authorities determine that such transfer is abusing forms of business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form.  A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international (including U.S.) capital markets.  If the SAT’s challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a relatively short history, there is uncertainty as to its application.  We (or a foreign investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that we (or such foreign investor) should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations (or such foreign investor’s investment in us).

 

If any such PRC taxes apply, a non-PRC resident stockholder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a foreign tax credit against such stockholder’s domestic income tax liability (subject to applicable conditions and limitations).  Prospective investors are encouraged to consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available foreign tax credits.

 

Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may materially adversely affect us.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents inside China, generally referred to as Circular 75.  The policy announced in this notice required PRC residents to register with the relevant SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Failure to comply with the requirements of Circular 75 and any of its internal implementing guidelines as applied by SAFE in accordance with Notice 106 may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions.  Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.

 

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We have requested our shareholders who are PRC residents to make the necessary applications, filings and amendments as required under Circular 75 and other related rules.  We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements.  However, we cannot provide any assurances that our shareholders who are PRC residents will comply with our request to make any applicable registrations, and nor can we provide any assurances that our shareholders who are PRC residents will be able to obtain such applicable registration or comply with other requirements required by Circular 75 or other related rules or that, if challenged by government agencies, the structure of our organization fully complies with all applicable registrations or approvals required by Circular 75.  Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies.  A failure by such PRC resident shareholders or future PRC resident shareholders to comply with Circular 75 or other related rules, if SAFE requires it, could subject these PRC resident shareholders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

 

Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

Our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China.  The Chinese economy differs from the economies of most developed countries in many respects, including:

 

the amount of government involvement;

 

the level of development;

 

the growth rate;

 

the control of foreign exchange; and

 

the allocation of resources.

 

While the Chinese economy has grown significantly in the past 20 years, we believe the growth has been uneven, both geographically and among various sectors of the economy.  The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources.  We believe some of these measures benefit the overall Chinese economy, but may also have a negative effect on us.  For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

 

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy.  Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government.  The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

 

Contract drafting, interpretation and enforcement in China involve significant uncertainty.

We have entered into numerous contracts governed by PRC law, many of which are material to our business.  As compared with contracts in the United States, contracts governed by PRC law tend to contain less detail and to not be as comprehensive in defining contracting parties’ rights and obligations.  As a result, contracts in China are more vulnerable to disputes and legal challenges.  In addition, contract interpretation and enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant uncertainties.  Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such disputes arise, we cannot assure you that we will prevail.

 

The application of PRC regulations relating to the overseas listing of PRC domestic companies is uncertain, and we may be subject to penalties for failing to request approval of the PRC authorities prior to listing our shares in the U.S.

On August 8, 2006, six PRC government agencies, namely, the Ministry of Commerce (“MOFCOM”), the State Administration for Industry and Commerce (“SAIC”), the China Securities Regulatory Commission (“CSRC”), SAFE, the State-Owned Assets Supervision and Administration Commission, (“SASAC”), and the State Administration for Taxation (“SAT”), jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rules”), which became effective on September 8, 2006.  The New M&A Rules purport, among other things, to require offshore “special purpose vehicles”, that are (1) formed for the purpose of overseas listing of the equity interests of PRC companies via acquisition and (2) are controlled directly or indirectly by PRC companies and/or PRC individuals, to obtain the approval of the CSRC prior to the listing and trading of their securities on overseas stock exchanges.  On September 21, 2006, pursuant to the New M&A Rules and other PRC Laws, the CSRC published on its official website relevant guidance with respect to the listing and trading of PRC domestic enterprises’ securities on overseas stock exchanges (the “Related Clarifications”), including a list of application materials regarding the listing on overseas stock exchanges by special purpose vehicles.  We were and are not required to obtain the approval of CSRC under the New M&A Rules in connection with this transaction because we were and are not a special purpose vehicle formed or controlled by PRC individuals.

 

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However, there are substantial uncertainties regarding the interpretation, application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of a PRC-related company structured similar to ours is subject to the approval of CSRC.  Any violation of these rules could result in fines and other penalties on our operations in China, restrictions or limitations on remitting dividends outside of China, and other forms of sanctions that may cause a material and adverse effect to our business, operations and financial conditions.

 

The New M&A Rules also established additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks or China’s traditional brands. We may grow our business in part by acquiring other businesses.  Complying with the requirements of the New M&A Rules in completing this type of transaction could be time-consuming, and any required approval processes, including CSRC approval, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

We may face regulatory uncertainties that could restrict our ability to issue equity compensation to our directors and employees and other parties who are PRC citizens or residents under PRC law.  The grant of stock options under any incentive plan that we adopt in the future would registration with SAFE.

On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78”.  It is not clear whether Circular 78 covers all forms of equity compensation plans or only those that provide for the grant of stock options.  For any equity compensation plan which is so covered and is adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with, and obtain the approval of, SAFE prior to their participation in any such plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participate in an overseas listed company’s covered equity compensation plan prior to April 6, 2007.  As of the date of this filing, we have not adopted any incentive plans, but may do so in the future. Any such plan may grant equity compensation, including, but not limited to, stock options, to our PRC employees and/or directors. The grant of any equity compensation under such a plan to a PRC citizen, however, may under Circular 78 require the PRC citizen to register with and obtain approval of SAFE.  We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming.  If it is determined that our such a plan, or any equity compensation grant under such a plan, is subject to Circular 78, failure to comply with such provisions of Circular 78 may subject us and any recipients thereof to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees and/or directors.  In that case, our ability to compensate our employees and directors through equity compensation would be hindered and/or prevented.

 

Capital outflow policies in the PRC may hamper our ability to remit income to the United States.

The PRC has adopted currency and capital transfer regulations.  These regulations may require that we comply with complex regulations for the movement of capital and as a result we may not be able to remit all income earned and proceeds received in connection with our operations or from the sale of our operating subsidiary to the U.S. or to our stockholders.

 

Our operations and assets in the PRC are subject to significant political and economic uncertainties.

Government policies are subject to rapid change and the government of the PRC may adopt policies which have the effect of hindering private economic activity and greater economic decentralization.  There is no assurance that the government of China will not significantly alter its policies from time to time without notice in a manner with reduces or eliminates any benefits from its present policies of economic reform.  In addition, a substantial portion of productive assets in China remains government-owned.  For instance, all lands are state or rural collective economic organizations owned and leased to business entities or individuals through governmental grants of the land use rights.  The grant process is typically based on government policies at the time of the grant, which could be lengthy and complex.  This process may adversely affect our business.  The government of China also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies.  Uncertainties may arise as a result of changing governmental policies and measures.  In addition, changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency, the nationalization or other expropriation of private enterprises, as well as adverse changes in the political, economic or social conditions in China, could have a material adverse effect on our business, results of operations and financial condition.

 

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Our use of the allocated land may be subject to challenges in the future.

All land use rights that we own are land use rights relating to allocated land.  The local governmental authorities have granted such land use rights to us for free use or at a discounted levy rate given our contribution to the development of the local economy.  However, pursuant to the Catalogue on Allocated Land issued by the Ministry of Land Resources of the PRC (the “Catalogue”), the land use rights for allocated land may only be granted to those specific projects which are in compliance with the Catalogue, subject to the approval of the competent governmental authorities.  We, as a privately owned agricultural producer, may not be qualified to be granted such land use rights for allocated land according to the Catalogue.  Consequently, our use of such land may be subject to challenge in the future, and the legal consequences could include the confiscation of such land by the governmental authorities or a demand that we pay a market price for purchasing the land use rights for such land and converting the allocated land use right to a granted land use right.

 

Because Chinese law governs almost all of our material agreements, we may not be able to enforce our legal rights within China or elsewhere, which could result in a significant loss of business, business opportunities, or capital.

Chinese law governs almost all of our material agreements.  We cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available outside of China.  The system of laws and the enforcement of existing laws in China may not be as certain in implementation and interpretation as in the United States.  Our inability to enforce or obtain a remedy under any of our current or future agreements could result in a significant loss of business, business opportunities or capital.  It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China.

 

Substantially all of our assets will be located in the PRC and all of our officers and our present directors reside outside of the United States.  As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under federal securities laws.  Moreover, we have been advised that China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United States and China would permit effective enforcement of criminal penalties of the federal securities laws.

 

We do not have insurance coverage.

We currently do not purchase property insurance for our properties, including raw materials, semi-manufactured goods, manufactured goods, buildings and machinery equipment, livestock, and we currently do not carry any product liability or other similar insurance, nor do we have business liability or business disruption insurance coverage for our operations in the PR. There is no insurance covering risks incurred through seasonal variation consequences. In this respect, we as an engineering based company have qualified personnel and staffs to manage and to limited the happenings of these relevant risk factors; however there is no guarantee that accidents will not happen, and if they happen, the consequences may have a material adverse effect on our business, financial condition and results of operations.

 

Because our cash and cash equivalent are held in banks which do not provide capital guarantee insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit.  A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of bank failure, we may not have access to, or may lose entirely, our funds on deposit.  Depending upon the amount of cash we maintain in a bank that fails, our inability to have access to such cash deposits could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.

 

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.  Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in the PRC.  We cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible.  If our employees or agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

Labor laws in the PRC may adversely affect our results of operations.

On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on January 1, 2008.  The New Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce.  Further, it requires that certain terminations be based upon seniority and not merit.  In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to effect such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.

 

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Risks Related to Ownership of our Common Stock

 

Volatility in our common stock price may subject us to securities litigation.

Stock markets, in general, have experienced in recent months, and continue to experience, significant price and volume volatility, and the market price of our common stock may continue to be subject to similar market fluctuations unrelated to our operating performance or prospects.  This increased volatility, coupled with depressed economic conditions, could continue to have a depressing effect on the market price of our common stock.  The following factors, many of which are beyond our control, may influence our stock price:

 

the status of our growth strategy including the building of our new production line with the net proceeds from the offering;

 

announcements of technological or competitive developments;

 

regulatory developments in the PRC affecting us, our customers or our competitors;

 

announcements regarding patent or other intellectual property litigation or the issuance of patents to us or our competitors or updates with respect to the enforceability of patents or other intellectual property rights generally in the PRC or internationally;

 

actual or anticipated fluctuations in our quarterly operating results;

 

changes in financial estimates by securities research analysts;

 

changes in the economic performance or market valuations of our competitors;

 

additions or departures of our executive officers;

 

release or expiration of lock-up or other transfer restrictions on our outstanding common stock; and

 

sales or perceived sales of additional shares of our common stock.

 

In addition, the securities markets have, from time to time, experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.  Any of these factors could result in large and sudden changes in the volume and trading price of our common stock and could cause our stockholders to incur substantial losses.  In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted securities class action litigation against that company.  If we were involved in a class action suit or other securities litigation, it would divert the attention of our senior management, require us to incur significant expense and, whether or not adversely determined, have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Your ability to bring an action against us or against our directors and officer, or to enforce a judgment against us or them, will be limited because we conduct substantially all of our operations in the PRC and because the majority of our directors and officers reside outside of the United States.

We are a Nevada holding company and substantially all of our assets are located outside of the United States.  Substantially all of our current operations are conducted in the PRC.  In addition, all of our directors and officers are nationals and residents of countries other than the United States.  A substantial portion of the assets of these persons are located outside the United States.  As a result, it may be difficult for you to effect service of process within the United States upon these persons.  It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, none of whom are residents in the United States and the substantial majority of whose assets are located outside of the United States.  In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts.  Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law.  Courts in the PRC may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions.  The PRC does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States.  In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest.  So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

 

We will be a “controlled company” within the meaning of the NASDAQ Marketplace rules and, as a result, will qualify for and will rely on certain exemptions from certain corporate governance requirements.

After the closing of this offering, our chief executive officer will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” pursuant to Rule 5615(c) of the corporate governance standards of the NASDAQ Stock Market LLC.  Under such rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the NASDAQ Stock Market LLC, including the requirements that:

 

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a majority of our Board of Directors consist of independent directors;

 

the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

 

This controlled company exemption does not extend to the audit committee requirements under Rule 5605(c) or the requirement for executive sessions of Independent Directors under Rule 5605(b)(2).

 

We intend to elect to be treated as a “controlled company” in the event that we should seek to list our shares on the Nasdaq Stock Market LLC.  As a result, you may not have the same protections afforded to stockholders of companies that are mandatorily subject to all of the corporate governance requirements of the NASDAQ Stock Market LLC.

 

One of our directors and officers controls a majority of our common stock and his interests may not align with the interests of our other stockholders.

Solomon Lee, our chairman, chief executive officer and president, controls our company and will both before and after this offering beneficially own in excess of 50.1% of our issued and outstanding common stock.  This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive a disadvantage in owning shares in a company with one or several controlling stockholders.  Furthermore, our directors and officers, as a group, have the ability to significantly influence or control the outcome of all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets.  This concentration of ownership may have the effect of delaying or preventing a change in control of our company which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common stock.  In addition, without the consent of Mr. Lee, we could be prevented from entering into transactions that could be beneficial to us.  Mr. Lee may cause us to take actions that are opposed by other stockholders as his interests may differ from those of other stockholders.

 

Future issuances of capital stock may depress the trading price of our common stock.

Any issuance of shares of our common stock (or common stock equivalents) after this offering could dilute the interests of our existing stockholders and could substantially decrease the trading price of our common stock.  We may issue additional shares of our common stock in the future for a number of reasons, including financing our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions).

 

Sales of a substantial number of shares of our common stock in the public market could depress the market price of our common stock, and impair our ability to raise capital through the sale of additional equity securities.  We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock.

 

We believe that the market price of our shares in the OTC BB markets is adversely affected by the current stigma associated with Chinese companies quoted or listed publicly in the United States.

We believe that the market price of our shares in the OTC BB markets is adversely affected by the current stigma associated with Chinese companies quoted or listed publicly in the United States. Although we managed to maintain our liquidity to a certain degree, our market prices are suffering (e.g., our shares are presently trading at approximately 25% of our net tangible asset value per share). Many Chinese companies are suffering from this stigma, which tends to affect both market prices and liquidities, and our company is no exception. There are reasons of varying degrees of legitimacy explaining this stigma, including but not limited to: (i) investors’ experience of losses suffered in the course of investing in other Chinese companies, (ii) the difficulty some Chinese companies have had in preparing auditable financial statements, (iii) the difficult in enforcing US judgments in foreign courts generally, all of which have contributed to a negative perception in the minds of some US investors regarding all Chinese companies publicly traded on US markets. Regardless of the reasons for this perception, should it continue over a sustained period of time our market prices may keep on trading below our net tangible asset value per share, which would not only increase the risk that our shareholders lose the funds they have invested in our company, but may also adversely affect our ability to maintain our growth plan on a timely manner and thus our business and financial condition as well.

 

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If following the closing of the offering, shares of our common stock remains subject to the U.S. “Penny Stock” Rules, investors who purchase our common stock in the offering may have difficulty re-selling their shares of our common stock as the liquidity of the market for our shares may be adversely affected by the impact of the “Penny Stock” Rules.

Although we anticipate that at some point following this offering, shares of our common stock will trade on the NASDAQ Capital Market, in the event that shares of our common stock do not become listed on the NASDAQ Capital Market or if our shares are in the future delisted from the NASDAQ Capital Market, it may be more difficult for investors in the offering to sell the shares of our common stock.  A “penny stock” is generally defined by regulations of the U.S. Securities and Exchange Commission (“SEC”) as an equity security with a market price of less than US$5.00 per share.  However, an equity security with a market price under US$5.00 will not be considered a penny stock if it fits within any of the following exceptions:

 

(i) the equity security is listed on a national securities exchange;

 

(ii) the issuer of the equity security has been in continuous operation for less than three years, and either has (a) net tangible assets of at least US$5,000,000, or (b) average annual revenue of at least US$6,000,000; or

 

(iii) the issuer of the equity security has been in continuous operation for more than three years, and has net tangible assets of at least US$2,000,000.

 

Although we believe our common stock is not a penny stock based upon the exception (iii) above, we cannot provide any assurance that in the future our common stock will not be classified as Penny Stock.

 

If an investor buys or sells a penny stock, SEC regulations require that the investor receive, prior to the transaction, a disclosure explaining the penny stock market and associated risks. Furthermore, trading in our common stock is currently subject to Rule 15g-9 of the Exchange Act, which relates to non-NASDAQ and non-exchange listed securities.  Under this rule, broker/dealers who recommend our securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale.

 

The low price of our common stock has a negative effect on the amount and percentage of transaction costs paid by individual shareholders.  The low price of our common stock also limits our ability to raise additional capital by issuing additional shares.  There are several reasons for these effects.  First, the internal policies of certain institutional investors prohibit the purchase of low-priced stocks.  Second, many brokerage houses do not permit low-priced stocks to be used as collateral for margin accounts or to be purchased on margin.  Third, some brokerage house policies and practices tend to discourage individual brokers from dealing in low-priced stocks.  Finally, broker's commissions on low-priced stocks usually represent a higher percentage of the stock price than commissions on higher priced stocks.  As a result, our stockholders may pay transaction costs that are a higher percentage of their total share value than they would if our share price were substantially higher.

 

As an issuer of “penny stock” the protection provided by the federal securities laws relating to a forward-looking statement does not apply to us and as a result we could be subject to legal action.

Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks.  As a result, if we are a penny stock, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.

 

The issuance of any of our equity securities pursuant any equity compensation plan we may adopt may dilute the value of existing stockholders and may affect the market price of our stock.

In the future, we may issue to our officers, directors, employees and/or other persons equity based compensation under any equity compensation plan we may adopt to provide motivation and compensation to our officers, employees and key independent consultants.  The award of any such incentives could result in an immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the value of our stock price.  The exercise of these options and the sale of the underlying shares of common stock and the sale of stock issued pursuant to stock grants may have an adverse effect upon the price of our stock. In addition, if the holders of outstanding convertible securities convert such securities into common stock, you will suffer further dilution; at present, the only convertible securities issued and outstanding are the 7,000,000 shares of Series B Preferred Stock, which are convertible into common stock on a one-for-one basis.

 

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The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain qualified board members.

We are a public company and subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley Act of 2002. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of our internal controls structure and procedures for financial reporting. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. If we fail to maintain compliance under Section 404, or if in the future management determines that our internal control over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by the NASDAQ Stock Market should we in the future be listed on this market, the SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our common stock. Any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company, particularly if we become fully subject to Section 404 and its auditor attestation requirements, which will increase costs. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and to meeting the obligations that are associated with being a public company, which may divert attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our shares of common stock may be thinly traded, so you may be unable to sell at or near ask prices or at all.

We cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common stock is currently traded on the OTC Bulletin Board where the shares have historically been thinly traded, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent.

 

This situation may be attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community who generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we have become more seasoned and viable. As a consequence, there may be periods of several days, weeks or months when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot assure you that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained or not diminish.

 

We may become involved in securities class action litigation that could divert management’s attention and harm our business.

The stock market in general, and the shares of early stage companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in the future, the market price of our shares could fall regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. If the market price or volume of our shares suffers extreme fluctuations, then we may become involved in this type of litigation, which would be expensive and divert management’s attention and resources from managing our business.

 

As a public company, we may also from time to time make forward-looking statements about future operating results and provide some financial guidance to the public markets. The management has limited experience as a management team in a public company and as a result projections may not be made timely or set at expected performance levels and could materially affect the price of our shares. Any failure to meet published forward-looking statements that adversely affect the stock price could result in losses to investors, stockholder lawsuits or other litigation, sanctions or restrictions issued by the SEC.

 

Securities analysts may elect not to report on our common stock or may issue negative reports that adversely affect the stock price.

At this time, no securities analysts provide research coverage of our common stock, and securities analysts may not elect not to provide such coverage in the future. It may remain difficult for our company, with its small market capitalization, to attract independent financial analysts that will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect the stock’s actual and potential market price. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or more analysts elect to cover our company and then downgrade the stock, the stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which, in turn, could cause our stock price to decline. This could have a negative effect on the market price of our common stock.

 

19
 

 

Risks Related to this Offering:

 

New investors in our common stock will experience immediate and substantial dilution.

The public offering price of our common stock is substantially higher than our net tangible book value per share of common stock. Investors purchasing shares of common stock in this offering will, therefore, incur immediate dilution in net tangible book value per share of common stock. See “Dilution.”

 

Because there is no minimum required for the offering to close, investors in this offering will not receive a refund in the event that we do not sell an amount of shares sufficient to pursue the business goals outlined in this prospectus .

We have not specified a minimum offering amount nor have or will we establish an escrow account in connection with this offering. Because there is no escrow account and no minimum offering amount, investors could be in a position where they have invested in our company, but we are unable to fulfill our objectives or proceed with our operations due to a lack of interest in this offering. If this were to occur, we may be forced to curtail or abandon our operations with a loss to investors who purchase stock under this prospectus. Further, because there is no escrow account in operation and no minimum investment amount, any proceeds from the sale of shares offered by us will be available for our immediate use, despite uncertainty about whether we would be able to use such funds to effectively implement our business plan. Investor funds will not be returned under any circumstances whether during or after the offering.

 

Our management might not use the proceeds of this offering effectively.

Our management has broad discretion over the use of proceeds of this offering. In addition, our management has not designated a specific use for a substantial portion of the proceeds of this offering. Accordingly, it is possible that our management may allocate the proceeds in ways that do not improve our operating results. In addition, cash proceeds received in the offering may be temporarily used to purchase short-term, low-risk investments, and such investments might not be invested to yield a favorable rate of return.

 

We are selling the shares of common stock offered in this prospectus without an underwriter and may not be able to sell any of the shares offered herein.

Our officers and directors are offering the shares of common stock being sold on our behalf. There is no broker-dealer retained as an underwriter and no broker-dealer is under any obligation to purchase any common shares. There are no firm commitments to purchase any of the shares in this offering. Consequently, there is no guarantee that we will be capable of selling all, or any, of the shares of common stock being offered hereby.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

20
 

 

USE OF PROCEEDS

 

There is no minimum number of shares that must be sold in the offering, we will retain the proceeds from the sale of any of the offered shares, and funds will not be returned to investors. It is possible that no proceeds will be received by the Company or that if any proceeds are received, that such proceeds will not be sufficient to cover the costs of the offering. The estimated net proceeds to the Company from the sale of the maximum number of shares of common stock offered hereby are estimated to be approximately $26,080,000 after deducting estimated offering expenses.  We intend to use the net proceeds of this offering to finance our developments capital expenditures, summarized as follows:

 

    25% of the
Maximum Offering
    50% of the
Maximum Offering
    75% of the
Maximum Offering
    100% of the
Maximum Offering
 
    $     $     $     $  
Gross Proceeds     6,562,500       13,125,000       19,687,500       26,250,000  
Less offering expenses                                
Commissions     -       -       -       -  
Consulting, Legal and advertising     150,000       150,000       150,000       150,000  
Printing and advertising     20,000       20,000       20,000       20,000  
Net Proceeds     6,392,500       12,955,000       19,517,500       26,080,000  
                                 
Use of Net Proceeds                                
Sales and brokerage fess     31,963       64,775       97,588       130,400  
Marketing and out of pocket expenses     63,925       129,550       195,175       260,800  
Legal and professional endorsement fees     95,888       95,888       95,888       95,888  
Capital Expenditures in:                                
1     SJAP (Huangyuan Xining)'s developments     1,860,218       3,799,436       5,738,655       7,677,874  
2     HSA (Hunan, Linli)'s Developments     1,860,218       3,799,436       5,738,655       7,677,874  
3     MEIJI's developments in cattle farms     -       -       -       -  
4     HU Plantation's developments     -       -       -       -  
5     CA's developments in Fishery activities     -       -       -       -  
6     Corporate division     2,480,290       5,065,915       7,651,540       10,237,165  
                                 
Total Use of Net proceeds     6,392,500       12,955,000       19,517,500       26,080,000  

 

The following terms further clarify certain line items or terms used in the Use of Net Proceeds set forth above:

 

All general administration and general expenses required for this offering will be absorbed into our daily operation cost.

 

Sales and brokerage fees is estimated at an average of 0.5% of the net proceeds.

 

Marketing and out of pocket expenses (including traveling expenses) are based on 1% of the net proceeds.

 

Advertising, legal and professional expenses are based on a flat rate of US$150,000.

 

Allocation of the proceeds will be mainly used by SJAP, HSA and the Company’s Corporate division based on the ratio of 30%, 30% and 40% respectively. As for the funding needs for the development of MEIJI, HU Plantation and CA, we believe that these 3 entities may have sufficient internally generated cash-flows to self-finance their respective developments.

 

If we fail to meet expectations, we may need to adjust the use of proceeds, which we presently expect would affect principally the Company’s Corporate division and delay the development of SJAP and HSA until such time we will be in a financial position to commence financing these activities. If we must curtail or cease these activities, our growth plan will be delayed, which would have a material, adverse effect on our financial condition and business.

 

21
 

 

DILUTION

 

Dilution represents the difference between the offering price and the net tangible book value per share immediately after completion of this offering.  Net tangible book value is the amount that results from subtracting total liabilities and intangible assets from total assets.  As of June 30, 2013, we had $258,495,707 in net tangible book value and $2.15 in net tangible book value per share. Because this is a direct public offering, with no minimum number of shares that must be sold, it is possible that none or some of the maximum number of shares offered will be sold. In our case, the net tangible book value per share is higher than the offering price, so the sale of the shares to you is accretive rather than dilutive.

 

After giving effect to the sale of 25%, 50%, 75% and 100% of the maximum shares of Common Stock offered by the Company hereby, at an assumed initial public offering price per share of $1.00 and the application of the estimated net proceeds there from (after deducting estimated offering expenses), the net tangible book value of the Company as of June 30, 2013, under the assumptions set forth above and after giving effect to the sale of shares offered hereby, would decrease from $2.15 to $1.97, $1.93, $1.89 and $1.85 per share, respectively. This represents an immediate decrease in the net tangible book value of $0.18, $0.22, $0.26 and $0.30 per share to current shareholders, respectively, and an immediate accretion of $0.97, 0.93, 0.89 and 0.85 per share to new investors.

 

The following table summarizes the per share dilution based on 25% of the maximum number of shares being sold:

 

Public offering price per share   $ 1.00  
Net tangible book value per share before this offering   $ 2.15  
Decrease per share attributable to new investors   $ 0.18  
Adjusted net tangible book value per share after this offering   $ 1.97  
Accretion per share to new investors   $ 0.97  
Percentage accretion     97 %

 

50% of the maximum number of shares being sold:

 

Public offering price per share   $ 1.00  
Net tangible book value per share before this offering   $ 2.15  
Decrease per share attributable to new investors   $ 0.22  
Adjusted net tangible book value per share after this offering   $ 1.93  
Accretion per share to new investors   $ 0.93  
Percentage accretion     93 %

 

 

The following table summarizes the per share dilution based on 75% of the maximum number of shares being sold:

 

Public offering price per share   $ 1.00  
Net tangible book value per share before this offering   $ 2.15  
Decrease per share attributable to new investors   $ 0.26  
Adjusted net tangible book value per share after this offering   $ 1.89  
Accretion per share to new investors   $ 0.89  
Percentage accretion     89 %

 

The following table summarizes the per share dilution based on 100% of the maximum number of shares being sold:

 

Public offering price per share   $ 1.00  
Net tangible book value per share before this offering   $ 2.15  
Decrease per share attributable to new investors   $ 0.30  
Adjusted net tangible book value per share after this offering   $ 1.85  
Accretion per share to new investors   $ 0.85  
Percentage accretion     85 %

 

22
 

 

MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 

Since January 5, 2012, our common stock has been quoted on OTC Bulletin Board under the symbol of “SIAF.” Prior thereto, on July 24, 2007, our Common Stock began to be quoted on the Pink OTC Markets under the symbol “SIAF.PK.” The following table lists the high and low bid price for our Common Stock as quoted by the Pink OTC Markets, then the OTC BB during each quarter within the last two completed fiscal years. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions.

 

Year 2011   High     Low  
First Quarter   $ 1.58     $ 1.21  
Second Quarter   $ 1.43     $ 0.82  
Third Quarter   $ 1.04     $ 0.45  
Fourth Quarter   $ 0.78     $ 0.36  

 

Year 2012   High     Low  
First Quarter   $ 0.93     $ 0.50  
Second Quarter   $ 0.98     $ 0.42  
Third Quarter   $ 0.67     $ 0.34  
Fourth Quarter   $ 0.71     $ 0.51  

 

Year 2013   High     Low  
First Quarter   $ 0.67     $ 0.38  
Second Quarter   $ 0.55     $ 0.36  
Third Quarter to date   $ 0.45     $ 0.35  

 

The closing price of our common stock on the OTC Bulletin Board on September 20, 2013 was $0.405 per share.

 

Holders

 

As of September 4, 2013, an aggregate of 127,713,766 shares of our common stock were issued and outstanding and were owned by approximately 5,211 stockholders of record.

 

Dividends

 

On October 2, 2011, we declared cash dividends of US $0.01 per share of our common stock with a record date of October 31, 2010, and payment date of November 15, 2011. Subsequently, the dividend was fully paid to shareholders of record on November 15, 2011. On December 6, 2012, we declared cash dividends of US $0.01 per share of our common stock with a record date of December 26, 2012, and payment date of January 15, 2013. Subsequently, the dividend was fully paid to shareholders of record on January 15, 2013.

 

Equity Compensation Plan Information

 

The following table sets forth certain information as of December 31, 2012, with respect to compensation plans under which the Company’s equity securities are authorized for issuance:

 

    (a)     (b)     (c)  
    Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
    The weighted-average exercise
price of outstanding options,
warrants and rights
    Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a))
 
                   
Equity compensation     None       -       -  
Plans approved by                        
Security holders                        
                         
Equity compensation     None       -       -  
Plans not approved                        
By security holders                        
Total                        

 

23
 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of financial condition and results of operation together with the financial statements and the related notes appearing beginning on page F-1 of this prospectus. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this prospectus. See “Risk Factors” beginning on page 4 of this prospectus. Our actual results may differ materially.

 

Forward-looking Statements

 

We and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this prospectus and other filings with the SEC, reports to our stockholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “may,” “should,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. We undertake no obligation to update or revise any of the forward-looking statements after the date of this annual report to conform forward-looking statements to actual results.  Important factors on which such statements are based are assumptions concerning uncertainties, including but not limited to, uncertainties associated with the following:

 

Inadequate capital and barriers to raising the additional capital or to obtaining the financing needed to implement our business plans;

 

Our failure to earn revenues or profits;

 

Inadequate capital to continue business;

 

Volatility or decline of our stock price;

 

Potential fluctuation in quarterly results;

 

Rapid and significant changes in markets;

 

Litigation with or legal claims and allegations by outside parties; and

 

Insufficient revenues to cover operating costs.

 

Business Overview

We are a consulting, engineering and technology based company operating in the agriculture and aquaculture sectors with a vertically integrated business model as a developer, producer and distributor of organic agriculture and aquaculture produce and products through our operating subsidiaries in China.

 

Activities in 2011 concentrated on the building of primary production activities in our feedstock, fertilizer fishery and cattle farm businesses leading to the initiation of basic infrastructure developed for our pre-wholesale and wholesale operations. 2012 was characterized by a marked expansion and continuation of our primary production activities and the development of wholesale operations, many delivering product sales, and by the build-out of the distribution network including import-export, as well as the start of retail operations.

 

We divide our operations into five standalone business divisions or units as follows: (1) fishery, (2) beef cattle, (3) fertilizer, enzymes and livestock feed, (4) Dragon Fruit (“HU”) flower plantation and (5) Corporate. The commonality between the divisions is that each operates in a comparatively slow growth consolidating market; our strategy is targeting niches within these markets with our products.

 

Below is a summary of our operational and/or developing stage business activities carried out by our subsidiaries.

 

24
 

 

Fishery Division

 

The main revenues of Capital Award, Inc. (“Capital Award”) are generated from the following activities:

 

1. Engineering and Technology Services . Engineering and technology services earned through providing consulting management and servicing contracts and management services to our group companies and third parties. As of the date of this prospectus, Capital Award has six (6) consulting and servicing contracts consisting of the following:

 

(a) A contract for developing a fish farm (“Fish Farm 1”), completed in March 2011 but generating income since August 2011; Fish Farm 1 is owned and operated by our 75% subsidiary, Jiang Men City A Power Fishery Development Co., Limited (“JFD”), a Sino Joint Venture Company (an “SJVC”).

 

(b) Phase 1 development work on a prawn hatchery and nursery farm (“Prawn Farm 2”) with Zhongshan A Power Prawn Culture Development Co. Ltd. (“ZSAPP”) (a proposed name of this future SJVC), an entity in which the Company owns a direct 25% equity interest, was completed in May 2012.

 

(c) The development of a prawn production farm (“Prawn Farm 1”) with Enping A Power Prawn Culture Development Co. Ltd. (“EBAPCD”) (a proposed name of this future SJVC), an entity in which the Company owns a 25% equity interest.  This project was completed on January 31, 2013.

 

(d) The development work on the fish and eel farm (“Fish Farm 2”) with an unrelated entity, Gao A Power Fishery Development Co. Ltd. is still in progress. The project is delayed because the property is located on an inlet and drainage is extremely difficult to resolve and costly to fix.

 

(e) The development work of the project for a “marketing, distribution, seafood processing and sales” complex (“Wholesale Center 1”), with Guangzhou City A Power Nawei Trading Co. Ltd. (“GCAPNT”), an entity in which the Company owns a direct 25% equity interest.

 

(f) The development work on a prawn farm at Huanyuan County, Xining City (“Prawn Farm 3”) is for an unrelated third party Chinese investor, Wu Aquaculture A Power Development Co. Ltd. (a proposed name for this future SJVC) originally planned to be on the property of Qinghai Sanjiang A Power Agriculture Co. Ltd. (“SJAP”).

 

2. Marketing and sales of live seafood. Consists of marketing and sales of live seafood (e.g., fish, prawns and eels), and the marketing and distribution agent of the fishery farms developed by Capital Award in China. There are two Capital Award fish or prawn farms generating revenues. We have certain subsidiaries that are or will be operated under a Sino Joint Venture Company incorporated in China to carry out fishery operations, consisting of the following:

 

(a) JFD . JFD is the owner and operator of Fish Farm 1. The Company presently owns a 75% equity interest in JFD.

 

(b) EBAPCD . EBAPCD is the proposed name of the future SJVC (subject to approval by relevant Chinese authorities under our application for SJVC status), established to own and operate Prawn Farm 1. EBAPCD will generate revenue during the third quarter of 2013. Capital Award will recognize income from the sale and marketing of its prawns as EBAPCD’s marketing and sales agent.

 

(c) ZSAPP . ZSAPP is also an intended name of the future SJVC (subject to approval by relevant Chinese authorities under our application for SJVC, established to own and operate Prawn Farm 2. Capital Award recognizes income from the sale and marketing of its prawn flies as ZSAPP’s marketing and sales agent.

 

(d) Capital Award . Capital Award has been sub-contracting with local aquaculture farms to grow sleepy cod based on a fixed production cost since 2012 continuing through 2013.

 

Beef Cattle Farm Division

Operation 1. Operation 1 is operated from Huangyuan County of Xining City, Qinghai Province by SJAP, a majority owned subsidiary of the Company incorporated in China in 2009. SJAP’S principal activities that are generating revenues comprise: (i) manufacturing and sales of organic fertilizer, (ii) manufacturing and sales of livestock feed, and (iii) rearing and sales of beef cattle. On February 28, 2013, SJAP completed its development of the Concentrated Livestock Feed Manufacturing Factory and started the production and sales of Contracted Livestock Feed (“CLSF”) from March 2013. Our strategy includes building and owning our own abattoir and deboning room in 2013 and the value added processing facilities in 2014.

 

25
 

 

Fertilizer Division

 

1. Operation 1 .    Operation 1 is operated in Linli District, Hunan Province, by Hunan Shenghua A Power Agriculture Co. Ltd. China (“HSA”), a 76% owned subsidiary. HSA conducts the following business activities, both of which are in the development stage: (i) manufacturing and sales of organic and mixed fertilizer, and (ii) cultivation of pastures and crops in preparation for the establishment of beef cattle farm. On March 5, 2013, HSA secured the rights to use a well proven enzyme that, when applied to our organic fertilizer, converts part of the organic raw material into potash and phosphate without having to add chemically formulated potash and phosphate, such that our end fertilizer can be qualified as pure organic fertilizer made with 100% natural organic raw materials. Sales of pure organic fertilizer commenced during the fourth week of March, 2013.

 

2. Operation 2. Operation 2 has two sub-divisions:

  

  (a) Operation 3(a) is a beef cattle farm known as Cattle Farm 1 located at Guangdong Province, Enping City, owned and operated by Jiangman Hang Mei Cattle Farm Development Co., Limited (“JHMC”). On September 17, 2012, through our wholly owned subsidiary Macau Eiji Company Limited (“MEIJI”), we acquired a total of 75% equity interest and became the controlling shareholder of JHMC.

 

  (b) Operation 3(b) is a beef cattle farm known as Cattle Farm 2 located in Guangdong Province, Guangzhou City and is operated by MEIJI. As of the date of this Prospectus, MEIJI generates revenues through engineering and technology services obtained through consulting and servicing contracts and management fees.

    

Hylocereus Undatus (“HU”) Plantation Division

 

Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd. (“JHST”), an SJVC that is 75% owned by MEIJI, is consolidated as a subsidiary, and is the owner and operator of the Hylocereus Undatus Plantation (“HU Plantation”), which is situated at Enping City, Guangdong Province. JHST has two types of operations: (i) growth and sales of HU flowers; and (ii) drying and value added processing and sales of HU flower products.

 

SIAF/Corporate

 

Since the fourth quarter of 2012 the Company has generated income from the following business operations to supplement its shared services operations’ working capital annual budget:

 

(1) The wholesale and distribution facilities development project including design, construction and project management of its specialist modern beef wholesale and distribution center (“Wholesale Center 2”) for GCAPNT, an unrelated Chinese third party owned company situated at the Guangzhou City, LiWan District, New Wholesale Market.

 

(2) The Central Kitchen and related facilities development project including design, construction and project management of its business operations for Guangzhou City Wangxiangcheng (“WXC”).

 

(3) The Restaurants development project including design, construction and project management of its business operations for WXC.

 

(4) The construction of a trading complex for the import and export trades of the Company itself, at another building adjacent to Wholesale Center 1 and Wholesale Center 2 (collectively, the “ Trading Center ”).

 

(5) The import and export trading operation. 

 

We believe that our 5-year plan envisioning a synergistic melding of pre-wholesale, wholesale, distribution and retail activities are on track.

 

Consolidated Results of Operations

 

Part A. Consolidated Results of Operations for the three months ended June 30, 2013 compared to the three months ended June 30, 2012

 

Revenue

Revenue increased by $29,052,042 (or 114.61%) to $54,400,329 for the three months ended June 30, 2013 from $25,348,287 for the three months ended June 30, 2012. The increase was primarily due to the natural growth of revenue generated from our fishery, plantation, beef, organic fertilizer, cattle farm, beef and corporate and others operations and the maturity of on-going divisional businesses improving their revenues.

 

26
 

 

The following chart illustrates the changes by category from the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

 

Revenue                  
    2013     2012        
Category   Q2     Q2     Difference  
    $     $     $  
Fishery     17,904,106       15,799,765       2,104,341  
                         
Plantation     3,554,986       2,081,863       1,473,123  
                         
Beef     7,328,071       2,170,154       5,157,917  
                         
Organic fertilizer     9,618,307       1,781,966       7,836,341  
                         
Cattle farm     6,421,161       3,514,539       2,906,622  
                         
Corporate and others     9,573,698       -       9,573,698  
                         
Total     54,400,329       25,348,287       29,052,042  

  

Fishery : Revenue from fishery increased by $2,104,341 (or 13.32%) to $17,904,106 for the three months ended June 30, 2013 from $15,799,765 for the three months ended June 30, 2012. The increase was primarily due to our increased contract service income from fishery, WSC 1 and prawn development contracts and sale of fish for the three months ended June 30, 2013 versus consulting income and sale of fish for the three months ended June 30, 2012.

 

Plantation : Revenue from plantation of flowers increased by $1,473,123 (or 70.76%) to $3,554,986 for the three months ended June 30, 2013 from $2,081,863 for the three months ended June 30, 2012. The increase was primarily due to the increase of wholesale prices in both the fresh and dried flowers and the increase of production of flowers this season.

 

Beef : Revenue from beef increased by $5,157,917 (or 237.68%) to $7,328,071 for the three months ended June 30, 2013 from $2,170,154 for the three months ended June 30, 2012.The increase was primarily due to our increase of cattle grown on the farms.

 

Organic fertilizer : Revenue from organic fertilizer increased by $7,836,341 (or 439.76%) to $9,618,307 for the three months ended June 30, 2013 from $1,781,966 for the three months ended June 30, 2012. The increase was primarily due to the new production plants at HSA increasing its sales and production of fertilizer.

 

Cattle farm : Revenue from the cattle farm increased by $2,906,622 (or 82.70%) to $6,421,161 for the three months ended June 30, 2013 from $3,514,539 for the three months ended June 30, 2012. The increase was primarily to the increase of sales due to the increase of cattle being grown in the Cattle Farm 1.

 

Corporate and others : Revenues from corporate and others for the three months ended June 30, 2013 increased by $9,537,638 from $0 for the three months ended June 30, 2012. The increase is due primarily to the increase of consulting and services being contracted and the increase of sales through trading of the imported frozen and fresh seafood for the three months ended June 30, 2013.

 

Cost of Goods Sold

Cost of goods sold increased by $23,219,843 (or 196.94%) to $35,009,882 for the three months ended June 30, 2013 from $11,790,039 for the three months ended June 30, 2012. The increase was primarily due to the Company increasing its scale of operations in terms of our fishery, plantation, beef, organic fertilizer, cattle farm, beef and corporate and others for three months ended June 30, 2013 as compared to the three months ended June 30, 2012.

 

27
 

 

The following chart illustrates the changes by category from the three months ended June 30, 2013 to three months ended June 30, 2012.

 

Cost of Goods Sold                  
    2013     2012        
Category   Q2     Q2     Difference  
    $     $     $  
Fishery     13,773,395       6,592,310       7,181,085  
                         
Plantation     1,260,957       558,348       702,609  
                         
Beef     5,852,877       2,667,740       3,185,137  
                         
Organic Fertilizer     5,040,172       1,063,207       3,976,965  
                         
Cattle farm     3,315,692       908,434       2,407,258  
                         
Corporate and others     5,766,789       -       5,766,789  
                         
Total     35,009,882       11,790,039       23,219,843  

 

Fishery : Cost of goods sold from fishery increased by $7,181,085 (or 108.93%) to $13,776,395 for the three months ended June 30, 2013 from $6,592,310 for the three months ended June 30, 2012. The increase was primarily due to an increase in the sales relating to the increase in volume of fish production of our fish farms for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

 

Plantation : Cost of goods sold from plantation of flowers increased by $702,609 (or 125.84%) to $1,260,957 for the three months ended June 30, 2013 from $558,348 for the three months ended June 30, 2012. The increase was primarily due to cost increases in farm labor, logistics and associated general overhead of operation due to the related increase in sales.

 

Beef : Cost of goods sold from beef increased by $3,185,137 (or 119.39%) to $5,852,877 for the three months ended June 30, 2013 from $2,667,740 for the three months ended June 30, 2012.The increase was primarily due to the increased sales volume of cattle, which led to a corresponding increase in the cost of sales.

 

Organic fertilizer : Cost of goods sold from organic fertilizer increased by $3,976,965 (or 374.05%) to $5,040,172 for the three months ended June 30, 2013 from $1,063,207 for the three months ended June 30, 2012. The increase was primarily due to the related increase of sales.

 

Cattle farm : Cost of goods sold from cattle farm increased by $2,407,258 (or 264.99%) to $3,315,692 for the three months ended June 30, 2013 from $908,434 for the three months ended June 30, 2012. The increase primarily was due to the increase of cattle being grown and sold by the Cattle Farm 1 for the three months ended June 30, 2013.

 

Corporate and others : Cost of sales for the three months ended June 30, 2013 increased by $5,766,789 from $0 for the three months ended June 30, 2012. The increase is due primarily to the corresponding increase of sales and trades and consulting services for the three months ended June 30, 2013.

 

Gross Profit

 

Gross profit increased by $5,832,199 or 43.02% to $19,390,447 for the three months ended June 30, 2013 from $13,558,248 for the three months ended June 30, 2012. The increase was primarily due to the corresponding increases in revenues from our plantation, beef, organic fertilizer, cattle farm and beef and corporate and others operations.

 

28
 

 

The following chart illustrates the changes by category from the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

 

Gross profit                  
                   
    2013     2012        
Category   Q2     Q2     Difference  
    $     $     $  
Fishery     4,130,711       9,207,455       (5,076,744 )
                         
Plantation     2,294,029       1,523,515       770,514  
                         
Beef     1,475,194       846,799       628,395  
                         
Organic fertilizer     4,578,135       1,106,947       3,471,188  
                         
Cattle farm     3,105,469       873,532       2,231,937  
                         
Corporate and others     3,806,909       -       3,806,909  
                         
Total     19,390,447       13,558,248       5,832,199  

  

Fishery : Gross profit of the fishery decreased by $4,130,711 (or 55.13%) to $4,130,711 for the three months ended June 30, 2013 from $9,207,455 for the three months ended June 30, 2012. The decrease was primarily due to (i) part of the sales from fishery segment was reallocated to a new segment marked “Corporate and others” amounting to $3,806,909 and (ii) the decrease of the Gross Profit by $1,269,835 for the three months ended June 30, 2013 was due primarily to the decrease in the sales prices of sleepy cod fish dropping from $27/kg during the three months ended June 30, 2012 to $15.3/Kg during the three months ended June 30, 2013.

 

Plantation : Gross profit from the plantation increased by $770,514 (or 50.57%) to $2,294,029 for the three months ended June 30, 2013 from $1,523,515 for the three months ended June 30, 2012. The increase was due mainly to the increase of wholesale prices both on dried and fresh flowers and the increase of production of flowers.

 

Beef : Gross profit from beef increased by $628,395 (or 74.21%) to $1,475,194 or for the three months ended June 30, 2013 from $846,799 for the three months ended June 30, 2012 which was due primarily to the natural growth of operation.

 

Organic fertilizer : Gross profit from organic fertilizer increased by $3,471,188 (or 313.58%) to $4,578,135 for the three months ended June 30, 2013 from $1,106,947 for the three months ended June 30, 2012. The increase was primarily due to the increase of fertilizer sales by HSA’s new production factory.

 

Cattle farm : Gross profit from cattle farm development increased by $2,231,937 (or 255.51%) to $3,105,469 for the three months ended June 30, 2013 from $873,532 for the three months ended June 30, 2012. The increase was primarily due to the increase in the number of cattle being grown and sold by Cattle Farm 1 during the three months ended June 30, 2013.

 

Corporate and others: Gross profit from the corporate and others increased by $3,806,909 for the three months ended June 30, 2013 from $0 for the three months ended June 30, 2012; the increase was due primarily to the fact that part of the Fishery segment’s sales in consulting service and trading of fish sales were reallocated to this segment for the three months ended June 30, 2013.

 

General and Administrative Expenses and Interest Expenses

 

General and administrative expenses (including depreciation and amortization) decreased by $1,127,374 to $1,663,262 for the three months ended June 30, 2013 from $2,735,677 for the three months ended June 30, 2012. The decrease was primarily due to the decrease in wages and salaries payments paid as incentive compensation to our staff by the issuance of shares amounting to $666,778 for the three months ended June 30, 2012 compared to $90,600 for the three months ended June 30, 2013 and included in the miscellaneous were payments for overseas professional services of $781,684 for the three months ended June 30,2012 whereas payments for overseas professional services were billed under Office and corporate expenses instead of miscellaneous for the three months ended June 30, 2013.

 

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The following chart illustrates the changes by category from the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

 

Category   2013 Q2     2012 Q2     Difference  
    $     $     $  
Office and corporate expenses     590,182       309,685       280,497  
                         
Wages and salaries     375,374       918,205       (542,831 )
                         
Traveling and related lodging     20,513       8,119       12,394  
                         
Motor vehicles expenses and local transportation     44,257       16,750       27,507  
                         
Entertainments and meals     36,832       35,519       1,313  
                         
Others and miscellaneous     77,827       897,586       (819,759 )
                         
Depreciation and amortization     463,319       549,814       (86,495 )
                         
Sub-total     1,608,304       2,735,677       (1,127,374 )
                         
Interest expenses     54,958       -       54,958  
                         
Total     1,663,262       2,735,677       (1,072,416 )

 

Depreciation and Amortization

Depreciation and Amortization increased by $56,088 (or 6.13%) to $970,023 for the three months ended June 30, 2013 from $913,935 for the three months ended June 30, 2013. The increase was primarily due to the increase of depreciation by $206,066 to $331,596 for the six months ended June 30, 2013 from depreciation of $125,530 for the three months ended June 30, 2012, and the decrease of amortization by $149,978 to $638,427 for three months ended June 30, 2013 from amortization of $788,405 for the three months ended June 30, 2012.

 

In this respect, total depreciation and amortization amounted to $970,023 for the three months ended June 30, 2013, out of which amount, $463,319 was booked under General and administration expenses and $506,704 was booked under cost of goods sold; whereas total depreciation and amortization was at $913,935 for the three months ended June 30, 2012 and out of which amount, $549,814 was booked under General and Administration expenses and $364,121 was booked under cost of goods sold.

 

Gain on extinguishment of debts

The Company entered into several agreements with third parties to settle debts by issuance of the Company’s common stock. The shares issued by the Company were valued at the trading price of the stock on the date the shares were issued. The Company has reported $498,025 and $562,361 as gain on the extinguishment of debts for the three months ended June 30, 2013 and 2012, respectively.

 

Part B. Consolidated Results of Operations for the six months ended June 30, 2013 compared to the six months ended June 30, 2012

 

Revenues

 

Revenues increased by $68,179,777 (or 164.97%) to $109,508,080 for the six months ended June 30, 2013 from $41,328,303 for the six months ended June 30, 2012. The increase was primarily due to the increase of revenue generated from our fishery, plantation, beef, organic fertilizer, cattle farm and corporate and others operations and the maturity of ongoing divisional businesses improving their revenues.

 

30
 

 

The following chart illustrates the changes by category from the six months ended June 30, 2013 to June 30, 2012.

 

Revenue                  
    2013     2012        
Category   Q1- Q2     Q1-Q2     Difference  
    $     $     $  
Fishery     42,122,633       26,894,374       15,228,259  
                         
Plantation     3,554,986       2,081,863       1,473,123  
                         
Beef     14,123,908       7,445,425       6,678,483  
                         
Organic fertilizer     17,700,369       2,183,215       15,517,154  
                         
Cattle farm     14,783,718       2,723,426       12,060,292  
                         
Corporate and others     17,222,466       -       17,222,466  
                         
Total     109,508,080       41,328,303       68,179,777  

 

Fishery : Revenues from fishery increased by $15,228,259 (or 56.62%) from $26,894,373 for the six months ended June 30, 2012 to $42,122,633 for the six months ended June 30, 2013.The increase in fishery was primarily due to our increased contract service income from fishery and prawn development contract for the six months ended June 30, 2013.

 

Plantation : Revenues from plantation increased by $1,473,123 (or 70.76%) to $3,554,986 for the six months ended June 30, 2013 from $2,081,863 for the six months ended June 30, 2012. The increase in plantation was primarily due to the increase of sale of products derived from the increase of field production of flowers.

 

Beef : Revenues from beef increased by $6,678,483 (or 89.70%) to $14,123,908 for the six months ended June 30, 2013 from $7,445,425 for the six months ended June 30, 2012. The increase in beef sales was primarily due to the increase of cattle being grown in the farms during the six months ended June 30, 2013.

 

Organic fertilizer : Revenue from organic fertilizer increased by $15,517,154 or (710.75%) to $17,700,369 for the six months ended June 30, 2013 from $2,183,215 for the six months ended June 30, 2012. The increase was due to the increase of production and sales by the new fertilizer factory of HSA.

 

Cattle farm : Revenues from cattle farm increased by $12,060,292 (or 442.84%) to $14,783,718 for the six months ended June 30, 2013 from $2,723,426 for the six months ended June 30, 2012. The increase in cattle farm was primarily due to the increase of cattle being grown at Cattle Farm 1 during the six months ended June 30, 2013.

 

Corporate and others: Revenues increased by $17,222,466 for the six months ended June 30, 2013 from $0 for the six months ended June 30, 2012. The increase is due primarily that part of the Fishery segment’s sale deriving from consulting service, and seafood trading were reallocated to the segment of “Corporate and others” during the corresponding period.

 

Cost of Goods Sold

Cost of goods sold increased by $48,838,353 (or 247.20%) to $68,594,816 for the six months ended June 30, 2013 from $19,756,463 for the six months ended June 30, 2012. The increase was primarily due to the Company increased our fishery, plantation, beef, organic fertilizer, cattle farm and corporate and others operations for six months ended June 30, 2013 as compared for the six months ended June 30, 2012.

 

The following chart illustrates the changes by category from the six months ended June 30, 2013 to June 30, 2012.

 

31
 

 

Cost of goods sold                  
    2013     2012        
Category   Q1- Q2     Q1-Q2     Difference  
    $     $     $  
Fishery     28,354,892       12,090,750       16,264,142  
                         
Plantation     1,260,957       558,348       702,609  
                         
Beef     9,633,534       4,970,923       4,662,611  
                         
Organic fertilizer     9,132,048       1,075,329       8,056,719  
                         
Cattle farm     8,913,731       1,061,113       7,852,618  
Corporate and others     11,299,654               11,299,654  
                         
Total     68,594,816       19,756,463       48,838,353  

 

Fishery : Cost of goods sold from fishery increased by $16,264,142 (or 134.52%) to $28,354,892 for the six months ended June 30, 2013 from $12,090,750 for the six months ended June 30, 2012. The increase of cost of sales of fishery was primarily due to the related increase of fish production during the six months ended June 30, 2012.

 

Plantation : Cost of goods sold from plantation increased by $702,609 (or 125.84%) to $1,260,957 for the six months ended June 30, 2013 from $558,348 for the six months ended 30 June 2012. The increase in cost of sales of the plantation was primarily due to the increase of corresponding production of flowers.

 

Beef : Revenues from beef increased by $4,662,611or 93.80%) to $9,633,534 for the six months ended June 30, 2013 from $4,970,923 for the six months ended June 30, 2012. The increase in cost of sales of the beef was primarily due to the increase of the corresponding increase of sale derived from more cattle being grown in the farm during the six months ended June 30, 2013.

 

Organic fertilizer : Cost of goods sold from organic fertilizer increased by $8,056,719 (or 749.23%) to $9,132,048 for the six months ended June 30, 2013 from $1,075,329 for the six months ended June 30, 2012. The increase was due to the increase of fertilizer production from the new fertilizer factory of HSA during the six months ended June 30, 2013.

 

Cattle farm : Cost of goods sold from cattle farm increased by $7,852,618 (or 740.04%) to $8,913,731 for the six months ended 30 June 2013from $1,061,113 for the six months ended 30 June 2012. The increase in cattle farm was primarily due to the increase of production having more being grown in Cattle Farm 1 during the six months ended June 30, 2013.

 

Corporate and others: Cost of goods sold increased by $11,299,654 for the six months ended June 30, 2013 from $0 for the six months ended June 30, 2012. The increase is due primarily to the fact that that part of the Fishery segment’s sales deriving from consulting services, and seafood trading were reallocated to the segment of “Corporate and others” during the six months ended June 30, 2013 as such enhancing corresponding increase in cost of sales accordingly.

 

Gross Profit

Gross profit increased by $19,341,424 (or 89.66%) to $40,913,264 for the six months ended June 30, 2013 from $21,571,840 for the six months ended June 30, 2012. The increase was primarily due to the corresponding increase in scale of operation of revenues from plantation, beef, organic fertilizer, cattle farm, Corporate and others.

 

The following chart illustrates the changes by category from the six months ended June 30, 2013 to June 30, 2012.

 

32
 

 

The gross profit by category is as follows:

 

Gross profit                  
    2013     2012        
Category   Q1- Q2     Q1- Q2     Difference  
    $     $     $  
Fishery     13,767,741       14,803,623       (1,035,882 )
Plantation     2,294,029       1,523,515       770,514  
                         
Beef     4,490,374       2,474,502       2,015,872  
                         
Organic fertilizer     8,568,321       1,107,887       7,460,434  
                         
Cattle farm     5,869,987       1,662,313       4,207,674  
                         
Corporate and others     5,922,812       -       5,922,812  
                         
Total     40,913,264       21,571,840       19,341,424  

 

Fishery : Gross profit from fishery decreased by $1,035,882 (or 7%) from $13,767,741 for the six months ended June 30, 2013from $14,803,623 for the six months ended June 30, 2012. The decrease in fishery was primarily due to the decrease of sales prices of sleepy cod fish falling from the average of $27/Kg for the six months ended June 30, 2012 to its current average of $15.3/Kg for the six months ended June 30, 2013.

 

Plantation : Gross profit from plantation increased by $770,514 (or 50.57%) to $2,294,029 for the six months ended June 30, 2013 from $1,523,515 for the six months ended June 30, 2012. The increase in plantation was primarily due to the increase of sales due to increase of production of flowers at the farm during the six months ended June 30, 2013.

 

Beef : Gross profit from beef increased by $2,015,872 (or 81.46%) to $4,490,374 for the six months ended June 30, 2013 from $2,474,502 for the six months ended June 30, 2012. The increase in beef was primarily due to increased sales of cattle.

 

Organic fertilizer : Gross profit from organic fertilizer increased by $7,460,434 (or 673.39%) to $8,568,321 for the six months ended June 30, 2013 from $1,107,887 for the six months ended June 30, 2012. The increase was due to the increase of sales of fertilizer produced by the new fertilizer of HSA during the six months ended June 30, 2013.

 

Cattle farm : Gross profit from cattle farm increased by $4,207,674 (or 253.12%) to $5,869,987 for the six months ended June 30, 2013 from $1,662,313 for the six months ended June 30, 2012. The increase of gross profit in cattle farm was primarily due to the increase of sales in cattle and having more cattle being grown in Cattle Farm 1 in the six months ended June 30, 2013.

 

Corporate and others: Gross profit increased by $5,922,812 for the six months ended June 30, 2013 from $0 for the six months ended June 30, 2012. The reason for the increase is primarily the fact that part of the fishery segment’s sales in consulting services and trading of imported seafood were reallocated to this segment, thereby increasing the gross profit generated.

 

General and Administrative Expenses and Interest Expenses

General and administrative expenses and interest expenses (including depreciation and amortization) decreased by $1,032,298 (or 23.08%) to $3,925,702 for the six months ended June 30, 2013 from $4,957,999 for the six months ended June 30, 2012. The decrease was primarily due to decrease in wages and salaries payments paid for incentive compensation to our staff by the issuance of shares amounting to $1,333,556 for the six months ended June 30,2012 compares to $181,200 for the six months ended June 30, 2013 and including in the miscellaneous were payments for overseas professional services of $781,684 for the six months ended June 30, 2012 whereas payments for overseas professional services were billed under Office and corporate expenses instead of miscellaneous for the six months ended June 30, 2013.

 

33
 

  

Category   2013 Q1-Q2     2012 Q1-Q2     Difference  
    $     $     $  
Office and corporate expenses     1,328,662       1,151,439       177,223  
Wages and salaries     962,101       1,863,290       (901,189 )
Traveling and related lodging     34,998       20,276       14,722  
Motor vehicles expenses and local transportation     73,893       37,200       36,693  
Entertainments and meals     64,850       52,395       12,455  
Others and miscellaneous     300,881       929,902       (629,021 )
Depreciation and amortization     1,048,307       903,498       144,809  
Sub-total     3,813,692       4,957,999       (1,144,308 )
Interest expenses     112,010       -       112,010  
                         
Total     3,925,702       4,957,999       (1,032,298 )

 

Depreciation and Amortization

Depreciation and amortization increase by $293,635 (or 22.22%) to $1,614,965 for the six months ended June 30, 2013 from $1,321,330 for the six months ended June 30, 2012. The decrease was primarily due to the increase of depreciation by $455,517 to $638,671 for the six months ended June 30, 2013 from depreciation of $183,154 for the six months ended June 30, 2012, and the decrease of amortization by $161,882 to $976,294 for six months ended June 30, 2013 from amortization of $1,138,176 for the six months ended June 30, 2012.

 

In this respect, total depreciation and amortization amounted to $1,614,965 for the six months ended June 30, 2013, out of which amount, $1,048,307 was booked under general and administration expenses and $566,658 was booked under cost of goods sold; whereas total depreciation and amortization was at $1,321,330 for the six months ended June 30, 2012 and out of which amount, $903,498 was booked under general and administration expenses and $417,832 was booked under cost of goods sold.

 

Gain (loss) of extinguishment of debts

Any deficit (excess) of the fair value of the shares over the carrying cost of the debt has been reported as a gain (loss) on the extinguishment of debts of $1,051,013 and $817,513 has been credited (charged) to operations for the six months ended June 30, 2013 and 2012, respectively.

 

Part C. More detailed segment information and analysis of the financial statements for the six months ended June 30, 2013

 

This Part C discusses and analyzes certain items that we believe would assist our shareholders in obtaining a better understanding on the Company’s results of operations and financial condition:

 

 (A) Breakdown of Balance Sheet items (1) on total current assets:

 

    As of June 30, 
2013
    Note  
    $        
Cash and cash equivalents     9,391,449          
Inventories     18,887,433       1  
Cost and estimated earnings in excess of billings on uncompleted contracts     1,286,775          
Deposits and prepaid expenses     52,091,997       2  
Accounts receivable, net of allowance for doubtful debts     82,373,870       3  
Other receivables     6,374,272       4  
      170,405,796          

 

34
 

 

Note (1): Breakdown of Inventories

 

    As of June 30, 2013  
    $  
Sleepy cod and eels     5,432,990  
Bread grass     709,366  
Beef cattle     2,985,965  
Organic fertilizer     702,836  
Forage for cattle and consumable     3,144,896  
Raw materials for bread grass and organic fertilizer     5,237,102  
Unharvested HU plantation     674,278  
      18,887,433  

 

Note (2) Breakdown of Deposits and Prepaid Expenses

 

    As of June 30, 2013       Note  
    $          
Deposits for                
Deposits for Prepayments for purchases of equipment     2,059,776          
Deposits for- acquisition of land use right     7,826,508       2A  
Deposits for- inventory purchases     4,940,767          
Deposits for- aquaculture contract     1,303,607          
Deposits for- building materials     1,281,935          
Deposits for- proprietary technology     2,254,839          
Prepayments for construction in progress     19,658,537          
Shares issued for employee compensation and overseas professional fees     90,600          
Temporary deposits paid to entities for investments in future Sino Foreign Joint Venture companies     7,704,670          
Miscellaneous     4,970,758          
      52,091,997          

  

Note (2A) Breakdown of Deposit for- acquisition of Land Use Right:

 

As of June 30, 2013, we have $7,826,508 for a deposit paid for the acquisition of a Land Use Right derived from the following transactions:

 

$3,182,180 (or RMB20,000,000) was for the full payment on June 6, 2012 for the Land Use Right by HSA of a block of land measuring 150 Mu (approximately 25 acres of prime agriculture land) located at Linli District of Hunan Province within 10 Km of HSA’s complex. The process of application to register the said “Land Use Right” is in progress and is expected to be finalized officially on or before the end of year 2013 as such and in the interim prior to the Land Use Right being officially registered, this payment is recorded as Deposit and Prepaid Expenses.

 

$190,930 (or RMB1,200,000) was paid by SJAP as deposit for the acquisition of “Land Use Right” on a block of land measuring 15 Mu (or 2.475 acres) located at Huangyuan district next to SJAP’s complex on October 15, 2012. This piece of land will be rezoned into Residential from its present status of agriculture and transferred from the Local Government (Huangyuan County) to SJAP to build new staff quarters; as such SJAP is waiting on the completion of such processes to finalize the said purchase of Land Use Right.

 

$4,453,398 (or RMB 27,989,606) was the full payment Capital Award made for the purchase of the Land Use Right on a block of prime agriculture land measuring 235 Mu (approximately 38.5 acres) located at the Cong Hua District Guangzhou City in late October 2010. This block of land is part of a larger block of land (of some 500 acres) that was applying to become a subdivision; however in 2011 the Land Law was changed such that the said subdivision would require the approval of the central government instead of the approval by the local government alone prior to 2011, entailing a much longer approval process. Cong Hua District was rezoned as a suburb of the Guangzhou City in 2010 and is within close proximity of the Guangzhou City; as such management evaluates it as a valuable piece of land very suitable for the development of one of our agriculture projects.

 

35
 

 

The new block of land namely “Guangdong Lot 10 (referred to in our “Summary of Land Assets” of this report) is land zoned as “Industrial Land” that will be used by HST to expand its processing operation of the HU Plants and Immortal Vegetables and it has a tenure period of 10 years secured under a Management Right at the cost of RMB3,040,000 (equivalent to $490,322) that was paid fully; as such as at the period ended June 30, 2013 no additional deposit and prepayment was recorded.  

 

 Note (3) Breakdown of Accounts Receivable:

 

    As of June  30, 2013  
    Accounts receivable     0-30 days past due     31-90 days past due     91-120 days past due     over 120 days
and less than 1
year past due
 
    $     $     $     $     $  
Consulting and Service (from 6 contracts) totaling     49,195,415       12,564,089       27,954,719       8,003,832       672,775  
                                         
Sales of Fish (from Farms and from imports)     10,962,674       4,363,031       3,399,821       3,199,821       -  
                                         
Sales of Cattle and Beef Meats (from Enping Farm)     1,558,096       16,390       1,541,706       -       -  
                                         
Sales of HU Flowers (Dried)     3,364,099       2,912,015       452,084       -       -  
                                         
Sales Fertilizer, Bulk Stock feed and Cattle by SJYL     14,180,446       4,861,406       5,759,543       3,542,171       17,326  
                                         
Sales Fertilizer from H.S.A..     3,113,140       847,118       1,745,787       505,689       14,547  
                                         
Total Accounts Receivable     82,373,870       25,564,049       40,853,660       15,251,513       704,648  
                                         
Percentage of total population     100 %     31 %     50 %     19 %     1 %

 

Information on trading terms and provision for diminution in value of accounts receivable:

 

None of our accounts receivable is more than 12 months old. Receivables from revenue derived from consulting and services billed for work completed are within our normal trading terms capped within 180 days with our principal investor and therefore no diminution in value is required, as the quality of the receivable is not in doubt.

 

Fish Sales: Most farmed fish are sold to wholesalers at prevailing daily market prices capped within 90 days trading terms with a small portion at 180 days (for oversized fish, as the sale of oversized fish takes time to sell). We sold over US$10.9 million in fish to the wholesalers during the second quarter 2013, and as of June 30, 2013, accounts receivable of $0 was over 180 days. These debtors are wholesalers who are profitable and viable businesses with a good track record and therefore provision of diminution in value is not required as collection is not in doubt.

 

Sales of dried HU flowers: The dried flowers were sold to wholesalers in line with our longer trading terms (e.g., up to 180 days) so as to offset their holding cost so that they could sell the dried flowers through the winter months (from December 2013 to June 2014 when the new season starts). We agreed with the wholesalers that they would buy our dried flowers as soon as we produce them. Therefore, we consider the receivables from the sales of dried HU flowers to be from wholesalers with a good track record and therefore provision for diminution in value is not required as collection is not in doubt. As shown in the table above, $3,364,099 sales revenues are derived from new season sales whereas all 2012 season’s sale was paid and collected.

 

Sales of fertilizer and bulk Livestock Feed: These were sales made to regional farmers who are contracting to grow crops and pastures for us using and purchasing our fertilizer and we in turn are to buy their cattle that are fed with bulk cattle feed purchased from us, such that we are ultimately to repurchase the cattle. Under this term of arrangements our accounts receivable are normally carried forward until such time they can be offset against our account payables (that is, the amount owed for the amount of crops and pastures is offset against the amount of cattle that we have brought from them respectively). Therefore there is no need to provide any diminution in value as these debtors are on-going and profitable and viable businesses with a good track record with us and collection from them is not in doubt.

 

36
 

 

Information on Concentration of credit risk of account receivables:

 

We had 4 major customers (referring to Customer A, B, C and D mentioned in the Financial Statement of this report under Note 2.26) who accounted for ten percent or more of our consolidated revenues during the six months ended June 30, 2013 shown in table below:

 

   Six months ended June 30 2013 
   % of total Revenue   $   Total Revenue 
Customer A   18.57%   20,338,677     
Customer B   16.71%   19,293,639      
Customer C   12.32%   13,494,997      
Customer D     10.09 %     11,051,367          
                         
      57.69 %     64,178,680       109,508,080  

  

Customer A is WSC 1, which is owned and operated by Guangzhou City A Power NaWei Trading Co. Ltd (“APNW”). CA was the consulting engineer responsible for the construction of WSC 1 and development of its business operation via a Consulting and Service Contract granted by APNW. APNW is now one of our main wholesalers which we bill our sales of seafood to (including live and frozen seafood). APNW then distributes the seafood to other wholesalers in various cities in China. WSC 1 is situated ideally at the center of all interprovincial logistic services. At the same time, APNW has obtained all relevant import quotas and permits during the six months ended June 30, 2013. As such, SIAF uses APNW’s permits for its import and export trades to be carried out in China. WSC 1 had 18.57% of our total consolidated revenue (equivalent to $20,338,677 out of our total revenue of $109,508,080) derived collectively from the following segments of activities:

 

                Six months  ended June 30, 2013  
Name of company   Segments   Operation Division   Abbreviation name   % of total consolidated
Revenue
    Amount in
$
 
                         
CA   Fishery   Consulting and Services   Wholesale Center (1)     1.61 %     1,760,135  
        Sales of fish (from Fish Farm 1)         2.79 %     3,058,089  
        Sales of fish / eels from Contract Growers         2.89 %   3,166,528  
                             
SIAF   Corporate   Trading sales of seafood         11.28 %     12,353,925  
                  18.57 %     20,338,677  

  

Customer B is Guangzhou Wholesale market (Store 8) represented by Mr. Han Zhiqiang who distributes our live fish (or other live aquatic animals, e.g., prawns and eels) to other wholesalers at the Guangzhou Wholesale Fish Markets. While there are over 300 live seafood wholesalers at the Guangzhou wholesale markets, there are only about 30 of them are in Mr. Han’s group of wholesalers handling the sales of our aquatic seafood. Furthermore, although we billed our live aquatic seafood sales to one wholesaler (Mr. Han) that did not mean that our live aquatic seafood was sold by one wholesaler. During the six months period ended June 30, 2013, Mr. Han had 16.71%of our total consolidated revenue (equivalent to $18,293,639 out of our total revenue of $109,508,080) derived from the sales of CA’s live aquatic seafood under the segment of Fishery.

 

Customer C is one of our main agents, Mr. Li Changfa, who distributes SJAP’s organic fertilizer, bulk livestock feed and concentrated livestock feed to our corporative farmers and other regional farmers. During the six months period ended June 30, 2013, Mr. Li had 12.32% of our total consolidated revenue (equivalent to $13,494,997 out of our total revenue of $109,508,080) derived from the sales of SJAP’s organic fertile, bulk livestock feed and concentrated livestock feed under the segment of Organic Fertilizer and Bread Grass.

 

Customer D is Mr. Liu Guang, the Chinese legal representative of the group of businessmen with whom CA contracts under a Consulting and Service Contract to construct and develop Prawn Farm 2 and to develop its related business operation. During the six months period ended June 30, 2013, Mr. Liu had 10.09% of our total consolidated revenue (equivalent to $11,051,367 out of our total revenue of $109,508,080) derived from CA’s Consulting and Service Contract under the segment of Fishery.

 

37
 

 

The Company had 4 major customers whose accounts receivable balance individually represented the following percentages of the Company’s total accounts receivable during the six months ended June 30, 2013:

 

    As of  June 30, 2013     Total  
    % of total Accounts receivables     amount in $     Accounts receivables  
Customer A     15.21 %     12,593,302        
Customer B     15.01 %     12,427,710          
Customer C     12.03 %     9,960,383          
Customer D     11.69 %     9,678,876          
      53.94 %     44,660,271       82,796,201  

 

Note4 Breakdown of Other Receivables:

 

    As of June
30, 2013
      Note  
    $        
             
Cash advances paid as consideration to secure investments     4,657,728          
Miscellaneous     937,497          
Advances to employees     206,046          
Advances to Suppliers (at SJAP's operations)     573,001       4A  
                 
      6,374,272          

  

Note 4A: Breakdown of Advances to Suppliers at SJAP’s operations:

 

At SJAP it is a common practice to make cash advances to our corporative growers (presently standing at 100 members) who are our suppliers, to carry them through respective growing periods (for cropping or pasturing or cattle growing purposes) before final harvests of produces or sales of their cattle. On average, it works out at less than US$63,742 per member which in management’s opinion is a normal ongoing seasonal process deemed fair and equitable. In this respect, as the said average increases it means that the average corporative farmer is increasing his productivity (whether in the growing of crops or cattle), and in simple terms, it represents good progress indicating that SJAP’s revenue is also increasing.

 

(B). Breakdown of Balance Sheet Item (2) on Current Liabilities:

 

    As at June 30, 2013     Note  
Current liabilities                
Accounts payable and accruals     8,368,834       7  
Billings in excess of cost and estimated earnings on uncompleted contracts     922,375          
Due to a director     3,257,085          
Other payables     10,259,178       8  
Short term bank loan     2,265,849          
Total current liabilities     25,073,321          

 

Note 7. Accounts payables and accrued expenses clarification:

 

Our current trading environment to limited number of suppliers who will offer prolonged credit terms means that most purchases are paid for in cash or short credit terms (7 to 10 days), and in a way this allows us better bargaining ability to obtain cash discounts resulting in the low trade account payables balance of $8,368,834 representing about 7.65% of total sales of $109.5 million for the reasons stated below:

 

38
 

 

Our main Account Payables during the six months ended June 30, 2013 were generated from the following activities:

 

1. We supply the following cost elements: our own staff, engineering and technology that enhanced our profit margins and reduced the overall cost of sales. Consulting and services(“C&S”) since inception account is the major contributor of income to date and cost of sales averaging52% and 31% for CA and SIAF, respectively derived from its respective C&S during the quarter.

 

2. Implementation, supervision, training and associated management work and most of the building sub-contractors worked on sub-contract at cost fixed by us; consequently, no big profit margin is accepted that did not provide room for prolonged credit term. For contracts related to the construction of farms we use plants, equipment, parts and components that were specially manufactured and made as per our own designs and engineering by local manufacturers and suppliers (who carry a high amount of initial development costs and inventories for us based on the understanding that we would pay for the deliveries of goods sold within shorter trading terms such that they could afford to carry such costs). We pay promptly in this respect and believe that, as time has passed, our track record has earned us excellent credibility with all of our suppliers and sub-contractors.

 

3. Fish sales started gradually in late 2011, and the cost of sales averaged 47% and 63% in the three months ended March 31 and June 30 of 2013, respectively (the bulk of the cost came from the supplies of baby fingerlings and the live-bait as the main fish feed), and customary trading terms of Chinese suppliers is on a cash on delivery basis, and suppliers who provide short credit terms presently is limited to no more than a select few.

 

4. Cattle sales at SJAP’s own cattle stations and from its corporative farmers started in 2011 at lower profit margins compared to the sales of fish and the cost of sales was averaging 77% and 80% for the three months ended March 31 and June 30 of 2013, respectively; it is also customary in China to pay for the young live cattle by cash on deliveries. The Enping cattle farm started to buy young cattle in 2011 and started sales of mature cattle in 2012; cost of sales is averaging 72%and 90% in the three months ended March 31 and June 30 of 2013, respectively. Most of the young cattle supplies were from small primary producers (local small farmers) who did not have great financial resources; as such we paid for these supplies of young cattle in cash on delivery or short credit term after delivery.

 

5. In SJAP, the bulk of our fertilizers were sold to farmers who are growing pastures and crops for us such that their fertilizer sales were kept as book entries that would be offset with the pastures and crops that we would buy back from them. In the case of JHMC which is a very early stage company especially so in the manufacturing of fertilizer such that prolonged credit term facilities have not been established for its purchases of raw materials.

 

6. Bulk livestock feed are produced by regional corporative growers under contract to us and they use our supply of fertilizer and seeds that represented the main cost components enhancing cost of sales, which average 48% and 40% in the three months ended March 31 and June 30,of 2013. Again, sale of fertilizer is held on credit against crops and pasture grass purchased from them, as well as bulk livestock feed sold to them for cattle rearing, and reconciled once cattle are purchased from them.

 

Note 8.Analysis of Other Payables:

 

As of June 30, 2013, we have other payables totaling $10,259,178, composed of the following:

 

Promissory notes amounting to $4,477,414 were issued to third parties for advances granted by third parties collectively to the Company (and/or to its subsidiaries) that are personally guaranteed by a director, repayable within two years at interest free term. Promissory notes could be repaid either by cash or shares of the Company or a combination thereof. If debt amounts are settled by shares, their respective share conversion rates will be determined by both parties at the time of settlement.

 

A grant of $2,192,825 paid by the Chinese Government to SJAP for the development of a certain project, however it is the law of China such that if SJAP will not be able to complete the said project, SJAP will have to repay the said grant to the Government. As of June 30, 2013, although work is in progress on the said project but it is not yet completed, the grant is recorded as other payables.

 

Other advances that were given by third parties collectively to our subsidiaries with no fixed term of repayment at interest free terms that do not have any promissory note or agreement but verbal understanding amounting to $3,593,095.

 

39
 

 

 (C). Breakdown of Income Statements (1) Segment Item – Revenue, Cost of Sales and Gross Profit (for the three months ended June 30, 2013): 

 

    Sales Revenue     % of total     Cost of sales     % of sales     Gross Profit     % of sales        
 Segments   Q22013     Revenue     Q22013     Revenue     Q22013     Revenue       Note   
    $           $           $              
Fishery Sector                                                        
CA                                                        
Consulting and Service     6,338,929       12 %     3,286,211       52 %     3,052,718       38 %      a  
Others in sales of Fish, Prawns and commissions etc.     11,565,177       21 %     9,371,504       81 %     2,193,673       19 %      b  
                                                         
Cattle Farm Sector                                                        
MEIJI                                                        
Consulting and Service     2,480,443       5 %     1,652,711       67 %     827,732       10 %      d  
Others in sales of cattle, meat and commission etc.     3,940,718       7 %     2,755,886       70 %     1,184,832       30 %      e  
                                                         
Beef,Organic fertilizer Sector                                                        
Qinghai Sanjiang A Power, HuangYuan, Xining (45% subsidiary)                                                        
Fertilizer     2,118,342       4 %     920,411       43 %     1,197,931       57 %      f  
Bulk Live Stock Feed     2,193,056       4 %     886,014       40 %     1,307,042       60 %      g  
Concentrated Live-stock Feed and related products     2,700,277       5 %     1,640,523       61 %     1,059,754       39 %      h  
Cattle     7,359,619       14 %     5,878,075       80 %     1,481,544       20 %      i  
Hunan Shanghua A Power (75% Subsidiary)                                                        
Organic Fertilizer (ex-stocks supplied by SJAP)     550,054       1 %     441,821       80 %     108,233       20 %      j  
100% pure organic mixed fertilizer     2,025,030       4 %     1,148,980       57 %     876,050       44 %      k  
HU Plant Sector                                                        
Jiang Men HST (75% subsidiary)     3,554,986       7 %     1,260,957       35 %     2,294,029       65 %      l  
Corporate Sector (SIAF)                                                        
SIAF                                     -                  
Consulting and Service     4,272,119       8 %     1,322,097       31 %     2,950,022       69 %      m  
Import and export sales others     5,301,579       10 %     4,444,692       84 %     856,886       16 %      n  
                                                       o  
Total     54,400,329       100 %     35,009,882       64 %     19,390,447       36 %        

 

40
 

 

Note (a), (d) and (m) Consulting and Service

 

The table below highlights on general information of ongoing Consulting and Services of the quarter provided by Capital Award, MEIJI and SIAF respectively:

  

Name of the developments   Location of development   Land area or Built
up area
  Current Phase &
Stage
  Commencement
date
  Estimated
completion date
on or before
  Contractual
amount
  % of work
done as at
30.06.2013
 
                        $      
CA's Consulting and Services                                
Fish Farm (2) "The Fish & Eel Farm   Xin Hui District, Jiang Men.   33,000 m2   Phase (2)   15.Jan. 2013   June. 2014    14.9 million     28 %
Prawn Farm (2) The Hatchery & Nusery & Grow-out prawn farm   San Jiao Town, Zhong San City,   120,000 m2   Phase 2 Stage 1    12. Oct. 2012   31. Dec. 2013    8.67 Million     50 %
MEIJI's Consulting and Services                                
Cattle Farm (2) External Road work.   LiangXi Town, Enping City   10 Km Road   One Phase    15. Sept. 2012   31. March. 2013    5.28 Million     100 %
SIAF's Consulting and Services:                                
Wang Xiangcheng Restaurant projects   Hai Zhu District, Guangzhou City   Pending   Phase 1    01. Oct. 2012   30. Sept. 2015    17.5 Million     25 %
Whole Sale Center (2) (Beef)   Li Wan District, Guangzhou City   5,000 m2   Phase 1 Stage 1&2    15. Aug. 2012   30. Sept. 2013    3.7 Million     100 %

 

41
 

 

Whereas CA’s revenues (Note a) generated from its Consulting and Service Contracts (“C&S”) are normal resulting Gross Profit (“GP”) margin around its general standard of (38 to 45%), MEIJI’s GP margin (Note b) (at only 10%) is much lower than its general standard (of about 30 to 35%) due primarily to its work done during the quarter mainly consisting of the finishing work of the external roads that involved many sub-contractors who are registered in the panels of the Government that did not allow MEIJI to gain higher margins and at the same time, the heavy rainy weather of the quarter interrupted many working schedules arranged for the development of Cattle Farm 2 that involved extra costs and SIAF’s work (Note m) performed during the quarter on the development and construction of restaurants and wholesale centers involved much work that was carried out by our own departments resulting in much higher GP margins (69%) for the quarter than our normal standard (recorded at average of 45 to 55%), as such we are expecting that the GP margins will be adjusted and vary from quarter to quarter as the work progresses.

 

Note (b) and (d): Analysis of Fish sales of Capital Award

 

During the three month period ended June 30, 2013, Capital Award’s fish sales were derived from following divisional activities:

 

Capital Award brought from external growers over 318,000 pieces of sleepy cod (at an average weight of 350 gram/piece), around 300,000 pieces of baby eels and 350 MT of fish feed which were sold to Fish Farm 1 as inventory at an average cost of $5.00/piece, $2.06/piece and $1,660/MT respectively.

 

Capital Award brought from Fish Farm 1 and sold to wholesale markets 478,603 pieces of sleepy cod(at an average weight of 739 gram/fish) for an average price of $15.8/Kg thus earned commissions based on US$3.20/Kg as its marketing and sales agent. Due to the decline in wholesale prices of sleepy cod (from 2012’s average of US$25.5/Kg), Fish Farm 1’s cost of sales increased to 89% during the first quarter of 2013 but, assisted by the proportionate decrease in cost of the inventory stocks during the last quarter, Fish Farm 1 reduced its cost of sales to 66% during this quarter. In this respect Capital Award’s commission charge (based on RMB20/Kg or equivalent to US$3.2/Kg) has not been readjusted downward during the period.

 

Capital Award has been contracting with external growers to grow sleepy cod since January 2012 at fixed cost from US$13.3/Kg in its early days to its recent cost of $15.30/Kg and when these sleepy would grow to market sizes of 500 gram and above/fish, CA would sell them to the wholesale markets. In this respect during this second quarter, Capital Award sold, from its contracted grown sleepy cod inventory, to the Guangzhou City wholesale markets 244,118 pieces of marketable size sleepy cod at the average price of $7.38/fish and to WSC 1 for distribution to the Shanghai wholesale markets as well as to the Southern coastal town’s wholesale markets 391,854 pieces of bigger sized sleep cod at the average of $10.10/fish. Capital Award also brought from external growers 44,385 pieces of “Dark Ring Circle” eels that weigh between (3.2 to 3.7 Kg/eel) at cost average of US$6.5/Kg and sold them to WSC 1 and to various wholesale markets in the regional cities (e.g., Shanghai, Guangzhou and Beijing) at relatively low margin (of breakeven prices) to get familiar with the eel markets.

 

As such, Capital Award’s overall GP margin averaged 27% during this quarter derived from the sales of its live aquatic seafood.

 

Note (e) and (i): referring to Analysis of Cattle sales of MEIJI and SJAP

 

Note (e) referring to MEIJI’s cattle sales during the three month period ended June30, 2013:

 

MEIJI brought from Cattle Farm 1 cattle aged between 15 months to 19 months old at live weight (from 579 kg/head to 815 kg/head for 775 heads of cattle or at the average of 715.8 Kg/head) and sold them to Beijing wholesale market sat the average of $5.16/Kg of live weight or $3,693/head (equivalent to RMB22,162/head) that their growing and sales cost (or cost of sales) is at the average of $3,232/head representing around 12.4% GP margin. In this respect, we believe that our Cattle Farm 1 cattle must have good consistent quality being fed with our Aromatic Feed and grown in our semi-free growing conditions that they were getting good responses from the Beijing markets to allow a premium of $0.65/Kg (live weight) above the general wholesale prices of $4.52/Kg that was recorded during this quarter and is lower than the wholesale prices of $5.2/Kg (average) recorded during the first quarter of 2013. MEIJI’s total revenues shown in the table above includes the sales of 550 heads of young cattle (aged between 7 to 12 months old) brought from external growers and sold to Cattle Farm 1 as its inventory at cost for value of $1,095,290.

 

However, among MEIJI’s sales, there were 350 heads sold to the “Beijing Cattle Farm” joint venture (described above) that will be distributed by and in the “small wholesale shop” to the regional distributors and public of Beijing, a portion of the additional profits generated from which sales will be shared by MEIJI. Taking into consideration that MEIJI’s cattle production is increasing gradually and slowly in comparison to SJAP, it is possible that our Joint Ventured Beijing Cattle Farm will sell all what MEIJI will produce within the next few years and increase MEIJI’s cattle sales GP margins by an additional 10% or more starting from the third quarter of 2013.

 

Note (i) referring to the sales of cattle at SJAP during the three month period ended June 30, 2013:

 

- 42 -
 

  

SJAP sold over 2,345 heads of cattle from its own cattle station and corporative growers collectively at an average of $3,150/head at cost of sales of ($2,417/head from its own cattle station and $2,659/head from the corporative growers) generating revenue of $7.36 million with GP margin averaging 20%. The reasons SJAP enjoys greater profit margins include; (1) SJAP’s batch of cattle sales this quarter were from young cattle SJAP brought through the winter months of last year when the region was short of livestock feed at lower cost, (2) SJAP’s concentrated livestock feed is manufactured in house starting from early of the quarter saving in logistic transportation cost and the benefit of feeding the cattle with our own concentrated livestock feed, (3) the cattle were grown during the warmer months reducing the associated cost of energy under better growing climates. The average sales prices per head of cattle is lower than MEIJI’s cattle sales due mainly to the fact that SJAP’s cattle are lighter in weight due to the shorter fattening period influenced by its regional market demands of smaller cattle compared to the requirement of cattle grown in our Cattle Farm 1and sold at the Beijing markets.

 

Note (f, g, h, i and k) referring to Analysis of Fertilizer and Livestock feed of SJAP and HSA:

 

During the second quarter of 2013;

 

HSA sold 2,273 MT of organic fertilizer from inventory that was supplied by SJAP in 2012 at the average of US$242/MT and at a cost of US$182.4/MT, and also sold 4,895 MT of 100% Pure Organic mixed fertilizer (“POMF”) from production of its own fertilizer factory at average prices of US$420/MT that cost US$216/MT.

 

SJAP sold 12,015 MT, 14,315 MT and 6,440 MT of organic fertilizer, bulk livestock feed and concentrated livestock feed for US$176.3/MT, US$153.2 and US$419.3 and at cost of sales of US$74.2/MT, US$60.50/MT and US$252.25/MT respectively.

 

 Note (m and n) referring to Analysis of SIAF’s import and export seafood sales:

 

During the quarter, we imported seafood and sold to WSC 1 under and using its import quotas and licenses deriving revenues based on 16% marked up (inclusive servicing fees of 3.5%) detailed as follows:

 

 6 x 40’ (Sea-containers) of frozen cuttlefish and squid from Malaysia, 3 x 40” (sea-containers) of frozen Salmons from Russia, 74 MT of king sized Live Prawns (or shrimp) from Thailand via its local agent, 37.2 MT of Live Mud Crabs and 35.34 MT of Live Flower Pattern eels for total sales of $5,301,579 with GP margin at 16%.

 

Income Taxes

There was no income tax payable in six months ended June 30, 2013 or 2012.

 

Consolidated Results of Operations Fiscal Year 2012 Compared to Fiscal Year 2011

 

Part A .

 

Revenues

Revenues including continued and discontinued operations increased by $86,733,736 (or 167.18% from $51,879,903 for the year ended December 31, 2011to $138,613,639 for the year ended December 31, 2012. The increase was primarily due to maturity of all business sectors of the Company except for beef (i.e., fishery, plantation, organic fertilizer and cattle farm) as they gradually move into operational stages instead of developing stages.

 

The following chart illustrates the changes of revenues by category from the year ended December 31, 2012 to December 31, 2011.

 

    2012     2011     Difference  
    $     $     $  
Fishery     86,346,475       26,422,125       59,924,350  
Plantation     11,878,599       6,113,155       5,765,444  
Beef     14,224,324       15,182,222       -957,898  
Organic Fertilizer     9,126,240       2,480       9,123,760  
Cattle Farm     17,038,001       4,159,921       12,878,080  
Total     138,613,639       51,879,903       86,733,736  

 

Fishery : Revenue from fishery increased by $59,924,350 (or 226.80%) from $26,422,125 for the year ended December 31, 2011 to $86,346,475 for the year ended December 31, 2012. The increase in fishery was primarily due to our increase in revenue from the sale of fish and prawn and development contracting services for the year ended December 31, 2012 compared to the sale of fingerlings and consulting income for the year ended December 31, 2011.

 

- 43 -
 

 

Plantation : Revenue from our plantation increased by $5,765,444 (or 94.31%) from $6,113,155 for the year ended December 31, 2011 to $11,878,599 for the year ended December 31, 2012. The increase was primarily due to the increase of wholesale prices in fresh and dried flowers for the year ended December 31, 2012.

 

Beef : Revenue from beef decreased by $957,898 (or 6.31%) from $15,182,222 for the year ended December 31, 2011 to $14,224,324 for the year ended December 31, 2012. The decrease was primarily due to the fact that calves grew and become salable beef cattle.

 

Organic fertilizer : Revenue from organic fertilizer increased by $9,123,760 from $2,480 for the year ended December 31, 2011 to $9,126,240 for the year ended December 31, 2012. The increase was primarily due to the startup of the new business of organic fertilizer during the year ended December 31, 2012.

 

Cattle farm : Revenue from cattle farm development increased by $12,878,080 (or 309.57%) from $4,159,921 for the year ended December 31, 2011 to $17,038,001 for the year ended December 31, 2012. The increase was primarily due to increased development contract service of cattle farms for the year ended December 31, 2011.

 

Cost of Goods Sold

Cost of goods sold increased by $41,855,597 (or 155.30%) from $26,951,874 for the year ended December 31, 2011 to $68,807,471 for the year ended December 31, 2012. The increase was primarily due to the Company increasing its scale of operations from continuing operations in terms of its fishery, plantation, cattle farm and beef operations.

 

The following chart illustrates the changes of cost of goods sold by category from the year ended December 31, 2012 to December 31, 2011.

 

Category   2012     2011     Difference  
    $     $     $  
Fishery     39,862,296       15,392,278       24,470,018  
Plantation     5,035,955       2,070,835       2,965,120  
Beef     11,031,756       6,974,847       4,056,908  
Organic fertilizer     5,266,047       2,406       5,263,640  
Cattle farm     7,611,417       2,511,508       5,099,909  
      68,807,471       26,951,874       41,855,597  

 

Fishery : Cost of goods sold from fishery increased by $24,470,018 (or 158.98%) from $15,392,278 for the year ended December 31, 2011 to $39,862,296 for the year ended December 31, 2012. The increase was primarily due to an increase in the sales volume relating to fish and the expansion of contracted services for the year ended December 31, 2012 compared to for the year ended December 31, 2011.

 

Plantation : Cost of goods sold from our plantation increased by $2,965,120 (or 143.18%) from $2,070,835 for the year ended December 31, 2011 to $5,035,955 for the year ended December 31, 2012 due to good harvest in 2012. The increase was primarily due to cost increases in farm labor, logistic and associated general overhead of operations.

 

Beef : Cost of goods sold from beef increased by $4,056,908 (or 58.16%) from $6,974,847 for the year ended December 31, 2011 to $11,031,756 for the year ended December 31, 2012. The increase was primarily due to fact that cattle are in growing stage and therefore cost of sales increase even though revenue from beef decreases.

 

Organic fertilizer : Cost of goods sold from organic fertilizer increased by $5,263,640 (or 2,187.71%) from $2,406 for the year ended December 31, 2011 to $5,266,047 for the year ended December 31, 2012. The increase was primarily due to the startup of the new business of organic fertilizer for the year ended December 31, 2012.

 

Cattle farm : Cost of goods sold from cattle farm development increased by $5,099,909 (or 203.03%) from $2,511,508 for the year ended December 31, 2011 to $7,611,417 for the year ended December 31, 2012. The increase in cattle farm was primarily due to the commencement of our contracting services in the cattle farming industry for the year ended December 31, 2012.

 

Gross Profit

Gross profit increased by $44,878,139 (or 180.03%) from $24,928,029 for the year ended December 31, 2011 to $69,806,168 for the year ended December 31, 2012. The increase was primarily due to the corresponding increases in revenues from our fishery, plantation, cattle farm and organic fertilizer operations.

 

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The following chart illustrates the changes of gross profit by category from the year ended December 31, 2012 to December 31, 2011.

 

 

Category   2012     2011     Difference  
    $     $     $  
Fishery     46,484,179       11,029,847       35,454,332  
Plantation     6,842,644       4,042,320       2,800,324  
Beef     3,192,568       8,207,375       (5,014,805 )
Organic fertilizer     3,860,193       74       3,860,119  
Cattle farm     9,426,584       1,648,413       7,778,169  
Total     69,806,168       24,928,029       44,878,139  

 

Fishery : Gross profit from fishery increased by $35,454,332 from $11,029,847 for the year ended December 31, 2011 to $46,484,179 for the year ended December 31, 2012. The increase was primarily due to our increased contract service income from fishery and prawn development contracts and sale of fish for the year ended December 31, 2012 versus consulting income and sale of fish for the year ended December 31, 2011.

 

Plantation : Gross profit from our plantation increased by $2,800,324 (or 69.28%) from $4,042,320 for the year ended December 31, 2011 to $6,842,644 for the year ended December 31, 2012. The increase was due mainly to the increase of wholesale prices both on dried and fresh flowers for the year ended December 31, 2012.

 

Beef : Gross profit from beef decreased by $5,014,805 (or 61.1%) from $8,207,373 for the year ended December 31, 2011 to $3,192,568 for the year ended December 31, 2012. The decrease was primarily due to the decrease of revenue and the increase of cost of sales.

 

Organic fertilizer : Organic fertilizer increased by $3,860,119 from $74 for the year ended December 31, 2011 to $3,860,193 during the year ended December 31, 2012. The increase was primarily due to the start-up of our new business of organic fertilizer for the year ended December 31, 2012.

 

Cattle farm : Gross profit from cattle farm development increased by $7,778,171 (or 471.86%) from $1,648,415 for the year ended December 31, 2011 to $9,426,584 for the year ended December 31, 2012. The increase in cattle farm was primarily due to the commencement of our contracting services in the cattle farming industry for the year ended December 31, 2012.

 

General and Administrative Expenses and Interest Expenses

General and administrative and interest expenses from continuing and discontinued operation (including depreciation and amortization) increased by $3,046,994 (or 57.21%) from $5,302,736 for the year ended December 31, 2011 to $8,349,729 for the year ended December 31, 2012. The increase was primarily due to increase on the depreciation and amortization amounting to $1,764,288 for the year ended December 31, 2012 from $936,509 for the year ended December 31, 2011, and the increase in others and miscellaneous of $2,152,605 for year ended December 31, 2012 from $280,728for the year ended December 31, 2011.

 

Category   2012     2011     Difference  
    $     $     $  
Office and corporate expenses     1,619,888       1,718,389       -98,501  
Wages and salaries     2,555,681       2,122,975       432,706  
Traveling and related lodging     77,730       94,728       -16,998  
Motor vehicles expenses and local transportation     112,448       54,462       57,986  
Entertainments and meals     103,222       94,945       8,277  
Others and miscellaneous     2,152,605       280,728       1,871,877  
Depreciation and amortization     1,764,288       936,509       827,779  
Sub-total     8,385,862       5,302,736       3,083,126  
Interest expenses     282,320       -       282,320  
Total     8,668,182       5,302,736       3,365,446  

 

In this respect, total depreciation and amortization amounted to $2,378,270 for the year ended December 31, 2012, out of which amount, $1,764,288 was reported under general and administration expenses and $613,982 was reported under cost of goods sold; whereas total depreciation and amortization was at $1,475,450 for the year ended December 31, 2011 and out of which amount $936,509 was reported under General and Administration expenses and $538,941 was reported under cost of goods sold.

 

Part B. Discussion and analysis on the results of operations 2012: This Part B discusses and analyzes certain items that we believe may require further clarification and explanation; and other items of comparison 2012 to 2011 are not discussed in this Part B but in Part A above).

 

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Balance Sheet items (1) on total current assets:

 

    As of December
31, 2012
 
    $  
       
Cash and cash equivalents     8,424,265  
Inventories     17,114,755  
Cost and estimated earnings in excess of billings on uncompleted contracts     2,336,880  
Deposits and prepaid expenses     47,308,857  
Accounts receivable, net of allowance for doubtful debts     52,948,350  
         
Other receivables     5,954,248  
 Total current assets     134,087,355  

 

Accounts Receivable:

At December 31, 2012

    Accounts receivable     Current     0-30 days     31-90 days     91-120 days     over 120 days
and
less than 1 year
 
Consulting and Service (from 6 contracts) totaling     32,769,312             6,524,405       18,420,793       1,811,533       6,012,581  
                                                 
Sales of Fish (from Farms and from imports)     5,216,923               1,612,905       1,726,826       1,877,192       -  
                                                 
Sales of Cattle and Beef Meats (from Enping Farm)     610,880               335,984       274,896       -       -  
                                                 
Sales of HU Flowers (Dried)     5,549,439               -       2,538,175       2,749,650       261,614  
                                               
Sales Fertilizer, Bulk Stock feed and Cattle by SJYL     6,795,524               1,950,575       3,634,487       10,982       1,199,480  
                                                 
Sales Fertilizer from HAS     2,006,272               390,112       1,189,607       417,485       9,068  
                                               
Total Accounts Receivable     52,948,350               10,813,981       27,784,784       6,866,842       7,482,743  
                                               
Percentage of total     100 %             21 %     52 %     13 %     14 %

 

Provision for diminution in value of accounts receivable:

 

Receivables from revenue derived from consulting and services billed for work completed are within our normal trading terms with our principal investor and therefore no diminution in value is required.

 

Fish Sales: Most farmed fish are sold to wholesalers at prevailing daily market prices capped within 90 days trading terms with a small portion at 180 days as the sale of oversized fish takes time to sell.

 

We sold over US$43 million of fish to the wholesalers in year 2012, and as of December 31, 2012, accounts receivable of $1,877,192 was over 180 days past due representing less than 2% of the total sales. These debtors are wholesalers who are profitable and viable businesses with a good track record and therefore provision of diminution in value is not required.

 

Sales of dried HU flowers: The dried flowers have been sold to wholesalers with longer trading terms (e.g., up to 180 days) so as to offset with their holding cost so that they could sell the dried flowers through the winter months (from December 2013 to June 2014 when the new season starts) whereby we agreed with the wholesalers that they would buy our dried flowers as soon as we produce them. Therefore, we consider the receivables from the sales of dried HU flowers to be from wholesalers with a good track record and therefore provision for diminution in value is not required.

 

Sales of fertilizer and bulk livestock feed: Sales are made to regional farmers who agree to grow crops and pasture by purchasing and using our fertilizer. The farmers raise cattle on these pastures and we have agreed to purchase the cattle from these farmers at a later date. Under this arrangement the accounts receivable that are owed to us by the farmers can be offset by the amount that we owe to the farmers for the purchase of the cattle. Therefore there is no need to provide any diminution in value to the account receivable.

 

Deposits and Prepayments (Break-down)

 

Deposits for Prepayments for purchases of equipment     318,192  
Miscellaneous     4,892,258  
Deposits for- acquisition of land use right     7,826,508  
Deposits for- inventory purchases     2,228,854  
Deposits for- aquaculture contract     7,062,600  
Deposits for- building materials     2,000,000  
Deposits for- proprietary technology     2,254,839  
Prepayments for construction in progress     14,423,021  
Shares issued for employee compensation and oversea professional fee     271,800  
Temporary deposits payment for acquiring equity investments     6,030,785  
      47,308,857  

 

- 46 -
 

 

Balance Sheet Item (2) on Current Liabilities:

 

    As of December 31, 2012  
    $  
Current liabilities        
Accounts payable and accruals     5,762,643  
Billings in excess of cost and estimated earnings on uncompleted contracts     2,790,084  
Due to a director     3,345,803  
Dividend payable     951,308  
Other payables     6,422,478  
Short term bank loan     3,181,927  
Total current liabilities     22,686,243  

 

Account payables and Accruals:

Our current trading environment does not include many suppliers who will offer credit terms which means that most purchases are paid for in cash and this results in a low trade account payables balance of $8,762,643 representing about 8.4% of total sales of $68.8 million for the reasons stated below: (Note: For % cost of sales of the segment, please also refer to the table immediately following this section).

 

Trading environment of the following activities:

 

1. Consulting and services since inception account is the major contributor of income to date and cost of sales average 27% for cattle farms and others, and 40% for prawn or fish farms. We supply the following cost elements: our own staff, engineering, technology implementation, supervision, training and associated management work and most of the building sub-contractors worked on sub-contract at cost fixed by us; as such no big profit margin is accepted plus we require a prolonged credit term. For contracts related to the construction of farms we use plants, equipment, parts and components that were specially manufactured and made as per our own designs and engineering by local manufacturers and suppliers (who carry a high amount of initial development costs and inventories for us based on the understanding that we would pay for the deliveries of goods sold within shorter trading terms such that they could afford to carry such costs). We believe that, as time has passed, our track record has earned us excellent credibility with all of our suppliers and subcontractors due to our good standing.

 

2. Fish sales started gradually from late 2011with low cost of sales averaging 47% (the bulk of the cost comes from the supplies of baby fingerlings and the live-bait as the main fish feed), and customary trading terms of Chinese suppliers is on a cash on delivery basis, and suppliers who provide credit terms presently is limited to no more than a select few.

 

3. Cattle sales at Xining SJAP’s own cattle stations and from its cooperative farmers started in 2011at lower profit margins compared to the sales of fish with cost of sales averaging 77%, and it is also customary in China to pay for the young live-cattle by cash on deliveries. The Enping cattle farm started to buy young cattle in 2011 and started sales of mature cattle in 2012, but at small quantities with cost of sales averaging at 72% which is lower than in SJAP due to the fact that sales of mature cattle were from JHMC directly without the sales from cooperative farmers as in SJAP. Most of the young cattle supplies were from small primary producers (local small farmers) who did not have great resources of finance; as such we paid for these supplies of young cattle in cash on deliveries.

 

4. In SJAP, the actual cost of sales are averaging 49% and the bulk of our fertilizers were sold to farmers who are growing pastures and crops for us such that their fertilizer sales were kept as book entries that would be contrasted with the pastures and crops that we would buy back from them. In the case of JHMC, in 2012, its cost of sales were higher than in SJAP at 77% due to the fact that JHMC did not have its own production facilities constructed in 2012, such that its organic fertilizer was supplied from SJAP and thus involved additional transportation costs.

 

5. Bulk livestock feed are produced by regional cooperative growers under contract to us and they use our supply of fertilizer and seeds that represented the main cost components enhancing cost of sales at an average of 48%. Again, sale of fertilizer is held on credit against crops and pasture grass purchased from them, as well as bulk livestock feed sold to them for cattle rearing, and reconciled once cattle are purchased from them.

 

Other Payables: As of December 31, 2012, we have other payables totaling $6,422,478. Promissory notes amounting to $3,352,394 were issued to third parties and personally guaranteed by a director, repayable within two year with no interest being accrued Promissory notes could be repaid either as cash or shares of the Company or a combination of both. Debt amounts and the conversion rates applicable to the shares are determined by both parties as they agree to settle the debt by the Company’s issuance of shares.

 

- 47 -
 

 

Income Statements (1) Segment break-down on Revenue (to third parties):

 

Segments   Sales Revenue     % of total     Cost of sales     % of total cost     Gross Profit     % of total  
    2012     Revenue     2012     of sales     2012     gross  
    $           $           $     profit  
Fishery Sector                                                
Capital Award                                                
Consulting and Service     36,193,780       26 %     14,340,937       21 %     21,852,843       31 %
Others in sales of Fish, Prawns and commissions and management services     44,798,779       32 %     23,329,038       34 %     21,469,741       31 %
Fish Farm 1                                                
Sales of Fish     391,009       0.28 %     183,774       0 %     207,235       0 %
Cattle Farm Sector                                                
MEIJI                                                
Consulting and Service     11,080,131       8 %     2,998,343       4 %     8,081,788       12 %
Others in sales of cattle, meat and commission etc.     5,688,904       4 %     4,419,418       6 %     1,269,486       2 %
Cattle Farm 1     268,966       0.19 %     193,656       0 %     75,310       0 %
Beef Organic fertilizer Sector                                                
SJAP                                                
Fertilizer     3,825,194       3 %     2,136,239       3 %     1,688,955       2 %
Bulk Live Stock Feed     2,863,637       2 %     1,382,827       2 %     1,480,810       2 %
Cattle     14,445,695       10 %     11,079,144       16 %     3,366,551       5 %
HSA                                                
Fertilizer     2,213,038       2 %     1,699,593       2 %     513,445       1 %
HU Plant Sector                                                
JHST     11,878,599       9 %     5,035,955       7 %     6,842,644       10 %
Corporate Sector                                                
SIAF                                                
Consulting and Service     3,267,401       2 %     909,677       1 %     2,357,724       3 %
Others     1,698,506       1 %     1,098,870       2 %     599,636       1 %
Total     138,613,639       100 %     68,807,471       100 %     69,806,168       100 %

 

Segment of Revenue analysis and explanation:

 

1. In 2012, revenue of the consulting and management service by segments aggregated 36% (or $50.5 million) of the total revenue ($138.6 million) of the Company derived collectively from Capital Award (26% or $36.2 million), MEIJI (8% or $11 million) and SIAF (2% or $3.3 million).

 

The revenue from consulting and management service by segments has been reduced by 4% from 40% in 2011 to 36% in 2012 as shown in the table below. The reason for such decrease is primarily due to the increase of sales revenue of other segments (e.g., sales of fish, cattle and other goods), and this trend is expected to continue as more farms are anticipated to be developed and as the productivity of the existing developed farms increases. However, as we are an agriculture engineering based company, we intend to continue to build farms and other wholesaling and retailing facilities with the objective of maintaining the revenue from consulting and management service within 25% to 30% of the Company's total consolidated revenue year to year.

 

    Financial information 2010 to 2012 of the segments  
Segments   Revenue     Cost of Sales     Gross Profit  
    2010     2011     2012     2010     2011     2012     2010     2011     2012  
    $     $     $     $     $     $     $     $     $  
Fishery Sector                                                                        
Capital Award                                                                        
Consulting and Service     4,163,833       16,488,192       36,193,780       1,006,209       7,561,874       14,340,937       3,157,624       8,926,318       21,852,843  
Beef Sector                                                                        
MEIJI                                                                        
Consulting and Service     -       4,159,921       11,080,131       -       2,511,508       2,998,343       -       1,648,413       8,081,788  
Corporate Sector                                                                        
SIAF                                                                        
Consulting and Service                     3,267,401       -       -       909,677       -       -       2,357,724  
                                                                         
Total sales revenue of the segments     4,163,833       20,648,113       50,541,312       1,006,209       10,073,382       18,248,957       3,157,624       10,574,731       32,292,355  
Segment % of the group consolidated total     38 %     40 %     36 %                                                
Consolidated total of continuing operations     10,918,766       51,879,903       138,613,639       3,731,204       26,951,874       68,807,471       7,187,562       24,928,029       69,806,168  

 

- 48 -
 

 

2. In 2012, the revenue from other segments (e.g., sales of fish, fertilizer, bulk livestock feed, cattle, etc.) increased by 4% from 60% in 2011 to 64%. This increase is due primarily to additional farms being built in 2012, contributing to the increase in production as shown in the table below.

 

    Financial information 2010 to 2012 of the segments  
Segments   Revenue     Cost of Sales     Gross Profit  
    2010     2011     2012     2010     2011     2012     2010     2011     2012  
    $     $     $     $     $     $     $     $     $  
Fishery Sector                                                                        
Capital Award                                                                        
Others in sales of Fish, Prawns and commissions etc.             9,933,933       44,798,779               7,830,404       23,329,038       -       2,103,529       21,469,741  
Fish Farm 1                                                     -       -       -  
Sales of Fish     -       -       391,009       -       -       183,774       -       -       207,235  
Cattle Farm Sector                                                     -       -       -  
MEIJI                                                     -       -       -  
Others in sales of cattle, meat and commission etc.     -       -       5,688,904       -       -       4,419,418       -       -       1,269,486  
Cattle Farm 1     -       -       268,966       -       -       193,656       -       -       75,310  
Beef Organic fertilizer Sector                                                     -       -       -  
SJAP                                                     -       -       -  
Fertilizer     1,400,712       11,814,921       3,825,194       525,646       4,975,462       2,136,239       875,066       6,839,459       1,688,955  
Bulk Live Stock Feed     579,367       2,514,617       2,863,637       371,024       1,205,763       1,382,827       208,343       1,308,854       1,480,810  
Cattle     -       852,751       14,445,695               793,649       11,079,144       -       59,102       3,366,551  
Concentrated Live Stock Feed (Only for 2013)                                                     -       -       -  
HSA                                                     -       -       -  
Fertilizer     -       2,453       2,213,038       -       2,381       1,699,593       -       72       513,445  
Cattle (Only for 2013)                                                     -       -       -  
HU Plant Sector                                                     -       -       -  
JHST     4,774,854       6,113,115       11,878,599       1,828,325       2,070,833       5,035,955       2,946,529       4,042,282       6,842,644  
Corporate Sector                                                     -       -       -  
SIAF                                                     -       -       -  
Others                     1,698,506       -       -       1,098,870       -       -       599,636  
                                                      -       -       -  
Segments' Total     6,754,933       31,231,790       88,072,327       2,724,995       16,878,492       50,558,514       4,029,938       14,353,298       37,513,813  
Segment % of the consolidated total     62 %     60 %     64 %                                                
Consolidated total of     10,918,766       51,879,903       138,613,639       3,731,204       26,951,874       68,807,471       7,187,562       24,928,029       69,806,168  

 

Income Taxes

 

No EIT has been provided in the financial statements of CA, ZX, JHST, JHMC, JFD, HSA and SJAP since they are exempt from EIT for the years ended December 31, 2012 and 2011 as they are within the agriculture, dairy and fishery sectors. However as of December 31, 2012 JFD has been levied with an EIT of 25%, which JFD is appealing to the Taxation Department for a waiver of this tax. The Company expects to prevail in its appeal, therefore there is no EIT being provided for JFD during the years ended December 31, 2012 and 2011.

 

No EIT has been provided in the financial statements of HSA for the income earned for the years December 31, 2012 as they are within the agriculture, dairy and fishery sectors. EIT has been provided in the financial statements of HSA at 25% for the income for the years ended December 31, 2011 as it is not within the agriculture, dairy and fishery sectors.

  

However, as of December 31, 2012, Taxation Department agreed that HSA is exempt from EIT for the years ended December 31, 2012 and 2011. No EIT has been provided in the financial statements of HSA for the income earned for the years December 31, 2012 as they are within the agriculture, dairy and fishery sectors. EIT has been provided in the financial statements of HSA at 25% for the income for the years ended December 31, 2011 as part of its revenue was generated from other source of supply other than SJAP that was not exempted from EIT.

 

However, as of December 31, 2012, Taxation Department agreed that JFD is exempt from EIT for the years ended December 31, 2012 and 2011. No EIT has been provided in the financial statements of JFD for the income earned for the years December 31, 2012 as they are within the agriculture, dairy and fishery sectors. JFD had been levied with an EIT of 25% in 2011, but JFD’s appeal to the Taxation Department for a waiver of this tax was successful by December 31, 2012.

 

- 49 -
 

 

Off Balance Sheet Arrangements:

 

None.

 

Other Significant Factors That May Affect Cash/Liquidity:

 

Inflation factors affecting operations:

 

On the surface the Government’s anti-inflationary measures seemed to be working during the six months ended June 30, 2013. However, management remains concerned since most of the building materials, cost of labor and essential consumer goods are still rising at a higher rate than GDP. Its impact on consumer spending has not seemed to materialize, though, with growth in spending maintaining an upward trajectory.

 

As of June 30, 2013, the Company had no other significant transactions that may affect our cash/liquidity other than those mentioned in this prospectus.

 

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents kept with financial institutions in People’s Republic of China (“PRC”) are not insured or otherwise protected. Should any of those institutions holding the Company’s cash become insolvent, or the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit at that institution.

 

Liquidity and Capital Resources

As of June 30, 2013, we had unrestricted cash and cash equivalents of $9,391,449, (see notes to the consolidated account), and our working capital as of June 30, 2013 was $145,332,475.

 

As of June 30, 2013, our total long term debts are as follows:

 

Contractual Obligations   Less than 1 year ($)     1-3 years ($)     3-5 years ($)     More than 5 years ($)     Total ($)  
Short Term Bank Loan             2,265,849                          
Long Term Debts     0       0       178,031       0       0  
Promissory Notes Issued to third parties     5,915,423                                  

 

Cash provided by operating activities totaled $16,120,653 for the six months ended June 30, 2013. This compares with cash provided by operating activities $9,887,541 for the six months ended June 30, 2012. The increase in cash flows from operations primarily resulted from net cash provided by net income for the period after adjustments of non- cash items.

 

Cash used in investing activities totaled $14,086,955 for the six months ended June 30, 2013. This compares with cash used in investing activities totaled $11,722,784 for the six months ended June 30, 2012. The increase in cash flows used in investing activities primarily resulted from construction payments of $12,596,632 for the six months ended June 30, 2013 as compared to construction payments of $6,626,688 for the six months ended June 30, 2012.

 

Cash used in financing activities totaled $951,308 for the six months ended June 30, 2013. This compares with cash from financing activities totaled $1,672,033 for the six months ended June 30, 2012. The decrease in cash flows provided by investing activities primarily resulted from non-controlling interests contribution of $1,806,644 for the six months ended June 30, 2012 as compared with no non-controlling interests for the six months ended June 30, 2013.

 

- 50 -
 

 

The following table shows the debt we have exchanged for equity during the periods indicated:

 

        Issuance           Consideration     Investors  
Date   Events   of shares     Price / share     received     Non-USA     USA  
        # of shares     US$     US$     # of persons  
As at                                  
31.12.2010   Quoted in 10K and Form 10     55,474,136               50,884,475       136       5,123  
03.01.2011   Debt settlements     370,000       1.50       562,500               1  
13.01.2011   Debt settlements     491,000       1.50       736,500             1  
10.02.2011   Debt Settlements     425,000       1.50       637,500               1  
10.02.2011   Debt settlements     35,000       1.50       52,500             1  
16.04.2011   Debt settlements     530,000       1.50       795,000               1  
22.04.2011   Debt settlements     400,000       1.50       600,000             1  
08.05.2011   Debt settlements     351,000       1.50       526,500               1  
          2,602,000               3,910,500                  
                                             
06.07.2011   Brought from third parties for resale     -500,000       0.78       -390,000       -1        
19.07.2011   Brought from third parties for resale     -500,000       0.78       -390,000       -1        
27.06.2011   Debt Settlements     304,878       0.82       250,000               -  
21.07.2011   Debt Settlements     304,878       0.82       250,000               -  
16.08.2011   Debt Settlements     377,976       0.82       309,940               1  
02.09.2011   Debt Settlements     12,268       0.82       10,060                  
02.09.2011   Debt settlements     353,542       0.84       296,975               1  
02.09.2011   Debt settlements     426,787       0.69       293,629       2          
01.07.2011   Worker compensation & adjustments     1,706,620       1.01       1,723,686       79          
11.7.2011   Worker compensation & adjustments     1,054,109       0.90       943,428                  
11.07.2011   Professional services paid in shares and adjustments     1,800,000       0.90       1,611,000               4  
                                   
As at                                  
30.09.2011   Total Common shares issued     63,417,194               59,703,693       215       5,136  

 

Equity Changes
        Issurance of           Consideration     Investors  
Date   Events   shares     Price / share     received     Non-USA     USA  
        # of shares     US$     US$     # of persons  
As at                                  
30.09.2011   Total common shares issued     63,417,194.00               59,703,693.00       215.00       5,136.00  
08.10.2011   Share issued for debt settlement     1,470,588.00       0.85       1,250,000.00             1.00  
14.10.2011   Shares brought = (A)     -600,000.00       0.65       -390,000.00               -1.00  
19.10.2011   Shares brought = (B)     -620,000.00       0.65       -403,000.00             -1.00  
23.10.2011   Shares brought = ( C )     -2,000,000.00       0.01       -20,000.00               -  
23.10.2011   Shares brought = (D)     -2,000,000.00       0.01       -20,000.00             -  
23.10.2011   Shares brought = (E)     -2,400,000.00       0.01       -24,000.00               -  
14.10.2011   Debt Settlement     600,000.00       0.80       480,000.00       1.00          
14.11.2011   Debt Settlements     620,000.00       0.80       496,000.00       1.00        
14.11.2011   Debt settlement     1,596,480.00       0.91       1,450,000.00       3.00          
15.11.2011   Debt settlement     6,400,000.00       0.504       3,225,600.00       1.00        
15.12.2011   Debt settlement     550,000.00       0.504       277,200.00       -          
                                             
as at 31.12 2011         67,034,262.00               66,025,493.00       221.00       5,135.00  

 

- 51 -
 

 

Equity Changes
        Issurance of           Consideration     Investors  
Date   Events   shares     Price / share     received     Non-USA     USA  
        # of shares     US$     US$     # of persons  
as at 31.12 2011         67,034,262               66,025,493       221       5,135  
16.01.2012   Debt Settlement     867,100       0.65       563,615       1          
                                             
14.02.2012   Debt Settlement     1,508,959       0.60       905,375       1          
                                             
07.03.2012   Debt Settlement     722,225       0.63       455,002       1          
                                             
23.03.2012   Debt Settlements     600,000       0.75       450,000       1          
                                             
As at 31.03.2012         70,732,546       3       68,399,485       225       5,135  
                                             
20.04.2012   Debt Settlement     801,666       0.71       568,118       1          
20.04.2012   Debt Settlement     437,370       0.71       310,000       1          
20.04.2012   Debt Settlement     458,524       0.71       325,015       1          
                                             
25.05.2012   Debt Settlement     1,280,081       0.62       793,650       1          
25.05.2012   Debt Settlement     2,133,606       0.62       1,315,475       1          
08.06.2012   Debt Settlement     558,538       0.65       365,000       1          
08.06.2012   Debt Settlement     893,639       0.65       585,000       1          
15.06.2012   Debt Settlement     473,923       0.65       310,000       -          
                                             
As at 30.06.2012         77,769,893       8       72,971,743       232       5,135  
05.07.2012   Debt Settlement     2,151,247       0.54       1,161,825                  
19.07.2012   Debt Settlement     1,795,307       0.52       931,825                  
08.08.2012   Debt Settlement     765,000       0.52       400,000                  
16.08.2012   Worker Compensation     906,000       0.395       362,400       2       2  
18.08.2012   Debt Settlement     1,678,000       0.51       859,825       1          
22.08.2012   Debt Settlement     1,493,500       0.52       773,325               1  
17.09.2012   Debt Settlement     2,902,960       0.64       1,862,439                  
20.09.2012   Debt Settlement     390,625       0.65       250,000       -       -  
24.09.2012   Debt Settlement     527,803       0.71       400,000       -       -  
          668,647       0.71       500,000