SINO AGRO FOOD, INC. This Annual Report contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Forward-looking statements can be identified by the use of forward-looking terminology, such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties These statements reflect management's current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause the Company's actual results, performance or achievements in 2017 and beyond to differ materially from those expressed in, or implied by, such statements. Such statements, include, but are not limited to, statements contained in this Annual Report relating to the Company's business, financial performance, business strategy, recently announced transactions and capital outlook. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: a continued decline in general economic conditions nationally and internationally; decreased demand for our products and services; market acceptance of our products; the impact of any litigation or infringement actions brought against us; competition from other providers and products; the inability to raise capital to fund continuing operations; changes in government regulation; the ability to complete customer transactions, and other factors relating to our industry, our operations and results of operations and any businesses that may be acquired by us. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Readers of this Annual Report should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. You should read the following discussion and analysis of the financial condition and results of operations of the Company together with the financial statements and the related notes presented herein.
Description and interpretation and clarification of business category on the consolidated results of the operations
The Company's strategy is to manage and operate its businesses under five (5) business divisions or units on a standalone basis, namely:
Beef & Organic (Marked 1. (i) SJAP & QZH (Derecognized as variable
Fertilizer Division interest entity on
sales - (Discontinued operation from October 5, 2016 )
Cattle Farm Division (Marked 4. MEIJI and JHMC)
Corporate & Others (Marked 5. SIAF)
Division
A summary of each business division is described below:
· 1. Beef and Organic Fertilizer Division refers to:
(i) The operation of our partially owned subsidiary Qinghai Sanjiang A
Power Agriculture Co., Ltd. ("SJAP") in manufacturing and sales of
organic fertilizer, bulk livestock feed, concentrated livestock feed,
and the sales of live cattle inclusive of: (a) cattle that are not
being slaughtered in our own slaughter house operated by Qinghai Zhong
He Meat Products Co., Limited ("QZH") are sold live to third party
livestock wholesalers, and (b) cattle that are sold to QZH and
slaughtered and deboned and packed by QZH; and the sales of meats
deboned and packed by QZH that are sold to various meatdistributors,
wholesalers and super market chains and our own retail butcher stores.
QZH is a fully owned subsidiary of SJAP; as such, the financial
statements of these three companies (SJAP, QZH and HSA) are
consolidated into our wholly owned subsidiary, A Power AgroAgriculture
Development (Macau) Limited ("APWAM"), as one entity. SJAP and
QZH are
both variable interest entities over which we exercisesignificant
control. As of December 30, 2017 , QZH was derecognized as variable
interest entity and its operating profit and/or loss no longer
accretive to the Company's 41.25% holding in SJAP, a variable interest
entity. More details related to QZH's discontinuance ofoperations is
delineated throughout other sections of this report. From 1st
October 2019 onward, SJAP became an investee of associates of the
Company with Mr. Solomon Lee resigned as its chairman and SJAP's
operation contracted out to its management as such it is not a variable
interest entity and SJAP was reclassified as an unconsolidated equity
investee and SJAP's cattle and beef operation is discontinued on same
date .
- 42 -
(ii) The operation of
manufacturing and sales of organic fertilizer. From 1st October 2019
the Company contracted out its manufacturing and sales of organic
fertilizer to its management; as such income of HSA is derived mainly
from said management contract.
· 2. Plantation Division refers to the operations of Jiangmen City
where dragon fruit flowers (dried and fresh), crops of vegetables and
immortal vegetables (dried) are sold to wholesale and retail markets. JHST's
financial statements are consolidated into the financial statements of
contracted out its plantation operation to its management; as such income of
JHST is derived mainly from said management contract. .
· 3. Fishery Division refers to the operations of Capital Award Inc. ("Capital
Award" or "CA") covering its engineering, technology and consulting service
management of fishery farms and seafood sales operations and marketing,
where;
Capital Award generates revenues from providing engineering consulting services
as turnkey contractors to owners and developers of fishery projects that are
being designed and engineered into turnkey contracts by Capital Award in China
using its A Power Module Technology Systems ("APM") as follows:
(A). Engineering and Technology Services; via Consulting and Service Contracts
("CSC's") for the development, construction, and supply of plant and equipment,
and management of fishery (and prawn or shrimp) farms and related business
operations.
(B). Seafood Sales from CA's projected farms; became a discontinued segment of
operations from October 5, 2016 when Tri-way was disposed to other third parties
in term Tri-way was reclassified as an unconsolidated equity investee on same
date.
· 4. Cattle Farm Division refers to the operations of
are sold live to third party livestock wholesalers who sell them mainly to
of JHMC are consolidated into MEIJI as one entity along with MEIJI's
operation in the consulting and service for development of other cattle farms
(e.g.,
contracted out its cattle operation to its management; as such income of JHMC
is derived mainly from said management contract. .
· 5. Corporate & Others Division refers to the trading segment of business
operations of the Group named internally under Corporate division of Sino
operations provided to projects that are not included in the above
categories, and not limited to corporate affairs.
Industry Overview
This section discusses the industry in which the Company operates. Certain of
the information in this section relating to market environment, market
developments, growth rates, market trends, industry trends, competition and
similar information are estimates based on data compiled by professional
organizations, consultants and analysts, in addition to market data from
other external and publicly available sources.
- 43 -
Economic outlook in China
China's economy is at present second only to that of the United States .China's economy is expected to expand 6.2 percent in 2019 from 6.6 percent in
2018. Growth has slowed somewhat following government efforts to try and rein
in high levels of debt. China has started feeling the effects of the trade
war with
China has had a remarkable period of rapid growth shifting from a centrally
planned to a market based economy. Today, China is an upper middle-income
country that has complex development needs.
Agriculture in
Agriculture is a vital industry in
China ranks first in worldwide farm output, primarily producing rice, wheat,
potatoes, tomato, sorghum, peanuts, tea, millet, barley, cotton, oilseed and
soybeans and also the largest consumer of many agricultural products, such as
pork, rice and soybeans. Although accounting for only 10 percent of arable
land worldwide, it produces food for 20 percent of the world's population.
While China generally has been successful in meeting its rapidly rising
demand for food and grains by increasing domestic production, it has emerged
as a leading global importer of several agricultural commodities, including
cotton, soybeans, vegetable oils, and animal hides. As its domestic
agricultural production has grown, China has also become the largest exporter
in global markets for several horticultural products, including mandarin oranges, apples, apple juice, garlic and other vegetables. China's increasingly important position in global agricultural markets followed decades of gradual growth in domestic food production and consumption. After the introduction of market-based reforms in 1978 that
included the elimination of the collective production system and relaxation
of government direction over certain farmer production and marketing
decisions, Chinese agricultural output grew significantly. Between 1978 and
2008, China almost doubled its production of grains (rice, wheat and corn)
and quadrupled its production of meats; the production of fruit and milk was
about 30 times greater in 2008 than in 1978. During these three decades,
population growth of about 1 percent annually, coupled with annual per capita
income growth of eight percent, fueled a large increase in demand for more
and higher-value agricultural products, especially by China's large and
growing middle class. China's rapid growth in food consumption was largely
met by domestic production growth, enabling it to remain self-sufficient in
most major commodities. China's support for agriculture China's government support for agriculture is low compared to that of
developed countries, such as the
line with that of other rapidly growing economies, according to USITC. As
measured by the
farmers was low (and sometimes negative) during the 1990's, but gradually
rose during the period 2008-2010. Compared with other countries at a similar
level of development, including
China's support for farmers falls in the middle of the range. China's PSE
reflects changes in the central government's policy priorities from grain
self-sufficiency and low consumer prices toward a stronger focus on raising
farm household incomes, according to USITC. Government support to China's
agricultural sector indicates that Chinese policymakers are placing a renewed
emphasis on the rural economy. Indirect support, in the form of general
services, is very high relative to similar support programs in other
countries, due largely to investments in agricultural infrastructure. General
services include modern research and extension services, food safety
agencies, and agricultural price information services, most of which provide
benefits to producers and consumers throughout the economy. Compared with
direct payments to farmers, general services support is less production-distorting to the sector. Agricultural consumption China is a major global consumer of agricultural products. It consumes
one-third of the world's rice, one-fourth of all corn, and half of all pork
and cotton, and it is the largest consumer of oilseeds and most edible oils.
The traditional Chinese diet centers around staple foods (mainly grains and
starches), which account for nearly half of the daily caloric intake. Average
Chinese per capita consumption recently stabilized at approximately 3,000
calories per day, one of the highest levels among Asian countries.
1
- 44 -
Chinese food consumption is influenced by factors such as population size and
demographics, income, food prices, and general preferences. Per capita income
growth and urbanization are the two factors most responsible for altering
recent consumption patterns in
per capita food consumption, while increasing urbanization is driving
diversification of food choices because of greater availability and choice
offered through increasingly diverse sales outlets. Chinese consumers generally fall into one of three categories: rural consumers; urban low-income consumers; or urban high-income consumers. Although urban high-income consumers can afford to buy more and
better-quality food, the ubiquity of food outlets in cities means that nearly
every urban resident, regardless of income, has available an increasingly
diverse food selection. Compared to rural diets, urban diets contain less
grain and more non-staple items, including processed and convenience foods.
Rural migrants to cities tend to adopt the urban diet.
Expenditure on food
Food is the largest class of household expenditure for all Chinese income
groups; even housing takes a smaller share of average household income,
according to USITC. As income rises, the absolute amount of food expenditure
increases, although the share of income spent on food falls. Urban residents
spend substantially more on food than their rural counterparts, according to
USITC. Higher incomes lead to an increase in both the quantity and quality of
food demanded. However, while demand for higher quantities of food appears to
level off in the top income households, demand for higher-quality foods continues to rise with income. The market for aquatic products and aquaculture inChina
The information in this section regarding aquatic and aquaculture, including
graphs, is taken from the
unless otherwise stated.2
Total Aquatic Products Production
China has the world's largest aquatic production and its market share of the
world's fish production has risen from 7 percent in 1961 to 37 percent by
2012. China alone accounted for 62.5 percent of the aquaculture production in
the world by volume in 2015. Aquaculture represents more than 71.9 percent of
the total fish production in
increased 4.38 percent to reach 47.9 million tons, compared to the 45.8 million tons in 2014, per the FAO. Fish production accounts for 59 percent of the total aquatic production, followed by shellfish and crustaceans at 22.6 percent and 10 percent, respectively. Fish production is, according to theUSDA , expected to continue its upward growth trend to reach 34.5 million tons in 2012, up from 33 million tons in 2011 and 31.3 million tons in 2010.
In 2011,
According to @2019 undercurrent news, China's seafood imports increased by 44%
to
2 Definition of terms: China's definition of aquatic products includes both
cultured (farm-raised) and wild caught products; aquatic products include fish,
shrimp/prawn/crab, shellfish, algae, and other. Aquatic catch production is
total volume of both fresh and seawater wild caught aquatic products;
Aquaculture production is the total volume of both fresh and seawater cultured
(farmed) aquatic products. This report will use Chinese terminology to maintain
consistency between Chinese statistics and product categories. Total aquatic
trade statistics below do not include fishmeal.
- 45 -
The market for meat in
China is by far the world's largest producer and consumer of meat which includes pork, poultry and beef. Historically, this situation did not have a large impact on the rest of the world, as China, for the most part, maintained self-sufficiency in meat. However, since 2007 the situation has changed dramatically. China has gradually turned into a net importer of meats. World meat production was 323 million tons in 2017.3 Global trade in meat is projected to be 20% higher in 2027, representing a slowing down of meat trade growth to an annual average of 1.5% compared to 2.9% during the previous decade.4Meat imports intoAsia account for 56% of global trade, and poultry will constitute more than half of this additional import demand. China's meat production reached 86.60 million tons in 2018, where total meat production inthe United States amounted to 47.06 million tons in 2018. With strong economic growth and the improvement of living standards, the demand for beef inChina is rising.5 China's animal feed market is projected to grow at a CAGR of over 16% till 2019.6 There are several other specific market drivers which underpin the increase in demand for red meat. One driver is the improved living standard inChina which stimulates the growth of beef markets since beef often sells at a much higher price and traditionally has been more expensive than what most people can afford. Another is the fact that Chinese people's dietary structure is becoming more diversified and reasonable, bringing larger amount of beef consumption since beef has nutritional benefits. Lastly, a gradual lowering of import taxes is likely to support sufficient supply of cattle. Feed grain prices are projected to remain low during 2018-2027. The year 2017 was affected by numerous outbreaks of Avian Influenza (AI) around the world which resulted in a slower increase in world output. China, the second largest producer afterthe United States , was particularly affected by several outbreaks over the last years. Thus, China can expect a return to historical trend growth in poultry production from 2018 onwards. Globally, the share of meat output traded is expected to remain constant at around 10%, with most of the increase in volume coming from poultry meat. The projected production growth in developing countries remains insufficient to satisfy demand grown, particularly inAsia andAfrica . As a result, import demand is expected to remain strong.7 Market drivers
The improvement of living standard stimulates the growth of beef markets:
Traditionally, Chinese people eat pork and chicken to satisfy their desire for meat. This is largely due to the much higher price of beef which goes beyond normal people's affordable level. With the improvement of living standards, Chinese people have begun the upgrade of their consumption of meat, and began to eat more beef.
Chinese people's dietary structure becomes more diversified and reasonable, bringing larger amount of beef consumption:
At present, Chinese people are changing their diet patterns to higher and richer nutrition. From a nutritional perspective, beef not only contains high unsaturated fatty acids and high protein, it also has low fat and lots of nutrition, which makes it perfect for the healthy diet. Thus, in the future, beef is expected to replace some parts of the market shares in pork, chicken and other meats.8
3 Review of Recirculation Aquaculture System Technologies and their Commercial
Application, Stirling Aquaculture,
4 Food Outlook, FAO,
5 Research Report on Beef Import in
6 China Animal Feed Market Forecast and Opportunities, 2019
7 Meat - OECD-FAO Agricultural Outlook 2018-2027
8
- 46 -
The market for fertilizer in
Sales of fertilizers are expected to be supported by healthy expansion of agricultural activities as the amount of sown areas continues to grow and rural income levels rise. Farmers will continue to register steadily increasing incomes, the result of growing crop prices and government subsidies designed to supplement their revenues and reduce their material costs. Subsidies aimed directly at cutting the cost of fertilizers is expected to encourage additional use. In addition, rising crop prices have encouraged farmers to invest in fertilizers to further boost crop yields. Advances will also be driven by increases in the acreage of sown land dedicated to growing cash crops. However, increasing demand for organic food and improved understanding of the correct application of fertilizers is expected to prevent demand from rising at a faster pace. In value terms, fertilizer demand is expected to grow from over$195 billion in 2016 to over$245 billion in 2020.9 Faster value growth will be driven by strong demand for higher value multi-nutrient fertilizers. In addition, advances will be supported by continued growth in fertilizer prices as the cost of natural gas, oil, coal, and other raw materials continues to increase. Demand for fertilizer nutrients inChina is projected to grow 4.4 percent annually through 2015 to 98.1 million metric tons. Nutrient demand will be stimulated by increasing use of higher nutrient level products as income levels grow in rural areas inChina . In addition, government efforts to promote multi-nutrient fertilizers will also support gains in fertilizer nutrient demand. Accounting for more than three-fourths of total fertilizer demand in 2010, single-nutrient fertilizers will remain the larger product type through 2015, despite a relatively low growth rate of 2.1 percent per year. Sales of single nutrient fertilizers will continue to be supported by their relatively low prices. The size, growth and composition of fertilizer demand in the six regions that make up China vary considerably. The Central-South and Central-East will remain the two largest regional fertilizer markets. Due to the comparatively high income levels in the Central-South and Central-East ¨ ¨ which enable residents to afford more expensive food items ¨ demand for cash crops such as fruits and vegetables will rise in these regions, which in turn will fuel demand for fertilizer. Sales in the Northeast and Northwest regions will outpace the average through 2015, benefiting from the Great Western Development Strategy, the Northeast Revitalization Policy, and increasing income levels for farmers.10 In 2006, the central government started a program intended to partially compensate farmers for price increases in fuel, fertilizer and other agricultural inputs. In the case of fertilizers, government support is part of several separate programs targeting fertilizer producers, with cost reductions being passed along to farmers purchasing the input.
Market for fruits and vegetables in
The information in this section regarding the market for fruit inChina is taken from theInternational Trade Center report "Overview of the markets for selected tropical fruits and vegetables inChina " unless otherwise stated.
9 Fertilizer Market Global Report 2017,
10 Fertilizers in
- 47 -
CONSOLIDATED RESULTS OF OPERATIONS
Part A. Audited Income Statements of Consolidated Results of Operations for the
fiscal year ended
A (1) Income Statements (audited)
2019 2018
Revenue
- Sale of goods $ 133,879,067 $ 130,543,170 - Consulting and service income from development contracts 1,719,247
11,127,393
135,598,314 141,670,563
Cost of goods sold (113,401,961 ) (110,967,348 )
Cost of services (1,590,017 ) (9,051,408 )
Gross profit 20,606,336 21,651,807General and administrative expenses (17,286,419
) (15,595,032 ) Net income from operations 3,319,917 6,056,775 Other income (expenses) Government grant 739,283 649,095
Sharee of income from unconsolidated equity investee 7,537,498
14,251,264
Other income - 56,672
Non-operating expenses (22,598,607 ) (4,609,253 )
Interest expense (403,668 ) (600,519 )
Net income (expenses) (14,725,494 ) 9,747,259
Net income before income taxes (11,405,577
) 15,804,034 Provision for income taxes Net income (11,405,577
) 15,804,034 Less: Net (income) loss attributable to non - controlling interest
1,063,310 1,519,303
Net income attributable toSino Agro Food Inc. and subsidiaries (10,342,267
) 17,323,337 Other comprehensive income (loss) - Foreign currency translation gain (loss)
3,416,381 (14,555,377 )
Comprehensive income (6,925,886) 2,767,960 Less: Other comprehensive (income) loss attributable to non - controlling interest
915,590 1,793,417
Comprehensive income attributable to the
$ (6,010,296 ) 4,561,377
Earnings per share attributable to theSino Agro Food, Inc. and subsidiaries common stockholders: Basic$ (0.21 ) 0.46 Diluted$ (0.21 ) 0.46
Weighted average number of shares outstanding:
Basic 49,963,607 37,336,164
Diluted 49,963,607 37,336,164
- 48 -
Comparative overview of FY2019 and FY2018 based on results as illustrated in Table A(1), above:
Note (1) to (3) to Table A.1:
(A): Information of Note (1, 2 & 3) Sales, cost of sales and gross profit and analysis:
The Company's revenues were generated from (A) Sale ofGoods and (B) Consulting and Services provided in project and business developments covering technology transfers, engineering, construction, supervision, training, management and technology licensing fees etc.
Table (A.2). below reflects segmental break-down figures of Sales of Goods Sold,
Cost of Goods Sold, and related Gross Profit for the twelve months ended
In US$ Sales of goods Cost of Goods sold Sales of Goods' Gross profit
2019 2018 2019 2018 2019 2018
SJAP Sales of live cattle 3,752,843 6,644,964 3,527,690 7,624,190 225,153 -979,225
Sales of feedstock - -
Bulk Livestock feed 746,232 1,521,303 333,275 697,997 412,957 823,306
Concentrate livestock feed 4,864,755 8,043,813 2,713,600 4,477,767 2,151,155 3,566,046
Sales of fertilizer 1,922,323 3,028,357 1,688,240 2,137,582 234,083 890,775
SJAP Total 11,286,153 19,238,438 8,262,804 14,937,535 3,023,349 4,300,903
HSA Sales of Organic fertilizer 2,597,088 3,583,034 2,154,282 2,932,754 442,806
650,280
Sales of Organic Mixed Fertilizer 4,746,144 6,088,296 2,854,337 3,961,581 1,891,807 2,126,715
Ssles of Raw material 6,986,988 8,262,841 -1,275,853
Rental income 1,253,823 1,253,823
HSA Total 15,584,043 9,671,330 13,271,460 6,894,335 2,312,583 2,776,995
SJAP's& HSA/Organic fertilizer total 26,870,196 28,909,768 21,534,264 21,831,870 5,335,932 7,077,898
JHST Rental income 615,784 - 439,747 176,037 -
Ssles of Raw material 1,135,371 1,135,371
Sales of Dried HU Flowers 236,850 214,793 - 22,057
Sales of Dried Immortal vegetables 101,892 423,152 87,336 314,720 14,556 108,433
Sales of Vegetable products 2,732,556 2,957,246 2,055,771 2,568,877 676,785 388,369
JHST/Plantation Total 4,585,603 3,617,249 3,718,225 3,098,390 867,378 518,859
MEIJI - -
Sale of Live cattle (Aromatic) 34,062,396 29,558,983 27,519,186 24,761,345 6,543,210 4,797,638
Ssles of Raw material 1,630,277 1,621,621 8,656
Rental income 498,362 143,979 354,383
MEIJI / Cattle farm Total 36,191,035 29,558,983 29,284,786 24,761,345 6,906,249 4,797,638
SIAF - -
Sales of goods through trading/import/export activities - -
on seafood 29,362,140 35,468,172 26,099,679 31,553,391 3,262,461 3,914,781
on imported beef and mutton 36,870,093 32,988,998 32,765,007 29,722,352 4,105,086 3,266,646
SIAF/ Others& Corporate total 66,232,233 68,457,170 58,864,686 61,275,743 7,367,547 7,181,427
Group Total 133,879,067 130,543,170 113,401,961 110,967,348 20,477,106 19,575,822
Increases of 2019 to 2018 in $ 3,335,897 901,284
Increases of 2019 to 2018 in % 3 % 5 %
The Company's revenues generated from sale of goods increased by$3,335,897 or 3% from$130,543,170 for the year endedDecember 31, 2018 to$133,879,067 for the year endedDecember 31, 2019 . Most segments maintained or reduced their sales revenues and gross profits without much improvements except MEIJI's cattle farm segment improved on the sales of Asian yellow cattle generated sales ofUS$36.2 million and gross profits of 6.9 million in 2019 compares to sales ofUS$29.6 million and gross profits ofUS$4.8 million in 2018. The Company's cost of goods sold increased by$2,434,613 or 2% from$110,967,348 for the year endedDecember 31, 2018 to$113,401,961 for the year endedDecember 31, 2019 . The increase was primarily due to the increase of cost of sales in MEIJI's purchase of AsianYellow Cattle having sold more cattle in 2019. Gross profit of the Company generated from goods sold increased by$901,284 or 5% from$19,575,822 for the year endedDecember 31, 2018 to$20,477,106 for the year endedDecember 31, 2019 . The overall increase was primarily due to the increase of the increase of sales and gross profits in MEIJI's cattle farm segment. · 1. (i) Beef and Organic Fertilizer Division (SJAP and (discontinued) QZH): SJAP Sales of live cattle 3,752,843 6,644,964 3,527,690 7,624,190 225,153 -979,225 Sales of feedstock 0 - Bulk Livestock feed 746,232 1,521,303 333,275 697,997 412,957 823,306 Concentrate livestock feed 4,864,755 8,043,813 2,713,600 4,477,767 2,151,155 3,566,046 Sales of fertilizer 1,922,323 3,028,357 1,688,240 2,137,582 234,083 890,775 SJAP Total 11,286,153 19,238,438 8,262,804 14,937,535 3,023,349 4,300,903 % of increase (+) or decrease (-) -41 % -45 % -30 % In US$ Sales of goods Cost of Goods sold Gross profit 2019 2018 2019 2018 2019 2018 Sales of Organic HSA fertilizer 2,597,088 3,583,034 2,154,282 2,932,754 442,806 650,280
Sales of Organic Mixed
Fertilizer 4,746,144 6,088,296 2,854,337 3,961,581 1,891,807 2,126,715
Ssles of Raw material 6,986,988 8,262,841 (1,275,853 )
Rental income 1,253,823 1,253,823
HSA Total 15,584,043 9,671,330 13,271,460 6,894,335 2,312,583 2,776,995SJAP's & HS.A./Organic
fertilizer total 26,870,196 28,909,768 21,534,264 21,831,870 5,335,932 7,077,898
% of increase (+) or
decrease (-) -7 % -1 % -25 %
Revenue from the sector of beef and organic fertilizer decreased by $2,039,572
or 7% from $28,909,768 for the year ended December 31, 2018 to $26,870,196 for
the year ended December 31, 2019 . The decrease was mainly due to the decrease in
sales of the discontinued operation of SJAP from $19.2 million in 2018 to
$11.3million in 2019.
Cost of goods sold from beef and organic fertilizer decreased by $297,606 or 1%
from $21,831,870 for the year ended December 31, 2018 to $21,534,264 for the
year ended December 31, 2019 . The decrease was mainly due to the decrease in
cost of goods sold in the discontinued operation of SJAP from $14.9 million in 2018 to$8.3million in 2019. Gross profit from the beef and organic fertilizer sector decreased by$1,741,966 or 25% from$7,077,898 for the year endedDecember 31, 2018 to$5,357,962 for the year endedDecember 31, 2019 . The decrease was primarily due to the result in eliminating the losses from the discontinuing operation of SJAP (from$4.3 million in 2018 to$3.0 million in 2019). - 49 - The table below shows information of the sales of live cattle mostly from SJAP's own farm in 2019/ 2018 2019 2018 Difference
SJAP Production and Sales of live cattle Heads 2,203 3,886
(1,683 )
Average Unit sales price US$/head 1,704 1,710 (6 )
Unit cost prices US$/head 1,601 1,962 (361 )
Production and sales of feedstock - - 0
Bulk Livestock feed MT 4,318 8,619 (4,301 )
Average Unit sales price US$/MT 173 177 (4 )
Unit cost prices US$/MT 77 81 (4 )
Concentrated livestock feed MT 11,068 18,064 (6,996 )
Average Unit sales price US$/MT 440 445 (6 )
Unit cost prices US$/MT 153 248 (95 )
Production and sales of fertilizer MT 11,703 23,204 (11,501 )
Average Unit sales price US$/MT 164 131 34
Unit cost prices US$/MT 144 92 52
Since the disposal of QZH in 2017, the cattle sold were mostly from SJAP's own farm and at lighter weight (averaging at less than 300 Kg/head) to keep the losses of growing cattle as low as possible. The market price of live cattle has not improved during 2019 averaging lower thanUS$5.68 /kg which is below our growing cost of aboutUS$6.50 /Kg. At the same time, SJAP's bulk stock feed and concentrated stock feed sales reduced to 4,318 MT and 11,068 MT in 2019 compares to 2018's 8,619 MT and 18,064 MT respectively due primarily to decreased demands after SJAP is no longer requiring the corporative growers to do cattle fattening and in term reducing the production sales of the bulk stock feed and concentrated stock feed accordingly. SJAP's fertilizer segment also suffered reduction in sales and production with 2019's 11,703 MT to 2018's 11,703 MT. From1st October 2019 onward, SJAP became an investee of associates of the Company with Mr.Solomon Lee resigned as its chairman and SJAP's operation was contracted out to its management as such it is not a variable interest entity and SJAP was reclassified as an unconsolidated equity investee and SJAP's cattle and beef operation is discontinued on same date .
1. (ii). The operations of HSA in manufacturing and sales of organic fertilizer itemizing unit sales, costs and quantity of sales:
2019 2018 Difference
HSA Fertilizer operation
Organic Fertilizer MT 11,213 15,105 (3,892 )
Average Unit sales price $/MT 232 237 (6 )
Unit cost price $/MT 192 194 (2 )
Organic Mixed Fertilizer MT 11,374 14,638 (3,264 )
Average Unit sales price $/MT 417 416 1
Unit cost price $/MT 251 271 (20 )
HSA sold and produced 11,213 MT of organic fertilizer and 11,374 MT of organic
mixed fertilizer in the year ended 30.09.2019, compares to 2018's production
sales of 15,105 MT organic fertilizer and 14,638 MT of mixed organic fertilizer.
- 50 -
From 1st October 2019 the Company contracted out its manufacturing and sales of
organic fertilizer to its management; as such income of HSA is derived mainly
from said management contract. The Management contract generates fixed annual
income of RMB 19.15 million (equivalent to US$2,735,714 ) payable half yearly in
advance effective from 1st October 2019 . This contractual income is sufficient
to cover HSA's annual fixed expenditures / cost and capital debt repayments
(that is excluding corporate administration expenses) as shown in table below:
Management Contract Yrs. To go RMB / year % US$ / Year US$ / Quarter
Revenue
Contractual fees 19,150,000 100 % 2,735,714 683,929
Cost of contractual fees
Administration & expenses
of all properties 2,298,000 12 % 328,286 82,071
General maintenances of
buildings 1,532,000 8 % 218,857 54,714
Cost of security and guards
of properties 1,723,500 9 % 246,214 61,554
Cost of landscaping,
drainage & roads 2,489,500 13 % 355,643 88,911
Land levies and taxes 957,500 5 % 136,786 34,196
Depreciation 7,930,000 41 % 1,132,857 283,214
Gross Profits 2,219,501 12 % 309,123 77,281
Repayments of capital debts
Balanced cost of
construction of farm
buildings (of RMB 8
million ) inclusive interest 2 4,000,000 557,103 139,276
Balanced onstruction cost
of Etherine gas station
(
interest) 2 2,000,000 278,552 69,638
Net cash flow 4,149,501 577,925 144,481
2. Plantation Division refers to the operations of JHST. JHST is engaged in the
Sales of goods Cost of Goods sold Gross profit
2019 2018 2019 2018 2019 2018
Sales of Fresh
JHST HU Flowers -
Sales of Dried
HU Flowers 236,850 214,793 - 22,057
% of increases
(+) or decreases
(-)
Sales of Dried
Immortal
vegetables 101,892 423,152 87,336 314,720 14,556 108,433
% of increases
(+) or decreases
(-)
Sales of
Vegetable
products 2,732,556 2,957,246 2,055,771 2,568,877 676,785 388,369
% of increases
(+) or decreases
(-) -8 % -20 % 74 %
Rental income 615,784 439,747 176,037
Ssles of Raw
material 1,135,371 1,135,371 -
JHST/Plantation
Total 4,585,603 3,617,249 3,718,225
3,098,390 867,378 518,859
% of increases
(+) or decreases
(-) 27 % 20 % 67 %
Revenue from our plantation increased by $968,354 or 27% from $3,617,249 for the
year ended December 31, 2018 to $4,585,603 for the year ended 30thSeptember,
2019.
Cost of goods sold from the plantation increased by $619,835 or 20% from
$3,098,390 for the year ended December 31, 2018 to $3,718,225 for the year ended
30th September, 2019 . The increase was primarily due to the increase in sales
revenues.
Gross profit from our plantation increased by
- 51 -
From 1st October 2019 the Company contracted out its plantation operation to its
management; as such income of JHST is derived mainly from said management
contract. The Management contract generates fixed annual income of RMB 4.43
million (equivalent to US$615,748 ) payable half yearly in advance effective from
1st October 2019 . This contractual income is sufficient to cover JHST's fixed
annual expenditures / cost and capital debt repayments (that is excluding
corporate administration expenses) as shown in table below:
Management Contract Yrs. To go RMB / year % US$ / Year US$ / Quarter
Revenue
Contractual fees 7,000,000 100 % 1,000,000 250,000
Cost of contractual fees -
Adminstration & expenses of
all properties 840,000 12 % 120,000 30,000
General maintenances of
buildings 420,000 6 % 60,000 15,000Cost of security and guards
of properties 560,000 8 % 80,000 20,000
Cost of landscaping,
drainage & roads 770,000 11 % 110,000 27,500
Land levies and taxes 350,000 5 % 50,000 12,500
Depreciation 4,230,435 60 % 604,348 151,087
Gross Profits -170,435 -2 % -23,704 -5,926Repayments of capital debts - 2018 typhoon damages 2 1,200,000 166,898 41,725 incurred repairs payments - (at total cost ofRMB 3.1 million with balance to be paid ofRMB2.4 million ) 2019 road repairs at cost 2 585,000 81,363 20,341 ofRMB 1.68 million with - balance to be paidRMB 1.17 million Net cash flow 2,275,000
325,000 81,250
The Table below shows the itemized unit sales and cost prices of the produces
and products:
2019 2,018 Difference
JHST
Dried HU Flowers MT - 48 (48 )
Average Unit sales price US$/MT - 4,934 (4,934 )
Unit cost prices US$/MT - 4,475 (4,475 )
Dried Immortal vegetables MT 2 7 -5.00
Average Unit sales price US$/MT 50,946 60,450 -9,504.36
Unit cost prices US$/MT 43,668 44,960 -1,291.95
Vegetable products MT 2,575 2,846 (271 )
Average Unit sales price US$/MT 1,061 1,039 22
Unit cost prices US$/MT 798 903 (104 )
- 52 -
3. Cattle Farm Division refers to the operations of Cattle Farm 1 under Jiangmen
City Hang Mei Cattle Farm Development Co. Ltd ("JHMC") where locally bred cattle
are grown and sold live to third party livestock wholesalers who sell them
mainly in Guangzhou livestock wholesale markets. The financial statements of
JHMC are consolidated into MEIJI as one entity along with MEIJI's operation in
the consulting and service for development of other cattle farms, such as Cattle
Farm 2 or related projects.
2019 2018 2019 2018 2019 2018
MEIJI Sale of Live cattle (Aromatic) 34,062,396
27,519,186 6,543,210
Sales of Raw material 1,630,277 1,621,621 8,656
Rental income 498,362 29,558,983 143,979 24,761,345 354,383 4,797,638
MEIJI / Cattle farm Total 36,191,035 29,558,983 29,284,786 24,761,345 6,906,249 4,797,638
% of increases (+) & decreases (-) 22 % 18 % 44 %
The locally bred so-called "Asian Yellow cattle" ("AYC") currently has limited
but steady local markets (in Guangdong Province ) that can't handle big
production volumes (i.e., thousands of heads per day) with stable wholesale
prices averaging about US$12 /Kg (live weight) which is doubling SJAP's cattle
prices.
Revenue from the cattle farm increased by $6,632,052 or 22% from $29,558,983 for
the year ended December 31 , 2018to $36,191,035 for the year ended December 31,
2019 . The increase was primarily due to the steady demands of said local markets
at stable sale prices generating reasonable returns for the farm.
Cost of goods sold from the cattle farm increased by
Gross profit from cattle increased by
The Table below shows the itemized unit sales and cost prices of the produces
and products:
2019 2018 DifferenceMEIJI Production and trading on sale of Live cattle Head 9,073
7,945 1,128
Average Unit sales price $/head 3,989 3,720 268
Unit cost prices $/head 3,228 3,117 111
Currently there are two operations in this segment,
Cattle Farm 1:Cattle Farm 1 was built as a demonstration farm to show that cattle can be raised in a semi-tropical climate using the Company's semi-grazing and housing method. Using the Company's semi-free growing management system, the cattle are allowed to graze in the field during the early morning and kept indoors and out of the sun during the hot summer days. This method has proven reliable and adaptable to the "AsianYellow Cattle "Cattle Farm 2:Cattle Farm 2 is a beef cattle farm situated inGuangdong Province ,Guangzhou City.Cattle Farm 2 is operated by a private company formed inChina with Chinese citizens acting as its legal representative as required by Chinese law.Cattle Farm 2 is complementary toCattle Farm 1, having an additional 76 acres of land suitable for growing the Company's type of pasture (a cross between elephant grass and yellow grass) that has a very high yield rate of over 35 MT per 1/6 acre per year, and containing an average of over 9 percent protein that is very suitable for consumption by cattle. Between the two farms, under normal seasons, they have a capacity to produce up to 30,000 MT of pasture/year collectively that is capable to feed up to 5,000 head of cattle/year based on the consumption rate on average of 6 MT/head/year. - 53 - MEIJI is the marketing and distribution agent for all cattle farms that have been and will be developed by MEIJI using its "Semi-free growing" management systems and aromatic-feed programs and systems to grow beef cattle. Similar to CA in its business model, MEIJI purchases fully-grown cattle fromCattle Farm 1 and sells them to the cattle wholesalers. MEIJI also buys young cattle from other farmers and sells the young stock toCattle Farm 1. All cattle farms developed by MEIJI will utilize its "semi-free growing" management system and aromatic-feed programs and systems (which is a feeding program with special selected Chinese herbs to improve the health of the cattle to avoid the use of antibiotics) to raise beef cattle, such that cattle raised under this program have a distinct aromatic flavor sought by many restaurants inGuangdong Province . Presently, these farms are growing and fattening mainly AYC and that the Company's earlier plan (mentioned earlier in our 10K 2018 and subsequent 10Qs 2019 reports) to mergeCattle Farms (1) & (2) with HSA such that CF (1) & CF (2) will become breeding stations supplying yearlings for HSA to grow into full grown cattle (up to 3 years old) that will be sold in the Chinese market, is now pending on further evaluation of other alternatives aiming to achieve faster and better return on capital investment. However during 2018, the Company decided to restrict all capital spending such that the said merger plan was temporary ceased, and as from1st October 2019 the Company contracted out its cattle operation to its management of the farms; thus JHMC's income is derived mainly from said management contract. The Management contract generates fixed annual income ofRMB 19.88 million (equivalent toUS$2.84 million ) payable quarterly in advance and the Company is to share 20% of the net profit derived from the contracted management's cattle operation effective from1st October 2019 . This contractual income is sufficient to cover JHMC's fixed annual expenditures / cost and capital debt repayments (that is excluding corporate administration expenses) as shown in table below: Management Contract Yrs. To go RMB / year % US$ / Year US$ / Quarter Revenue Contractual fees 19,880,000 100 % 2,840,000 710,000 Cost of contractual fees - Administration & expenses of all properties 2,982,000 15 % 426,000 106,500 General maintenances of buildings 994,000 5 % 142,000 35,500 Cost of security and guards of properties 1,789,200 9 % 255,600 63,900
Cost of landscaping, drainage & roads 2,584,400
13 % 369,200 92,300
Land levies and taxes 994,000 5 % 142,000 35,500
Depreciation 3,423,752 49 % 489,107 122,277
Gross Profits 7,112,648 4 % 989,242 247,310
Repayments of capital debts etc. -Repayments on 200 heads of breeding
stocks (Bal.
RMB50K )=RMB10m 2 5,000,000 695,410 173,853 - Daily up-keep of 200 heads breeding stocks,(RMB20x30daysx200 heads) / month 2 1,440,000
200,278 50,070
Net cash flow 4,096,400 585,200 146,300
- 54 -
· 4. Corporate & Others Division refers to the business operations of the Group
called internally under the name of "Corporate & Other Division" of Sino Agro
operations provided to projects not included in the above categories, and not
limited to corporate affairs.
In US$ Sales of goods Cost of Goods sold Gross profit
2019 2018 2019 2018 2019 2018
SIAF Sales of goods through
trading/import/export activities
on seafood (via imports) 29,362,140 35,468,172 26,099,679 31,553,391 3,262,461 3,914,781
% of increases (+) and decreases (-) -17 % -17 % -17 %
on imported beef mainly 36,870,093 32,988,998 32,765,007 29,722,352 4,105,086 3,266,646
% of increases (+) and decreases (-) 12 % 10 % 26 %
SIAF/ Others & Corporate total 66,232,233 68,457,170 58,864,686 61,275,743 7,367,547 7,181,427
% of increases (+) and decreases (-) -3 % -4 % 3 %
Revenue from the corporate division decreased by $2,224,937 or 3% from
$68,457,170 for the year ended December 31, 2018 to $66,232,233 for the year
ended December 31, 2019 . The decrease was marginal primarily due to a decrease
in the sales of imported seafood from $35.4 million in 2018 to $29.4 million in
2019
Cost of goods sold from corporate decreased by$2,411,057 from$61,275,743 for the year endedDecember 31, 2018 to$58,864,686 for the year endedDecember 31, 2019 due primarily to the decreased sales of some imported goods. Gross profit from the corporate increased by$186,120 or 3% from$7,181,427 for the year endedDecember 31, 2018 to$7,367,547 for the year endedDecember 31, 2019 . The increase was primarily due to a corresponding decrease in sales. Description of items 2019 2018
Mixed seafood MT 1,487 1,927
Average of sales price $/MT 19,746 18,409
Average of cost prices $/MT 17,552 16,377
Beef & Lamb trading from imports MT 2,092 1,706
Average of sales price $/MT 17,624 19,337
Average of cost price $/MT 15,662 17,422
This trading (of mainly imported live-seafood) division has excellent growth
potential due mainly to the demands for selective live-seafood (i.e. live crabs,
lobsters and shell fish etc.) in China , but the growth of sales of this division
is mainly subject to the availability of working capital that helps drive sales'
turnover since all live seafood suppliers demand cash payments upon purchases.
Over the years this division has developed many reliable suppliers and supplied
sources that are supplying quality live seafood to our trust worthy
customers/agencies. Therefore we believe that this division will eventually
become an effective and major revenue drive of the group once some of the
financing plans will have materialized to allow more working capital being
employed in the division.
- 55 -
l 5.A. Engineering technology consulting and services:
Table (A.5) below shows the revenue, cost of services and gross profit generated
from consulting, services, commission and management fees for years 2019 and
2018.
2019 2018 Difference
Revenue
CA 1,719,247 11,127,393 (9,408,146)
Group Total Revenues 1,719,247 11,127,393 (9,408,146)
Cost of service
CA 1,590,017 9,051,408 (7,461,391)
Group Total Cost of sales 1,590,017 9,051,408 (7,461,391)
Gross Profit
CA 129,230 2,075,985 (1,946,755)
Group Total Gross Profit 129,230 2,075,985 (1,946,755)
Revenues decreased by
(i). Prior to the acquisition of farms by JFD/Tri-way, their respective development and construction costs and working capital requirements for all farms were mainly financed by their respective owners and investors and partly financed by CA's deferred account receivables. Since the acquisition, this has become the sole responsibility of JFD/Tri-way. (ii). Under said situation, most of the operational cash flow is being employed in working capital to generate continuing and constant sales revenues month after month. For example, with respect to a species of fish that takes 18 months to grow to marketable size from tiny fingerling (of 3 mm), if one wanted to sell 3 MT of the grown fish per day at gross profit margin of 35% and to generate annual sales ofUS$100 million , that would mean that the amount of working capital needed would be overUS$65 million plus daily operational expenses for 18 months or more amounting to more than$80 million and for each $ of increased sales per year a similar ratio of working capital would be required.
In other words, under current situation, Tri-way does not have enough free cash-flow to be spent on capital expenditures required by farm developments, thus reducing CA's C&S income in 2018 and 2019 accordingly.
Cost of services for consulting, service, commission and management fee
decreased by
Gross profit of consulting, service, commission and management fees decreased by$1,946,755 or 94%, from$2,075,985 for the year endedDecember 31, 2018 to$129,230 for the year endedDecember 31, 2019 The decrease was primarily due to the corresponding decreases in sales. .
Note to Table A 1 ( Net Expense):
Other income/(expense) decreased by$28,307,411 from$9,747,259 in 2018 to$(18,560,152) in 2019 was mainly due to i) an decrease in share of profit from a unconsolidated equity investee from$14,251,264 to$7,537,498 ; ii) change in non-operating expenses from$(4,609,253) to$(22,598,607) ; - 56 -
Note to Table A 1 General and Administrative and interest Expenses:
General and administrative (including depreciation and amortization) and interest expenses (including in Note Other income/(expenses) decreased by$2,340,122 or 14% from$16,195,551 for the year endedDecember 31, 2018 to$13,855,429 for the year endedDecember 31, 2019 . The decrease was mainly due to (i) a decrease in Wages and salaries of 201,111 from$1,862,232 for the year endedDecember 31, 2018 to$1,661,121 for the year endedDecember 31, 2019 ; and (ii) a decrease in Others and miscellaneous (including research and development) of$1,164,493 from$4,072,096 for the year endedDecember 31, 2018 to$2,907,603 for the year endedDecember 31, 2019 ; as shown in the table below: Table (i) Category 2019 2018 Difference Office and corporate expenses 3,296,862 3,354,114 (57,252) Wages and salaries 1,661,121 1,862,232 (201,111) Traveling and related lodging 24,219 45,430 (21,211)
Motor vehicles expenses and local transportation 38,243
56,198 (17,955)
Entertainments and meals 45,672 49,504 (3,832)
Others and miscellaneous 2,907,603 4,072,096 (1,164,493)
Depreciation and amortization 5,478,041 6,155,458 (677,417)
Sub-total 13,451,761 15,595,032 (2,143,271)
Interest expense 403,668 600,519 (196,851)
Total 13,855,429 16,195,551 (2,340,122)
Note to Table (i):
In this respect, total depreciation and amortization amounted to$7,311,242 for the year endedDecember 31, 2019 , out of which amount$5,478,041 was reported under general and administration expenses and$1,833,201 was reported under cost of goods sold; whereas total depreciation and amortization amounted to$15,351,003 for the year endedDecember 31, 2019 , out of which amount$6,155,548 was reported under general and administration expenses and$9,195,455 was reported under cost of goods sold. - 57 -
Note to Table A 1 Non-controlling interest:
Table (F) below shows the derivation of non-controlling interest
Jiangmen City
Jiangmen City
Heng Hang Mei Cattle Hunan Shenghua Qinghai Sanjiang
Sheng Tai
Agriculture Farm A Power A Power
Development Co. Development Co. Agriculture Co., Agriculture Co
Name of China
subsidiaries Ltd.(China) Ltd.(China) Limited (China) Ltd (China) TotalEffective shareholding 75 % 75 % 76 % 41.25 % Abbreviated names (JHST) (JHMC) (HSA) (SJAP) Net income (loss) of the P.R.C. subsidiaries for the year in $ (2,617,350 ) 1,995,528 (5,194,425 ) 576,694 (5,239,553 ) % of profit sharing of non-controlling interest 25 % 25 % 24 % 58.75 % Non-controlling interest's shares of Net incomes in $ (654,338 ) 498,882 (1,246,662 ) 338,808 (1,063,310 )
The Net Loss attributed to non-controlling interest is
Note (7) to Table A 1 Earnings per share (EPS):
Earnings per share decreased by$0.67 (basic) and$0.67 (diluted) per share from EPS of$0.46 (basic) and$0.46 (diluted) in 2018 to per share of$(0.21) (basic) and$(0.21) (diluted) in 2019. The reason for the decrease is primarily due to the declined earnings in 2019 from all segmental operations losing overUS$5.2 million and from CA's consulting and services losingUS$1.95 million . - 58 -
Part B. MD &A on Audited Consolidated Balance Sheet as of the year 2019 compared to year 2018 (fiscal year)
Consolidated Balance sheets December31,2019 December31,2018 Changes Note ASSETS Current assets Cash and cash equivalents 185,895 4,950,799 (4,764,904 ) 8 Inventories - 54,582,241 (54,582,241 ) 9 Costs and estimated earnings in excess of billings on uncompleted contracts 250,828 250,828 - Deposits and prepaid expenses 30,130,940 52,241,190 (22,110,250 ) Accounts receivable 98,528,589 101,652,131 (3,123,542 ) 11 Other receivables 95,565,376 28,307,526 67,257,850 15 Total current assets 224,661,629 241,984,715 (17,323,086 ) Property and equipment Property and equipment, net of accumulated depreciation 103,064,238 230,645,659 (127,581,421 ) 12 Construction in progress 0 12,515,527 (12,515,527 ) 13 Land use rights, net of accumulated amortization 52,759,085 53,814,281 (1,055,196 ) 14 Total property and equipment 154,097,166 296,975,467 (142,878,301 ) Other assets Goodwill 724,940 724,940 - Proprietary technologies, net of accumulated amortization 7,067,753 8,937,071 (1,869,318 ) Investment in unconsolidated equity investee 249,344,711 207,074,626 42,270,085 Temporary deposit paid to entities for investments in future Sino Joint Venture companies 17,507,626 34,905,960 (17,398,334 ) 10 Total other assets 272,918,874 251,642,597 21,276,277 Total assets 653,403,825 790,602,779 (137,198,954 ) Current liabilities Accounts payable and accrued expenses 2,590,637 8,280,358 (5,689,721 ) Billings in excess of costs and estimated earnings on uncompleted contracts 5,386,711 5,348,293 38,418 Due to a director 1,165,621 2,046,499 (880,878 ) Other payables 35,362,580 42,523,811 (7,161,231 ) 16A Borrowings-Short term bank loan 0 4,589,828 (4,589,828 ) Derivative liability - 2,100 (2,100 ) Convertible note payable - 3,894,978 (3,894,978 ) Total current liabilities 44,505,549 66,685,867 (22,180,318 ) 16 Non-current liabilities Other payables 7,151,762 7,792,774 (641,012 ) Borrowing-Long term debt 5,536,938 (5,536,938 ) Total non-current liabilities 7,151,762 13,329,712 (6,177,950 ) Stockholders' equity Common stock 51,576 49,866 1,710 Additional paid-in capital 133,575,810 181,501,056 (47,925,246 ) Retained earnings 448,469,577 458,811,844 (10,342,267 ) Accumulated other comprehensive income (59,011,769 ) (10,415,786 ) (48,595,983 ) Treasury stock (1,250,000 ) (1,250,000 ) -Total SIAF Inc. and subsidiaries' equity 521,835,194 628,696,980 (106,861,786 ) Non-controlling interest 79,911,320 81,890,220 (1,978,900 ) Total stockholders' equity 601,746,514 710,587,200 (108,840,686 ) Total liabilities and stockholders' equity 653,403,825 790,602,779 (137,198,954 ) - 59 -
Note (8) Cash and Cash Equivalents
Cash and cash equivalents decreased by
Note (9) Break down on Inventories:
2019 2018 Difference
$ $ $
Bread grass 0.00 744,378 (744,378 )
Beef cattle 0.00 11,561,117 (11,561,117 )
Organic fertilizer 0.00 14,266,923 (14,266,923 )
Forage for cattle and consumables 0.00 7,252,280 (7,252,280 )
Raw materials for bread grass and organic
fertilizer 0.00 18,885,258 (18,885,258 )
Immature seeds 1,872,285 (1,872,285 )
0
0.00 54,582,241 (54,582,241 )
Note (10) Breakdown of Deposits and Prepaid Expenses:
2019 2018 Difference
$ $ $
Deposits for
- purchases of equipment 2,037,425 2,158,867 (121,442 )
- acquisition of land use rights - 174,851 (174,851 )
- inventories purchases 1,059,543 16,921,188 (15,861,645 )
- construction in progress - 4,789,035 (4,789,035 )
- issue of shares as collateral 24,402,175 24,928,324 (526,149 )
Shares issued for employee compensation and
overseas professional and bond interest - 643,457 (643,457 )
Others 2,631,797 2,625,468 6,329
30,130,940 52,241,190 (22,110,250 )
- 60 -
Note (11): Aging and breakdown of Accounts receivable:
2019
Accounts
receivable over 120 days and
$ 0-30 days 31-90 days 91-120 days less than 1 year Over 1 year
Engineering consulting
service (CA) 39,321,639 707,819 38,613,820
Sales of imported seafood
(SIAF) 27,362,755 5,836,253 21,526,502
Sales of Cattle and Beef
Meats (MEIJI) 14,446,680 1,331,775 13,114,905
Sales of HU Flowers
(Fresh & Dried) (JHST) 5,037,397 5,037,397
Sales of Cattle and Beef
Meats (JHMC) 1,091,224 326,528 210,465 554,231
Sales Fertilizer from (HSA) 8,305,681 2,251,540 563,284 421,251 5,069,606
-
Total 95,565,376 9,746,096 40,452,553 975,482 5,777,425 38,613,820
% of total receivables 100 % 10 % 42 % 1 % 6 % 40 %
l In CA's engineering consulting services, over 120-day accounts receivable of
balance due from an unconsolidated investee, TRW, with
engineering consulting services during the year. The management takes into
consideration the significant influence it holds in TRW (36.6% of equity
interest from October 5, 2017 ).
l The normal credit period granted to the customers is 90 to 120 days. The
Company will quarterly evaluate the recoverability of the over 120-day
balance.
l Provision of bad debts may be necessary for certain portions of HSA's account
receivables of
30th June 2020 .
Information on Concentration of credit risk of account receivables:
Major customer's revenues/our total revenues:
We have 4 major long-term customers (referring to Customer A, B, C and D mentioned in the Financial Statements of this Annual Report), who have accounted for 78.08% of our consolidated revenues for the year endedDecember 31, 2019 as shown in the table below:
% of total revenue Customer's Total Revenue
Customer A 31.05 % 43,798,678
Customer B 24.77 % 34,135,176
Customer C 16.28 % 22,433,555
Customer D 5.98 % 8,240,811
78.08 % 108,608,221
Customer A is ShanghaiHongchang Yili company ("Vigor") that sells much of the imported beef and seafood as well as locally produced seafood. During 2019, the Company sold$43,798,678 of goods representing 31.05% of our total revenue
of$137,785,374 . - 61 - Customer B is Cattle Wholesale, represented by Mr.Zhen Runchi , who buys our fattened cattle to sell them in theGuangdong andBeijing cattle markets and at the same time supplies to us with young cattle. The fiscal year 2019, transactions through Mr.Zhen Runchi generated 24.77% of our total consolidated revenue (equivalent to$34,135,176 ) out of our total revenue of$137,785,374 .
Customer C is
Customer D isTri-way Industries Limited through our divestment when Tri-way (or "TRW") became our "Investment Associate."During 2019, transactions through TRW generated 16.28% of our total consolidated revenue equivalent to$22,433,555 out of our total revenue of$137,785,374 .
Major customer's account receivables:
These 4 major long-term customers (referred to as Customer A, B, C and D above & mentioned in the Financial Statements of this Annual Report), constitute accounts receivable in the aggregate amount of$81,131,075 , which is equivalent to58.88% of our consolidated revenues of$137,785,374 for the year 2019 as shown in the table below: December 31,2019 % of total Total Accounts Accounts receivables receivables Customer A 39.91 % 39,321,639 Customer B 16.11 % 15,871,509 Customer C 14.66 % 14,446,680 Customer D 11.66 % 11,491,246 82.34 % 81,131,075
Note (12) Property and equipment, (P&E) net of accumulation depreciation:
2019
Plant and machinery $ 9,652,132 Structure and leasehold improvements 90,615,323 Mature seeds and herbage cultivation 17,752,012 Furniture and equipment
2,613,172
Motor vehicles 3,241,556
123,874,195
Less: Accumulated depreciation 20,809,957
Net carrying amount $ 103,064,238 l Depreciation expenses were
December 31, 2019 , and 2018, respectively. - 62 -
Note (13) Construction in progress (CIP):
2019
Construction in progress 0- Office, warehouse and organic fertilizer plant in HSA$ 0 - Oven room, road for production of dried flowers
0
- Organic fertilizer and bread grass production plant and office building
0
- Rangeland for beef cattle and office building
0
- Fish pond and breeding factory
0
$ 0
- 63 -
Note (14): Land Use Rights, net of accumulated amortization:
Monthly
amortization Nature of
Item Owner Location Acres Date Acquired Tenure Expiry dates Cost $ $ 2019.12.31Balance$ ownership Nature of project
Ouchi Village,
Hunan Fenghuo Town , Linli Fertilizer
lot1 HS.A County 31.92 4/5/2011 43 4/4/2054 242,703 470 193,316 Lease production
Ouchi Village,
Hunan Fenghuo Town, Linli
lot2 HS.A County 247.05 7/1/2011 60 6/30/2071 36,666,141 50,925 31,471,771 Management Right Pasture growing
Ouchi Village,
Hunan Fenghuo Town , Linli Fertilizer
lot3 HS.A County 8.24 5/24/2011 40 5/23/2051 378,489 789 296,483 Land Use Rights production
Ouchi Village,
Hunan Fenghuo Town, Linli
lot4 HS.A County 24.71 6/1/2018 50 5/31/2068 3,021,148 5,035 2,925,478 Lease Pasture growing
Yane Village,
Guangdong Liangxi Town, Enping
lot 1 JHST City 8.23 8/10/2007 60 8/9/2067 1,064,501 1,478 844,208 Management Right HU Plantation
Nandu Village of
Yane Village,
Guangdong Liangxi Town, Enping
lot 2 JHST City 27.78 3/14/2007 60 3/13/2067 1,037,273 1,441 815,412 Management Right HU Plantation
Nandu Village of
Yane Village,
Guangdong Liangxi Town, Enping
lot 3 JHST City 60.72 3/14/2007 60 3/13/2067 2,267,363 3,149 1,782,399 Management Right HU Plantation
Nandu Village of
Yane Village,
Guangdong Liangxi Town, Enping
lot 4 JHST City 54.68 9/12/2007 60 9/11/2067 2,041,949 2,836 1,622,215 Management Right HU Plantation
Jishilu Village of
Dawan
Guangdong Village,Juntang
lot 5 JHST Town, Enping City 28.82 9/12/2007 60 9/11/2067 960,416 1,334 762,997 Management Right HU Plantation
Liankai Village of
Guangdong Niujiang Town,
lot 6 JHST Enping City 31.84 1/1/2008 60 12/31/2068 821,445 1,141 657,156 Management Right Fish Farm
Nandu Village of
Yane Village,
Guangdong Liangxi Town, Enping
lot 7 JHST City 41.18 1/1/2011 26 12/31/2037 5,716,764 18,323 3,737,884 Management Right HU Plantation
Shangchong Village
of Yane Village,
Guangdong Liangxi Town, Enping
lot 8 JHST City 11.28 1/1/2011 26 12/31/2037 1,566,393 5,020 1,024,180 Management Right HU Plantation
Xiaoban Village of
Yane Village,
Guangdong Liangxi Town, Enping
lot 9 MEIJI City 41.18 4/1/2011 20 3/31/2031 5,082,136 21,176 2,858,702 Management Right Cattle Farm
No. 498, Bei Da
Road, Chengguan Town Cattle farm,
of Huangyuan Land Use fertilizer and
Qinghai County,Xining City, Right & livestock feed
lot 1 SJAP Qinghai Province 21.09 11/1/2011 40 10/30/2051 527,234 1,098 419,591 Building ownership production
Niu Jiang Town,
Liangxi Town , Enping Processing
Guangdong lot 10 JHST City 6.27 3/4/2013 10 3/3/2023 489,904 4,083 155,136 Management Right factory
Da San Dui Wei ,You
Nan Village, Conghua
District of
Guangdong lot 11 CA Guangzhou City 33.28 10/28/2014 30 10/27/2044 4,453,665 12,371 3,674,274 Management Right Agriculture
Land improvement
JHST cost incurred 12/1/2013 3,914,275 6,155 3,464,995 Management Right HU Plantation
Exchange difference -6,271,961 -3,947,113
678 63,979,840 136,824 52,759,085
- 64 -
Note (15) Other Receivables
2019 Note
Advanced to employees $ 255,174
Advanced to suppliers 2,543,541 15A
Advanced to customers 14,131,956 15B
Advanced to SJAP 76,404,954 15C
Others 2,229,751
$ 95,565,376 15A. A portion of this consists of molds, parts and components necessary to manufacture and fit-out various types of filters in the APM systems requiring suppliers (manufacturers) to carry additional inventory. This inventory is billed to the Company at such times when the components are called to manufacture the APM filtration systems. Until then, the Company provides advances to the supplier to manufacture the components and hold in inventory on the Company's behalf until the components are called and billed to the Company, i.e., offsetting the amount invoiced with the proceeds received in advance. 15B. Advanced to customers refers to our distribution agents (i.e., theShanghai distribution center, theGuangzhou distribution centers, etc.) that CA was their turnkey contractor built and developed said centers for and on behalf of their respective owners with part of their respective capital expenditure in development costs are still outstanding as of the date of this report. These are similar arrangement as in theFishery Farms developments that CA has the option to acquire up to 75% of stakes on the assets and operation of said distribution agents: however as of date of this report CA has yet to exercise any of said options as such these sum are recorded as other receivables.
15C. Advance to SJAP is referring the funds the Company advanced to SJAP since 2018 to present for building up its assets since 2008 to present.
Note (16) Current Liabilities:
Current liabilities Accounts payable and accrued expenses 2,590,637
Billings in excess of costs and estimated earnings on uncompleted contracts
5,386,711
Due to a director 1,165,621
Other payables 35,362,580 16A
Borrowings - Short term bank loans -
44,505,549
Note (16A): Analysis of other payables (current liabilities):
As of
(1). Straight note payable of$29,367,999 represents a 10.5% Convertible Note in the aggregate principal amount of up to$33,300,000 issued onAugust 29, 2014 . OnJuly 18, 2018 , the Company and the note holder entered into a restructuring agreement regarding the settlement of the Note as follows:
(i) 50% in cash settlement of
(ii) The other 50% balance of$15,589,000 to be settled by the issuance of 5,196,333 common shares of the Company and 400,000 shares ofTri-way Industries Limited . - 65 -
As of the date of this report, the Company has paid
• We filed an 8-K onDecember 12, 2019 to state that we received a notice of default (the "Notice") from ECAB onDecember 12, 2018 contending that a new Note was in default because (i) SIAF had not made repayments on the new Note in the manner prescribed by its terms, and (ii) of certain other unspecified events of default. While ECAB stated in the Notice that it has not elected to accelerate the right to repayment of the entire principal amount, including accrued but unpaid interest on the ECAB Note, it reserves the right to do so. Prior to receipt of the Notice from ECAB, the Company was attempting to reach a negotiated settlement with ECAB. Notwithstanding receipt of the Notice, the Company hopes to continue to work with ECAB to settle its obligations under the ECAB Note. The Company intends to vigorously defend its position should a mutually amicable resolution prove unattainable. Subsequently, Note 1 would be matured onFebruary 28, 2020 the Company intends to offer the settlement of the note to the accredited investors based on the following understanding, terms and conditions: (i). The earlier understanding of the restructured indebtedness is to be carried as follows: (a) SIAF issues 5,196,333 shares of its common stock and transfer 400,000 shares of TRW to the note holder; and (b) SIAF is to pay the revised promissory note in the principal amount of$15,589,000 to the note holder. (ii). It is the Company's intension for the said 5,196,333 shares of its common stocks to be converted into the G Series Preferred Stocks at conversion ratio of the offer of the Initial Public Offer stated in the registration statement filed withSEC targeting on or beforeJune 30, 2021 . (iii). There were 500,050 Common Shares of the Company loaned to the said accredited investor on (Date:July 22, 2014 ) valued atUS$18.10 / share as security for the accredited investors to secure their investors to invest on the Bond prior to the completion of a registration statement filed withSEC onJune 2014 to allow the official issuing of additional common stocks to ECAB's BOND investors, and that ECAB would return back the loaned stocks back to the Company upon the time the said accredited investor invested the balance of the Note 1 proceed of (US$ 13,362,550 ) needed to complete the disbursement of the total loan proceed ofUS$25,000,000 on or before (Date:February 28th 2015 ). However the said investor sold the said loaned 500,050 common stocks of the Company in between the period (Date: February toMarch 2015 ) and invested part or the full sum from the sales proceeds of said 500,050 common stock of the Company (ofUS$10,500,000 ) back to the Company as part of the Note 1's disbursement to the Company making total disbursement sum ofUS$22,137,450.00 being advanced to the Company on or before30th June 2015 , and in turn, the investor did not return the said 500,050 common stocks of the Company to the Company and didn't help the Company to complete the said registration statement by not giving the Company the Debenture Agreement requested bySEC and needed to complete said registration statement withSEC . (iv). In order that the principal amount of$15,589,000 of the cash settlement sum mentioned above may be settled amicably between the accredited investor and the Company, the sales proceeds (ofUS$13,362,550.00 ) from the sales of the 500,050 shares loaned in good faith to ECAB must be taken into consideration and be deduced from the said principal amount before this bond arrangements can
be settled.
(2). As of the date of this report we have other payables due to various third
parties totaling
(i). A loan was granted by a friendly third party onOctober 12, 2017 for$6 million that was recorded at later date by a loan agreement executed onFebruary 18, 2019 for$6,301,480 (inclusive of an additional loan of$301,480 granted by the same third party onFebruary 2, 2019 . This loan is to be re-paid in 3 tranches inclusive of accrued interest calculated to time of repayments comprising Tranche (1) for$2,300,000 , Tranche (2) for$2,350,000 and Tranche (3) for$2,746,702 onAugust 31, 2019 ,October 30, 2019 andDecember 31, 2019 , respectively, for total repayment amount of$7,346,702 . (ii). A number of friendly third parties granted various advances and extended debts to the Company during the past years, and as at the date of this report the total loan and debts recorded under other payables of the Company's account amounting to$9,345,811 collectively that in general do not have fixed terms of repayments and interest. - 66 -
Note (16B): Analysis of Convertible Note ("CB Notes") Payable) in Other payables (current liabilities):
As of the date of this Annual Report there are various CB Notes amounting to
Subsequently as ofDecember 31, 2019 there is$7,151,762 in CB Notes remaining outstanding collectively and out of which$2,130,000 is secured by 2,666,735 shares due for redemption and the return of collateralized shares onSeptember 23, 2019 ; the balance of$1,173,000 are CB Notes due to 5 holders that will be settled either by cash or shares at prevailing market prices or a combination thereof during 2019 that was extended toSeptember 23 2021 under corresponding addendums datedSeptember 20th 2019 . Income Taxes The Company was incorporated in theState of Nevada , inthe United States of America . The Company has no operations inUnited States of America and no US corporate tax has been provided for in the consolidated financial statements of the Company.
Undistributed Earnings of Foreign Subsidiaries
The Company intends to use the remaining accumulated and future earnings of foreign subsidiaries to expand operations outsidethe United States of America and, accordingly, undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outsidethe United States and no provision forU.S. Federal and State income tax or applicable dividend distribution tax has been provided thereon.
The Company filed
As of
No EIT has been provided in the financial statements of SIAF, CA, JHST, JHMC, JFD, HSA, QZH and SJAP since they are exempt from EIT for the twelve months endedDecember 31, 2019 and 2018 as they are within the agriculture, dairy
and fishery sectors.
CA, CS and CH are international business companies incorporated in
No
NoMacau corporate income tax has been provided in the consolidated financial statements, since APWAM and MEIJI did not earn any assessable profits inMacau for the twelve months endedDecember 31, 2019 and 2018. Swedish corporate income tax has been provided in the consolidated financial statements for SAFS at$1,684 for the twelve months endedDecember 31, 2019
and$0 for 2018.
No deferred tax assets and liabilities are payable as ofDecember 31, 2019 andDecember 31, 2018 since there was no difference between the financial statements carrying amounts, and the tax basis of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to reverse.
Off Balance Sheet Arrangements:
None.
Liquidity and Capital Resources
As of
- 67 -
Cash provided by operating activities amounted to$6,786,632 for the twelve months endedDecember 31, 2019 . This compared with cash provided by operating activities totaled$20,175,276 for the twelve months endedDecember 31, 2018 . The decrease in cash provided by operations is mainly due to the decrease in Other receivables from$(7,627,048) for the twelve months endedDecember 31, 2018 to that of$(67,257,850) for the twelve months endedDecember 31, 2019 . Cash used in investing activities totaled$11,506,614 for the twelve months endedDecember 31, 2019 . This compares with cash used in investing activities totaling$13,828,019 for the twelve months endedDecember 31, 2018 . The decrease in cash flows used in investing activities primarily resulted from the decrease in payment for construction in progress from$6.8million for the twelve months endedDecember 31, 2018 to that of$11 million for the twelve months endedDecember 31, 2019 . Cash provided by financing activities totaled$(73,741) for the twelve monthsDecember 31, 2019 compared with cash used in financing activities totaling$(75,563) for the twelve months endedDecember 31, 2018 . The decrease in cash paid by financing activities is mainly due to net proceeds from convertible bonds payable of$4,533,777 during the year 2018, but 2019 is 0. CRITICAL ACCOUNTING POLICIES BASIS OF PRESENTATION
The audited consolidated financial statements for the twelve months ended
BASIS OF CONSOLIDATION The consolidated financial statements include the financial statements of SIAF, its subsidiaries Capital Award, CS, CH, TRW, MEIJI, JHST, JFD, JHMC, HSA, APWAM, SAFS and its variable interest entities SJAP and QZH. All material inter-company transactions and balances have been eliminated in consolidation. The results of companies acquired or disposed of during the year are included in the consolidated Financial Statements from the effective date of acquisition. BUSINESS COMBINATIONS The Company adopted the accounting pronouncements relating to business combinations (primarily contained in ASC Topic 805 "Business Combinations"), including assets acquired and liabilities assumed arising from contingencies. These pronouncements established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquire as well as provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, these pronouncements eliminate the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria and require an acquirer to develop a systematic and rational basis for subsequently measuring and accounting for acquired contingencies depending on their nature. Our adoption of these pronouncements will have an impact on the manner in which we account for any future acquisitions.
NON - CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted the accounting pronouncement on non-controlling interests in
consolidated financial statements, which establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This guidance is primarily contained in ASC
Topic "Consolidation". It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated financial statements.
The adoption of this standard has not had material impact on our consolidated
financial statements.
- 68 -
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make assumptions and estimates that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods covered thereby. Actual
results could differ from these estimates. Judgments and estimates of
uncertainties are required in applying the Company's accounting policies in
certain areas. The following are some of the areas requiring significant
judgments and estimates: determinations of the useful lives of assets, estimates
of allowances for doubtful accounts, cash flow and valuation assumptions in
performing asset impairment tests of long-lived assets, estimates of the
reliability of deferred tax assets and inventory reserves.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with ASC 605. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer. Service revenue is recognized when services have been rendered to a buyer by reference to the stage of completion. License fee income is recognized on the accrual basis in accordance with the underlying agreements. Government grants are recognized upon (i) the Company has substantially accomplished what we must be done pursuant to the terms of the policies and terms of the grant that are established by the local government; and (ii) the Company receives notification from the local government that the Company has satisfied all of the requirements to receive the government grants; and or (iii) the amounts are received.
Multiple-Element Arrangements
To qualify as a separate unit of accounting under ASC 605-25"Multiple Element Arrangements", the delivered item must have value to the customer on a standalone basis. The significant deliverables under the Company's multiple-element arrangements are consulting and service under development contract, commission and management service.
Revenues from the Company's fishery development services contract are performed under fixed-price contracts. Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting in accordance with theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition ("ASC 605"). Under the percentage-of-completion method, the Company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognized that profit over the contract term. The percentage of costs incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the installation contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as either costs or estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts.
The Company determines a customer's credit worthiness at the time an order is accepted. Sudden and unexpected changes in a customer's financial condition could put recoverability at risk.
The percentage of completion method requires the ability to estimate several
factors, including the ability of the customer to meet its obligations under the
contract, including the payment of amounts when due. If the Company determines
that collectability is not assured, we will defer revenue recognition and use
methods of accounting for the contract such as the completed contract method
until such time as the Company determines that collectability is reasonably
assured or through the completion of the project.
- 69 -
For fixed-price contracts, the Company uses the ratio of costs incurred to date on the contract (excluding uninstalled direct materials) to management's estimate of the contract's total costs, to determine the percentage of completion on each contract. This method is used as management considers expended costs to be the best available measure of progression of these contracts. Contract costs included all direct material, subcontract and labor costs and those indirect costs related to contract performance, such as supplies, tool repairs and depreciation. The Company accounts for maintenance and repair services under the guidance of ASC 605 as the services provided relate to construction work. Contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract. Changes in job performance, job conditions, and estimated profitability arising from contract penalty, change orders and final contract settlements may result in revisions to the estimated profitability during the contract. These changes, which include contracts with estimated costs in excess of estimated revenues, are recognized as contract costs in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. At the point the Company anticipates a loss on a contract, the Company estimates the ultimate loss through completion and recognizes that loss in the period in which the possible loss was identified. The Company does not provide warranties to customers on a basis customary to the industry; however, the customers can claim warranty directly from product manufacturers for defects in equipment or products. Historically, the Company has experienced no warranty claims. The Company's fishery development consultancy services revenues are recognized when the relevant services are rendered, and are subject to a Chinese business tax at a rate of 0% of the gross fishery development contract service income approved by the Chinese local government.
COST OF GOODS SOLD AND SERVICES
Cost of goods sold consists primarily of direct purchase cost of merchandise goods, and related levies. Cost of services consists primarily of direct cost and indirect cost incurred to date for development contracts and provision for anticipated losses on development contracts. SHIPPING AND HANDLING
Shipping and handling costs related to cost of goods sold are included in
general and administrative expenses, which totaled
ADVERTISING Advertising costs are included in general and administrative expenses, which totaled$956,056 , and$1,541,484 for the years endedDecember 31, 2019 and
2018, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are included in general and administrative expenses, which totaled$855,167 and$453 , 378 for the years ended December
31, 2019 and 2018, respectively. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents kept with financial institutions inthe People's Republic of China ("PRC") are not insured or otherwise protected. Should any of those institutions holding the Company's cash become insolvent, or the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit on that institution. ACCOUNTS RECEIVABLE The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis. - 70 - The standard credit period of the Company's most of customers is three months. Any amount that has an extended settlement date of over one year is classified as a long term receivable. Management evaluates the collectability of the receivables at least quarterly. There was a written off on bad debts of$14,394,402 arising due to the dispose of QZH for the twelve months endedDecember 31, 2019 or (2018: Nil) INVENTORIES Inventories are valued at the lower of cost (determined on a weighted average basis) and net realizable value. Costs incurred in bringing each product to its location and conditions are accounted for as follows:
• raw materials - purchase cost on a weighted average basis;
• manufactured finished goods and work-in-progress - cost of direct
materials and labor and a proportion of manufacturing overhead based on
normal operation capacity but excluding borrowing costs; and
• retail and wholesale merchandise finished goods - purchase cost on a
weighted average basis.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Such costs include the cost of replacing parts that are eligible for capitalization when the cost of replacing the parts is incurred. The assets' residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at the end of each year. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Milk cows 10 years Plant and machinery 5 - 10 years
Structure and leasehold improvements 10 - 30 years Mature seed and herbage cultivation 20 years Furniture, fixtures and equipment 2.5 - 10 years Motor vehicles
4 - 10 years
An item of property and equipment is removed from the accounts upon disposal or
when no future economic benefits are expected to arise from the continued use of
the asset. Any gain or loss arising on disposal of the asset (calculated as the
difference between the net disposal proceeds and the carrying amount of the
item) is included in the consolidated statements of income in the period the
item is disposed.
GOODWILL
Goodwill is an asset representing the fair economic benefits arising from other
assets acquired in a business combination that are not individually identified
and separately recognized. Goodwill is tested for impairment on an annual basis
at the end of the company's fiscal year, or when impairment indicators arise.
The Company uses a fair-value-based approach to test for impairment at the level
of each reporting unit. The Company directly acquired MEIJI, which is engaged in
Hu Plantation . As a result of this acquisition, the Company recorded goodwill in
the amount of $724,940 . This goodwill represents the fair value of the assets
acquired in these acquisitions over the cost of the assets acquired.
PROPRIETARY TECHNOLOGIES
The Company has determined that technological feasibility is established at the time a working model of products is completed. Master license of stock feed manufacturing technology was acquired and the costs of acquisition were capitalized as proprietary technologies when technological feasibility had been established. Proprietary technologies are intangible assets of finite lives. Proprietary technologies are amortized using the straight-line method over
their
estimated lives of 25 years.
- 71 -
An aromatic cattle-feeding formula was acquired and the costs of acquisition are
capitalized as proprietary technologies when technological feasibility has been
established. Cost of acquisition on aromatic cattle-feeding formula is amortized
using the straight-line method over its estimated life of 20 years.
The cost of sleepy cod breeding technology license is capitalized as proprietary technologies when technological feasibility has been established. Cost of granting sleepy cod breeding technology license is amortized using the straight-line method over its entitled life of 25 years.
Bacterial cellulose technology license and related trademark are capitalized as proprietary technologies when technological feasibility has been established. Cost of license and related trademark is amortized using the straight-line method over its estimated life of 20 years. Management evaluates the recoverability of proprietary technologies on an annual basis of the end of the company's fiscal year, or when impairment indicators arise. As required by ASC Topic 350 "Intangible -Goodwill and Other", the Company uses a fair-value-based approach to test for impairment. CONSTRUCTION IN PROGRESS
Construction in progress represents direct costs of construction as well as acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use. LAND USE RIGHTS Land use rights represent acquisition of land use right rights of agriculture land from farmers and are amortized on the straight line basis over the respective lease periods. The lease period of agriculture land is in the range from 10 years to 60 years. Land use rights purchase prices were determined in accordance with the PRC Government's minimum lease payments of agriculture land and mutually agreed between the company and the vendors. No independent professional appraiser performed a valuation of land use rights at the balance sheet dates. CORPORATE JOINT VENTURE A corporation formed, owned, and operated by two or more businesses (ventures) as a separate and discrete business or project (venture) for their mutual benefit is considered to be a corporate joint venture. Investee entities, in which the company can exercise significant influence, but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the company's share of the earnings or losses of these companies is included in net income.
A loss in value of an investment that is other than a temporary decline is recognized as a charge to operations. Evidence of a loss in value might include, but would not necessarily be limited to absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.
VARIABLE INTEREST ENTITY An entity (investee) in which the investor has obtained less than a majority-owned interest, according to theFinancial Accounting Standards Board (FASB). A variable interest entity (VIE) is subject to consolidation if a VIE is an entity meeting one of the following three criteria as elaborated in ASC
Topic 810-10, Consolidation.
(a) the equity-at-risk is not sufficient to support the entity's activities;
(b) as a group, the equity-at-risk holders cannot control the entity; or
(c) the economics do not coincide with the voting interests.
- 72 -
If a firm is the primary beneficiary of a VIE, the holdings must be disclosed on
the balance sheet. The primary beneficiary is defined as the person or company
with the majority of variable interests.
TREASURY STOCK
Treasury stock consists of a Company's own stock which has been issued, but is subsequently reacquired by the Company.Treasury stock does not reduce the number of shares issued but does reduce the number of shares outstanding. These shares are not eligible to receive cash dividends. Accounting for excesses and deficiencies on treasury stock transactions is governed by ASC 505-30-30.
State laws and federal agencies closely regulate transactions involving a company's own capital stock, so the purchase of outstanding shares and converting them into treasury shares must have a legitimate purpose. Some of the most common reasons for purchasing outstanding shares are as follows:
(i) to meet additional stock needs for various reasons, including newly implemented stock option plans, the issuance stock for convertible bonds or convertible preferred stock, or a stock dividend;
(ii) to eliminate the ownerships interests of a stockholder;
(iii) to increase the market price of the stock that returns capital to shareholders; and
(iv) to potentially increase earnings per share of the stock by decreasing the shares outstanding on the same earnings.
The Company has adopted the cost method of accounting for treasury stock shares. The purchase of outstanding shares is treated as a temporary reduction in shareholders' equity in view of the expectation to reissue the shares instead of retiring them. When the Company reissues the treasury shares, the temporary account is eliminated. The cost of treasury stock shares reacquired is charged to a contra account, in this case a contra equity account that reduces the
stockholder equity balance. INCOME TAXES The Company accounts for income taxes under the provisions of ASC 740 "Accounting for Income Taxes." Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred taxes area accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also adjusted in the equity accounts. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. ASC 740 also prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in
tax
expense.
- 73 -
POLITICAL AND BUSINESS RISK
The Company's operations are carried out in the PRC Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe . The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS
In accordance with ASC 360, "Property, Plant and Equipment", long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, at the end of each fiscal year. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As ofDecember 31, 2017 , the Company's impairment on interests in an unconsolidated investee of$153,046 was recorded.(2016: Nil). EARNINGS PER SHARE As prescribed in ASC Topic 260 "Earning per Share," Basic Earnings per Share ("EPS") is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common stock shares outstanding during the year plus potential dilutive instruments such as stock options and warrants. The effect of stock options on diluted EPS is determined through the application of the treasury stock method, whereby proceeds received by the Company based on assumed exercises are hypothetically used to repurchase the Company's common stock at the average market price during the period. For the years endedDecember 31 , 2019and 2018, basic (loss)/earnings per share attributable toSino Agro Food, Inc. and subsidiaries common stockholders amounted to$(0.21) and$0.46 , respectively. For the years endedDecember 31, 2019 and 2018, diluted (loss)/earnings per share attributable toSino Agro Food, Inc. and its subsidiaries' common stockholders amounted to$(0.21) and$0.46 , respectively.
FOREIGN CURRENCY TRANSLATION
The reporting currency of the Company is theU.S. dollars. The functional currency of the Company is the Chinese Renminbi (RMB). For those entities whose functional currency is other than theU.S. dollars, all assets and liabilities are translated intoU.S. dollars at the exchange rate on the balance sheet date; shareholder equity is translated at historical rates and items in the statements of income and of cash flows are translated at the average rate for the period. Because cash flows are translated based on the weighted average translation rate, amounts related to assets and liabilities reported in the statements of cash flows will not necessarily agree with changes in the corresponding balances in the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statements of equity.
For the fiscal year ended
Translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of income and comprehensive income as incurred. The balance sheet amounts with the exception of equity as ofDecember 31 2019 andDecember 31, 2018 were translated atRMB6.98 to$1.00 andRMB6.86 to$1.00 , respectively. The average translation rates applied to the consolidated statements of income and comprehensive income and of cash flows for the years endedDecember 31, 2019 andDecember 31 2018 wereRMB6.87 to$1.00 andRMB6.61 to$1.00 , respectively. - 74 -
For the fiscal year ended
Translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of income and comprehensive income as incurred. The balance sheet amounts with the exception of equity as ofDecember 31 2018 andDecember 31, 2017 were translated atRMB6.86 to$1.00 andRMB6.53 to$1.00 , respectively. The average translation rates applied to the consolidated statements of income and comprehensive income and of cash flows for the years endedDecember 31, 2018 andDecember 31 2017 wereRMB6.61 to$1.00 andRMB6.75 to$1.00 , respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME
ASC Topic 220 "Comprehensive Income"establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders' equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments. RETIREMENT BENEFIT COSTS PRC state managed retirement benefit programs are defined contribution plans and the payments to the plans are charged as expenses when employees have rendered service entitling them to the contribution.
STOCK-BASED COMPENSATION
The Company adopts both ASC Topic 718, "Compensation - Stock Compensation" and ASC Topic 505-50,"Equity-Based Payments to Non-Employees" using the fair value method in which an entity issues its equity instruments to acquire goods and services from employees and non-employees. Stock compensation for stock granted to non-employees has been determined in accordance with this accounting standard and the accounting standard regarding accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling goods or services, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured. This accounting standard allows the "simplified" method to determine the term of employee options when other information is not available. Under ASC Topic 718 and ASC Topic 505-50, stock compensation expenses is measured at the grant date on the value of the option or restricted stock and is recognized as expenses, less expected forfeitures, over the requisite service period, which is generally the vesting period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards
Codification for disclosures about fair value of its financial instruments and
paragraph 820-10-35-37 of the FASB Accounting Standards Codification ("Paragraph
820-10-35-37") to measure the fair value of its financial instruments. Paragraph
820-10-35-37 establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America (U.S. GAAP), and
expands disclosures about fair value measurements. To increase consistency and
comparability in fair value measurements and related disclosures, Paragraph
820-10-35-37 establishes a fair value hierarchy, which prioritizes the inputs to
valuation techniques used to measure fair value into three (3) broad levels. The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in
active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The three (3) levels of fair value hierarchy defined by
Paragraph 820-10-35-37 are described below:
NEW ACCOUNTING PRONOUNCEMENTS
The Company does not expect any recent accounting pronouncements to have a material effect on the Company's financial position, results of operations, or cash flows.
- 75 -
In May 2014 , the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606)
(ASU 2014-09), which amends the existing accounting standards for revenue
recognition. In August 2015 , the FASB issued ASU No. 2015-14, Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date, which
delays the effective date of ASU 2014-09 by one year. The FASB also agreed to
allow entities to choose to adopt the standard as of the original effective
date. In March 2016 , the FASB issued Accounting Standards Update No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which
clarifies the implementation guidance on principal versus agent considerations.
The guidance includes indicators to assist an entity in determining whether it
controls a specified good or service before it is transferred to the customers.
The new standard further requires new disclosures about contracts with
customers, including the significant judgments the company has made when
applying the guidance. We will adopt the new standard effective January 1, 2018 ,
using the modified retrospective transition method. We finalized our analysis
and the adoption of this guidance will not have a material impact on our
consolidated financial statements.
In February 2016 , the FASB issued Accounting Standards Update
No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires
companies to recognize operating and financing lease liabilities and
corresponding right-of-use assets on the balance sheet. This guidance will be
effective for us in the first quarter of 2019 on a modified retrospective basis
and early adoption is permitted. We will adopt the new standard effective
January 1, 2019 . We have selected a lease accounting system and we are in the
process of implementing such system as well as evaluating the use of the
optional practical expedients. While we continue to evaluate the effect of
adopting this guidance on our consolidated financial statements and related
disclosures, we expect our operating leases, as disclosed in Note 9 -
Commitments and Contingencies, will be subject to the new standard. We will
recognize right-of-use assets and operating lease liabilities on our
consolidated balance sheets upon adoption, which will increase our total assets
and liabilities.
In October 2016 , the FASB issued Accounting Standards Update No. 2016-16, Income
Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16),
which requires companies to recognize the income-tax consequences of an
intra-entity transfer of an asset other than inventory when the transfer occurs,
rather than when the asset has been sold to an outside party. We will adopt the
new standard effective January 1, 2018 , using the modified retrospective
transition approach through a cumulative-effect adjustment to retained earnings
as of the effective date. A cumulative-effect adjustment will capture the
write-off of income tax consequences deferred from past intra-entity transfers
involving assets other than inventory, new deferred tax assets, and other
liabilities for amounts not currently recognized under U.S. GAAP. Based on
transactions up to December 31, 2017 , we do not expect the adoption of this
guidance to have a material impact on our consolidated financial statements.
In November 2016 , the FASB issued Accounting Standards Update
No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18),
which requires companies to include amounts generally described as restricted
cash and restricted cash equivalents in cash and cash equivalents when
reconciling beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. We will adopt the new standard effective January 1,
2018 , using the retrospective transition approach for all periods presented. We
do not expect the adoption of this guidance to have a material impact on our
consolidated financial statements.
In January 2017 , the FASB issued Accounting Standards Update
No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business (ASU 2017-01), which revises the definition of a business and provides
new guidance in evaluating when a set of transferred assets and activities is a
business. We will adopt the new standard effective January 1, 2018 , on a
prospective basis and do not expect the standard to have a material impact on
our consolidated financial statements.
In January 2017 , the FASB issued Accounting Standards Update
No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment (ASU 2017-04), which eliminates step two from the
goodwill impairment test. Under ASU 2017-04, an entity should recognize an
impairment charge for the amount by which the carrying amount of a reporting
unit exceeds its fair value up to the amount of goodwill allocated to that
reporting unit. This guidance will be effective for us in the first quarter of
2020 on a prospective basis, and early adoption is permitted. We do not expect
the standard to have a material impact on our consolidated financial statements.
Although there are several other new accounting pronouncements issued or
proposed by the FASB, which the Company has adopted or will adopt, as
applicable, the Company does not believe any of these accounting pronouncements
has had or will have a material impact on its consolidated financial position,
operating results or statements of cash flows.
- 76 -
l Other relevant historical events and subsequent matters:
l Historical bridge financing
The bulk of the Company's agriculture-zoned land banks are owned by the Government that through land-usage rights permit the Company to develop properties, but to which no property title can be granted for them to be recognized as first-tier assets from which to borrow against, thus making obtaining any conventional lending based on those assets, virtually impossible to attain. Therefore, up until the time that the Company secured the convertible loan of$25m from ECAB, the Company's capital expenditures had been financed strictly through many individual investors and private entities either through private placements, debt, or services rendered to the Company settled with common shares. l Debt Conversion: From 2010 to present, part of the capital funding realized by the Company has been by issuing shares to some of the unrelated third parties consisting of service providers, suppliers, lenders, and debtors, etc., totaling 38,809,550 shares.
l Shares issued to staff, management, professional consultants and agencies to date of this report amount to 7,479,675 shares.
Since the beginning of the Company's operations inChina the Company provided share entitlement programs to selective staff and personnel that exemplified services and performance beyond their standard responsibilities; the annual amount capped at$1.5 million from 2007 to 2013, and increased to$2.5 million to present date with share values calculated at their respective market rates with the understanding that the Company reserves the right to defer share distribution until a later date, based on the Company's assessment that market prices may improve and/or the rate at which they are issued could help mitigate any impact they could pose to the market.
Also, shares have been issued to professional consultants and agencies for services rendered that were pre-approved by the Company and written into their respective service contracts, some requiring immediate payment and others allowing their shares to be distributed over a period of time.
l Collateral shares: This includes the Trade Facility consisting of 5,708,312 collateral shares, and Third-Party Loans consisting of 2,662,735 collateral shares, collectively that do not hold voting or dividend rights to be returned to the Company upon repayment. The maturity date on the Third-Party Loans and Trade Facility originally run through to30th September 2019 that was subsequently extended to30th September 2021 due to the impacts of the Covid-19 events, however reduction of the Trade Facility line from$20,000,000 to$13,000,000 and the third parties' loan debt has been reduced from$10,428,034 to$2,103,000 as atDecember 31st 2019 .. l The total consideration received from the above referred issuance of shares for$181,198,847 (fully paid up capital) together with (i) retained earnings of$458,811,844 , (ii) accumulated other comprehensive income of ($10,415,786 ) and (ii) treasury stock of (1,250,000) forms the Company's total equity (or, net assets) of$628,696,980 asDecember 31, 2019 (the equivalent of$16.83 /share representing a decrease of$1.70 /share compares to 2018's$18.53 /share). l The Company experienced a bad year in 2018 with SJAP suffered operation losses exceeding$30 million due to the down-turn of the cattle industry inChina coupled with the over spending on capital expenditure on Phase (1) of theMega Farm Project which exceeded the original budget ofUS$50 million by more than 60% and the operation of AF4 (Production factory 1), the operation of AF5 (Production factory 2) and the open dams at theMega Farm Project had a poor start and performed badly in 2018 suffering heavy losses such that by the first half of 2019, the Mega farm project had incurred debts over$4.5 million that really affected and tightened the Company's cash-flow. At the same time, although the Company tried and worked extremely diligently to pursue some of the short term and long term loans the Company has been applying yet none of them was materialized enhancing the reason of why the Company had to issue over 20 million shares and 10 million shares to redeem part of its outstanding debts in 2019 and 2020 respectively. - 77 - l There was no loan made during 2019.
l The Company remains committed to minimize any further use of equity in helping to bridge finance its operations yet remains open to the use of equity whenever it serves the purpose of securing conventional financing and other purposes accretive to the Company and its shareholders.
l Third Party Loans to Tri-way (related party) secured by shares of the Company:
The Company has depended from time to time on bridge loan financing, namely from
four individual third parties ("ITP") whose loans had been repaid either in
cash, shares or both. The issuance of shares (referred to as "Debt Settlement")
was in practice until the time that the Company committed in its August 14, 2014
Convertible Bond agreement with ECAB to discontinue repayment of loans through
the issuance of Debt Settlement shares.
As it was mentioned in the 10-K for the fiscal year ended 2018, the ITP loans
(provided through the same third parties) were provided to Tri-way ("Borrower")
with the final agreement entered into on August 5, 2016 ; the loan proceeds
having been incrementally received between July 15, 2016 through September 28,
2016 for a total net principal amount of $10,428,034 at interest free term
collateralized by 2.66 million shares (inclusive all top-up shares) matures by
23, September 2019 that was extended to 23rd September 2021 under corresponding
addendums dated 20th September 2019 . When the loan principal amount will be
fully repaid the collateralized shares will be returned to the Company. As of
the date of this report, there is $2,103,000 outstanding in this ITP.
General terms of the loans, include:
a)
loan principal, interest, closing and any other related loan costs.
b) SIAF, on behalf of Tri-way, acts as "Security Provider" providing shares
of common stock as collateral against the loans.
c) SIAF's only liability is contingent upon failure of Tri-way to repay the
loan. Since the shares have not been sold, but strictly are utilized as
security collateral, and, to date, have not incurred further liability to
SIAF, the Company has recorded the Consideration (Face Value
; LTV
(collateral) shares, which are reported in our Qs and Ks, accordingly.
l The Trade Facility secured by shares of the Company:
As it was stated in the 10K 2017 report that "The Trade Facility" was originally entered into onSeptember 22, 2015 that was finalized into an agreement datedJune 17th 2016 consisting of SIAF having securitized the loan with 2,133,333 of its common shares valued at$12.50 /share equivalent to the full face-value of the loan ($26,666,666 ), and the TPA having the full use of the trade facility to borrow and repay, against, as warranted, i.e. revolving LOC.
As such, the principal terms of this agreement are:
· SIAF acts as "Security Provider" to initiate the Trade Facility to be employed.
· The Third-Party Agent ("TPA") (described as an Import & Export Trading House
in Shanghai acting as distribution agent for the Company) is the responsible
party to cover loan principal, interest, closing and any other related loan
costs.
· SIAF's only liability is contingent upon failure of TPA to repay the loan.
Since the shares are strictly utilized as security collateral, and, to date,
have not incurred further liability to SIAF, the Company has recorded the
Consideration (Face Value: $26,666,666 ; LTV: $20,000,000 ) as Non-Current Assets,
offset by the issuance of collateral shares. The loan's face value is to be
secured by 133% of the value of the collateralized shares calculated to the
prevailing market values from time to time based on request of the facility
provider.
l Shares issued as security were not issued for market trading, but as security
against the loan required to be returned to SIAF upon full loan repayment by
TPA, which, to date, has not incurred any liability to the Company.
- 78 -
As of December 31, 2018 there were a total of 5,708,312 shares (inclusive of top
up shares) issued as collateral for the Trade Facility carrying an average value
at $2.63 /share, which still stands well above SIAF's current market value.
TPA repaid $5,000,000 in Cash payment on December 19th 2018 to the Trade
Facility Provider and agreed to have its facility face-value reduced to
$20,000,000 and the net amount employed to $15,000,000 . This amended arrangement
was agreed to avoid further issuance of shares due to the current share price.
As at December 31, 2019 PA has further reduced the net amount employed to $13
million and corresponding loan agreement was extended to December 31st 2021
caused and due to the Covid-19 situations.
l Information related to Tri-way Industries Limited (The unconsolidated
investee of the Company)
Some of the information listed below were reported in 10K 2018 and recapped for 2019
l The disposal of JFD and Tri-way (The Carve-out exercise)
At present, Tri-way remains a private company, but it is intended to be registered at theHong Kong Stock Exchange within a few years. The Company's ownership in Tri-way has been valued atUSD 124.7 million , equal to 36.6% of the enterprise value ofUSD 340.6 million . This includes (i) 23.89% (EV =USD 81.4 million ) as a result of retained interest in Tri-way, and (ii) 12.71% (EV =USD 43.3 million ) acquired in exchange for outstanding debt owed to the Company. These values result from Aquafarm 1, assets held in Aquafarms 2-5 and rights to technology licensed from Capital Award, a wholly owned subsidiary of the Company. An independent appraisal was obtained to determine fair value, and this appraisal resulted in a one-time (deemed) gain ofUSD 56.9 million for SIAF, as further detailed, below. Amounts shown incorporate audited adjustments: HK$ HK$ $ equivalent Fair value of interest retained in Tri-way (US$340,594,377 x 23.89%) 630,601,974 81,367,997 Less: Amount recognized prior to divestment of Tri-way Net asset of Tri-way 251,946,656 32,509,246 Non-controlling interest at divestment -62,683,968 8,088,254
Controlled group assets divested 189,262,688 24,420,992 Gain on disposal (including master licensing fees) 441,339,286 56,947,005 Net controlled group assets disposed ($27,872,348 x 76.11%) -144,047,832 -18,586,817 Gain on revaluation of retained interest Fair value of interest retained in Tri-way 630,601,974 81,367,997 Portion of divested assets retained in Tri-way ($27,872,348 x 23.89%) -45,214,856 -5,834,175 Gain on disposal (including master licensing fees) 441,339,286 56,947,005 l Table X below shows the derivation of $/shares after the injection of farms' assets Fair
values of Injected farms' assets
Inclusive respective indoor and open dams properties
US$1 =RMB6.7 FF1 PF1 PF2 PF3 PF4
Aqua Farm 4 Aqua Farm 5 Master License Total
In US$ equivalent US$ US$ US$ US$ US$ US$ US$
The Chattels 8,787,115.6 4,199,237.9 21,338,881.5 33,609,047.1 - - 67,934,282.1
The P&E 5,148,769.2 5,391,657.1 2,326,044.8 24,045,576.5 - - 36,912,047.6
The Intellectual
Properties 5,672,862.0 6,348,029.3 13,669,794.7
30,228,181.0 69,053,863.7 30,000,000.0 154,972,730.
11,883,710.4 - - 45,633,204.4
Immovable
structures 5,672,862.0 9,897,263.4 9,080,438.4 8,597,279.9 1,894,268.2 - 35,142,111.9
Total values 33,538,479.5 38,668,951.9 59,075,018.4
108,363,794.9 70,948,132.0 30,000,000.0 340,594,376.7
- 79 -
Equity shares of Tri-way Industrial Limited (HK)
Par value Share Capital Value/share
# of shares HK$ HK$ US$ equivalent HK$ US$ equivalent
Shares issued
prior to
Injection 10,000 1 10,000 1,299 1 0.13
Addition shares
issued afterinjection 99,990,000 1 2,622,576,701
340,594,377
Total Issued
shares 100,000,000 1 2,622,586,701 340,595,675 26.23 3.41
l Relevant dates of the transactions:
118-AUG-2016 Execution of Investment Agreement (IA) 218-AUG-2016 Jiangman Fishery Development Co. Ltd (JFD) acquired 25% ofGuangzhou Kangi Enterprize Management Co. Ltd such that JFD becomes 100% owned byTri-way Industries Limited (HK) (Tri-way) 318-AUG-2016 Effective Date that Investors agreed to inject their respective assets and businesses into the Assets Recipient, JFD, at the exchange value described in the Investment Agreement. 4.30-SEP-2016 SIAF assumed ownership of Tri-way's original assets in exchange for its original investment in Tri-way, in conjunction with TRW/JFD's exercise of other farm assets owned by other investors injected into it, as well. 5.05-OCT-2016 Completion Date on which Tri-way, with JFD having assumed ownership of said farms' assets (inclusive, all farms), allocated equitable allotments of shares to the Investors (or, their Nominees) in exchange for their injected farms' assets. In reference to the press release datedJanuary 17, 2017 , wherein the Company had indicated that legal due diligence had been completed in relation to the carve-out of its aquaculture operations, the announcement that legal due diligence had been performed had been released in conjunction with what had been the main announcement, which was SIAF wishing to convey to its shareholders that JFD had been officially registered as a Wholly Foreign Owned Enterprise of Tri-way, making it legally eligible for SIAF shareholders to now own shares
of Tri-way, directly. l The list of shareholders of record in Tri-way filed withHong Kong Company Registrar: Owner Shares % Sino Agro Food (OTCQX:SIAF) 36,590,000 36,6 % Ample Rise Limited 1,650,000 1.6 % Fortune Legend Investments Limited 2,750,000 2,8 % Sino Agro Food (HK) Limited 31,998,572 32 % Good Sea Limited 4,250,000 4,3 % Green & Natural Limited 3,250,000 3,3 % Lucky Shine Development Limited 2,750,000 2,8 % Yongfeng Agricultural Investment Co 4,180,068 4,2 % The Business Advocate 4,521,360 4,5 % Fine Happy Limited 2,750,000 2,8 % Flying Cristal Limited 4,200,000 4,2 % Mr.Arne Fredly and Heng Ren Sild Roads Mr. Arne Fredly and Heng Ren Sild Roads 1,100,000 1.1 - 80 -
Based on information which has been filed with the Hong Kong Companies Registrar and which is publicly available, the following information can be provided
about the shareholders of record:
Ø
ØSino Agro Food (HK) Limited , holding 32%, is primarily formed as a holding company for certain outside owners (ownership interests in Aquafarms 2-5, other than the Company) that when combined with the ownership of the Company provides a majority voting block (68.6%) necessary to meet minimum listing requirements inHong Kong for adequate "continuation of management/operations". The Company has no ownership inSino Agro Food (HK) Limited . ØThe Business Advocate (4.5%) andFlying Cristal Limited (4.2%) are companies appointed by Tri-way to hold in trust on behalf of certain holders of debt owed by Aquafarms 2-5 to keep shares in reserve in the event that their respective debts owed are converted to equity, at maturity. The debt in question relates to costs of development of the Aquafarms 2-5 incurred in connection with the development and construction stages.
Ø The remaining smaller holding companies are held by Nominees of ownership interests in Aquafarms 2-5 with their related Beneficial Owners becoming registered at the time that Tri-way becomes a registered public company.
The carve-out ofTri-way Industries Inc. ("Tri-way") fromSino Agro Food Inc. is not a related party transaction. Tri-way is held at 36.6 % by the Company and is thus considered an investment in associate and no longer registered as a subsidiary of the Company. Transactions made in connection with the carve-out process are with entities/parties not related to the Company.Sino Agro Food (HK) Limited is not an affiliate of the Company. To this effect, its directors or officers have not been nor are they currently an officer, director, 10% (or greater) shareholder, or in any other way an affiliate of the Company as that term is defined by Rule 405 of theU.S. Securities Act of 1933, and are not directly or indirectly through one or more intermediaries, in control of, controlled by, or under common control with the Company. No board members ofSino Agro Food Inc. , nor members of management ofSino Agro Food Inc. , have any positions in the Board of Directors or management ofSino Agro Food (HK) Limited . GOVERNMENT REGULATION
Regulation of M&A and Overseas Listings
OnAugust 8, 2006 , six PRC regulatory agencies, including theMinistry of Commerce (the "MOFCOM"), theState Assets Supervision and Administration Commission , theState Administration of Taxation ("SAT"), theState Administration of Industry and Commerce (the "SAIC"), theChina Securities Regulatory Commission ("CSRC"), and theState Administration of Foreign Exchange (the "SAFE"), jointly issued the Regulations on Mergers and Acquisitions ofDomestic Enterprises by Foreign Investors (the "M&A Rules"), which became effective onSeptember 8, 2006 and was amended onJune 22, 2009 . The M&A Rules include provisions that purport to require that an offshore special purpose vehicle formed for purposes of the overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle's securities on an overseas stock exchange. OnSeptember 21, 2006 , the CSRC published on its official Website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC. The application of this new PRC regulation remains unclear, with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement. - 81 - The M&A Rules also establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise. InFebruary 2011 , theGeneral Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions ofDomestic Enterprises by Foreign Investors ("Circular 6"), which established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having "national defense and security" concerns and mergers and acquisitions by which foreign investors may acquire "de facto control" of domestic enterprises with "national security" concerns. InAugust 2011 , the MOFCOM promulgated the Rules on Implementation of Security Review System (the "MOFCOM Security Review Rules"), to replace the Interim Provisions of theMinistry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and Acquisitions ofDomestic Enterprises by Foreign Investors promulgated by the MOFCOM inMarch 2011 . The MOFCOM Security Review Rules, which came into effect onSeptember 1, 2011 , provide that the MOFCOM will look into the substance and actual impact of a transaction and prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
Regulation of Foreign Currency Exchange and Dividend Distribution
The principal regulations governing foreign currency exchange inChina are the Foreign Exchange Administration Regulations (the "FX Regulations"), which were last amended inAugust 2008 . Under the FX Regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. OnAugust 29, 2008 , the SAFE issued a notice, Circular 142, regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that the registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, the SAFE increased its oversight of the flow and use of the registered capital of a foreign-invested company settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without the SAFE's approval, and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result, Circular 142 may significantly limit our ability to transfer cash or other assets from The Company and/or our other non-PRC subsidiaries into our subsidiaries in the PRC, which may adversely affect our business expansion and we may not be able to convert the net proceeds into RMB to invest in or acquire any other PRC companies, or establish other variable interest entities ("VIEs") in the PRC. Dividends paid by a PRC subsidiary to its overseas shareholder are deemed income of the shareholder and are taxable in the PRC. Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in the PRC may purchase or remit foreign currency, subject to a cap approved by the SAFE, for settlement of current account transactions without the approval of the SAFE. Foreign currency transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities. InOctober 2005 , the SAFE promulgated the Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Corporate Financing andRoundtrip Investment through Offshore Special Purpose Vehicles ("Circular 75"). Under Circular 75, which was issued by SAFE effectiveNovember 1, 2005 , prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to the registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore company. Moreover, Circular 75 applies retroactively. As a result, PRC residents who, prior toNovember 1, 2005 , had established or acquired control of offshore companies that had made onshore investments in the PRC prior to were required to complete the relevant registration procedures with the local SAFE branch byMarch 31, 2006 . - 82 - SinceMay 2007 , the SAFE has issued a series of guidance to its local branches with respect to the operational process for the SAFE registration under Circular 75. The guidance provides more specific and stringent supervision of the registration required by Circular 75. For example, the guidance imposes obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to the local SAFE authorities regarding any shareholder or beneficial owner of the offshore entity who is a PRC citizen or resident. Untrue statements by the onshore subsidiaries will lead to potential liability for the subsidiaries and, in some instances, for their legal representatives and other related individuals. Under the relevant rules, failure to comply with the registration procedures set forth in Circular 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including increases in its registered capital, payment of dividends and other distributions to its offshore parent or affiliate and capital inflows from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC residents who control our company from time to time are required to register with the SAFE in connection with their investments in us. OnDecember 25, 2006 , thePeople's Bank of China (the "PBOC") issued the Administration Measures on Individual Foreign Exchange Control and related Implementation Rules were issued by the SAFE onJanuary 5, 2007 . Both became effective onFebruary 1, 2007 . Under these regulations, all foreign exchange transactions involving an employee share incentive plan, share option plan, or similar plan participated in by onshore individuals may be conducted only with approval from the SAFE or its authorized branch. Under the Notice of Issues Related to theForeign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan ofOverseas Listed Company ("Offshore Share Incentives Rules"), which was issued by the SAFE onFebruary 15, 2012 , PRC citizens who are granted share options, restricted share units or restricted shares by an overseas publicly listed company are required to register with the SAFE or its authorized branch and to comply with a series of other requirements. If we, or the PRC employees of ours who hold options, restricted share units or restricted shares fail to comply with these registration or other procedural requirements, we, and/or such employees may be subject to fines and other legal sanctions. The principal regulations governing distribution of dividends of foreign holding companies include the Foreign Investment Enterprise Law (1986), which was amended inOctober 2000 , and the Administrative Rules under the Foreign Investment Enterprise Law (2001). Under these regulations, foreign investment enterprises inChina may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises inChina are required to allocate at least 10% of their accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.
Laws and Regulations Related to Employment and Labor Protection
OnJune 29, 2007 , theNational People's Congress promulgated the Employment Contract Law of PRC ("Employment Contract Law"), which became effective as ofJanuary 1, 2008 , and was amended onDecember 28, 2012 . The Employment Contract Law requires employers to provide written contracts to their employees, restricts the use of temporary workers and aims to give employees long-term
job security. Pursuant to the Employment Contract Law, employment contracts lawfully concluded prior to the implementation of the Employment Contract Law and continuing as of the date of its implementation shall continue to be performed. Where an employment relationship was established prior to the implementation of the Employment Contract Law but no written employment contract was concluded, a contract must be concluded within one month after its implementation.
On
As of
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Income Tax
OnMarch 16, 2007 , theNational People's Congress approved and promulgated the Enterprise Income Tax Law (the "EIT Law"). OnDecember 6, 2007 , theState Council approved the Implementing Rules. Both the EIT Law and its Implementing Rules became effective onJanuary 1, 2008 . Under the EIT Law and the Implementing Rules, which superseded the previous Income Tax Law, the enterprise income tax rate for both domestic companies and foreign invested enterprises is unified at 25%. OnDecember 26, 2007 , theState Council promulgated the Circular on Implementation of Enterprise Tax Transition Preferential Policy, or the Preferential Policy Circular. The EIT Law, its Implementing Rules and the Preferential Policy Circular provide a five-year transitional period for certain entities that had enjoyed a favorable income tax rate of less than 25% under the previous Income Tax Law and were established beforeMarch 16, 2007 , during which period the applicable enterprises income tax rate shall gradually increase
to 25%.
OnApril 14, 2008 , the Administration Measures for Recognition of High andNew Technology Enterprises , or the Recognition Measures, were jointly promulgated by theMinistry of Science and Technology , the Ministry of Finance, and the SAT, which sets out the standards and process for granting the high and new technology enterprises status. According to the EIT Law and its Implementing Rules as well as the Recognition Measures, enterprises which have been granted the high and new technology enterprises status shall enjoy a favorable income tax rate of 15%. The new EIT Law and its Implementation Rules also provide that "software enterprises" enjoy a two-year income tax exemption starting from the first profit making year, followed by a reduced tax rate of 12.5% for the subsequent three years. The EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose "de facto management body" is in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The Implementing Rules merely defines the location of the "de facto management body" as "the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located." The SAT issued the Circular regarding the Determination ofChinese-Controlled Offshore Incorporated Enterprises asPRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, onApril 22, 2009 . Circular 82 provides certain specific criteria for determining whether the "de facto management body" of a Chinese-controlled offshore-incorporated enterprise is located inChina . The SAT issued the Bulletin regarding the Administrative Measures on the Income Tax ofChinese-Controlled Offshore Incorporated Resident Enterprises (Interim) onJuly 27, 2011 , which became effective onSeptember 1, 2011 , providing more guidance on the implementation of Circular 82. This bulletin clarifies matters including resident status determination, post-determination administration and competent tax authorities. Although both Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not companies like us, the determining criteria set forth in Circular 82 and the bulletin may reflect the SAT's general position on how the "de facto management body" test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Based on a review of surrounding facts and circumstances, the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive toJanuary 1, 2008 . The EIT Law also imposes a withholding income tax of 10% on dividends distributed by a Foreign Invested Enterprise (an "FIE") to its immediate holding company outside of China if such immediate holding company is considered a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company's jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous law. TheState of Nevada , where the Company is incorporated, does not have such tax treaty with China. The SAT further promulgated a circular, or Circular 601, onOctober 27, 2009 , which provides that the tax treaty benefits will be denied to "conduit" or shell companies without business substance and that a beneficial ownership analysis will be used based on a "substance-over-form" principle to determine whether to grant the tax treaty benefits. Most our subsidiaries inChina are directly held by our non-Chinese subsidiaries. If we are regarded as a non-resident enterprise and our non-Chinese subsidiaries are regarded as resident enterprises, then our non-Chinese subsidiaries may be required to pay a 10% withholding tax on any dividends payable to us. If our non-Chinese subsidiaries are regarded as non-resident enterprises, then our PRC subsidiaries may be required to pay a 5% withholding tax for any dividends payable to our non-Chinese subsidiaries, however, it is still unclear at this stage whether Circular 601 applies to dividends from our PRC subsidiaries paid to our non-Chinese subsidiaries, and if our non-Chinese subsidiaries were not considered as "beneficial owners" of any dividends from their PRC subsidiaries, whether the dividends payable to our non-Chinese subsidiaries would be subject to withholding tax at a rate of 10%. - 84 - The EIT Law and its Implementation Rules have tried to scrutinize transactions between related parties. Pursuant to the EIT Law and its Implementation Rules, the tax authorities may impose mandatory adjustment on tax due to the extent a related party transaction is not in line with arm's-length principle or was entered with a purpose to reduce, avoid or delay the payment of tax. OnJanuary 8, 2009 , the SAT issued the Implementation Measures for Special Tax Adjustments (Trial), which clarifies the definition of "related party" and sets forth the tax-filing disclosure and documentation requirements, the selection and application of transfer pricing methods, and transfer pricing investigation and assessment procedures. OnDecember 10, 2009 , the SAT issued a circular on Strengthening theAdministration of Enterprise Income Tax Collection on Income Derived from Equity Transfer by Non-resident Enterprise, or Circular 698. Pursuant to Circular 698, non-resident enterprises should declare any direct transfer of equity interest of PRC resident enterprises and pay taxes in accordance with the EIT Law and relevant laws and regulations. For an indirect transfer, if the effective tax rate for the transferor (a non-PRC-resident enterprise) is lower than 12.5% under the law of the jurisdiction of the direct transferred target, the transferor is required to submit relevant transaction materials to PRC tax authorities for review. If such indirect transfer is determined by PRC tax authorities to be a transaction without any reasonable business purpose other than for tax avoidance, the gains derived from such transfer will be subject to PRC income tax.
In addition to the above, after the EIT Law and its Implementing Rules were promulgated, the SAT released several regulations to stipulate more details for carrying out the EIT Law and its Implementing Rules. These regulations include:
• Notice of the
• Notice of the
• Notice of the
• Opinion of the
• Notice of the Ministry of Finance and
• Interim Measures for the
• Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (2009);
• Circular of theState Council on Printing and Distributing Policies for Further Encouraging the Development of the Software Industry and the Integrated Circuit Industry (2011); and
• Circular on Income Tax Policies for Further Encouraging the Development of Software Industry and Integrated Circuit Industry (2012).
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