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SIAF > SEC Filings for SIAF > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for SINO AGRO FOOD, INC.

Form 10-Q for SINO AGRO FOOD, INC.


15-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q (the "Form 10-Q") 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 2012 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 Form 10-Q 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 Form 10-Q 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 in Item 1 of this Form 10-Q.

Overview

We are an integrated developer, producer and distributor of high quality organic agriculture and aquaculture products through our subsidiaries operating in China.

Below is a summary of our operational and/or developing stage business activities that are or are expected to generate revenues within year 2012 carried out by our existing or newly formed subsidiaries.

Categories of business activities:

1. Fishery Division and operation: (categorized as "Fishery" in accounting tables below)

1.1 Capital Award Inc. ("CA") is one of our wholly owned subsidiaries established and incorporated in Belize City in 2004; its main revenues are generated from the following activities:

1.1.1. Engineering and Technology services earned through consulting and servicing contracts and management fees. As of September 30, 2012, CA has five consulting and servicing contracts, consisting of the following:

(a) A contract for developing a fish farm (Fish Farm 1) has been completed and generating revenue since August 2011.

(b) Phase 1 development work on a prawn hatchery and nursery farm (Prawn Farm 2) was completed, and has been generating revenue since May 2012 with Phase 2 development work to develop facilities for the production of prawns, brood stock, and associated expansion activities having commenced in May 2012. Phase 2 work continued progressing throughout the third quarter of 2012, and is expected to be completed sometime in 2013.

(c) The development of a prawn production farm (Prawn Farm 1) was 90% complete as of September 30, 2012, and the Company is now running tests and expects production to start before year-end 2012.

(d) The development work on the fish and eel farm (Fish Farm 2) is still in progress, but is being delayed because the property is situated on an islet that is making drainage extremely difficult and costly. In response, we are engineering a solution that should resolve this problem.

(e) The development of a "marketing, distribution, seafood processing and sales" complex (Wholesale Center 1) situated at the Guangzhou City, LiWan District, New Wholesale Market. Work on this project began in May 2012, and as of September 30, 2012 70% of the work has been completed with business operations anticipated to begin on or before November 30, 2012.

(f) New Project: (Prawn Farm 3):

On August 16, 2012 CA began development of a new project, namely an additional Prawn Grow-out Farm (Prawn Farm 3) at Unit 1, Front Block A, No. 498, Bei Da Road, Huangyuan County, Xining City, QuingHai Province China.

1.1.2. Marketing and sales of live seafood (e.g., fish, prawns), and the marketing and distribution agent of the fishery farms developed by CA in China. As of September 30, 2012, there are two CA fish farms generating revenue.

1.1.3. Sales of fish grown by contracted 3rd-party fish farms. CA has contracted with one fish farm in China, namely Gao Aquaculture Fish Farm, which is used to produce fish to sell locally.

1.1.4. Import/Export seafood trade that began in May 2012.

1.2 The Company's subsidiaries that are or will be operated under a Sino Joint Venture Company incorporated in China to carry out fishery operations consist of the following:

1.2.1. Jiangman A Power Fishery Development Co. Ltd. ("JAPF") or (Fish Farm 1). JAPF is the owner and operator of Fish Farm 1. On June 30, 2012, the Company, through Triway Industrial Ltd. (Triway), a company incorporated in Hong Kong, and a wholly owned subsidiary of the Company, acquired a total of 75% equity interest in JAPF; as such, the Company's third quarter 2012 consolidated financial statements incorporate the financial results of JAPF.

1.2.2. Enping A Power Prawn Culture Co. Ltd. ("EAPPC") or (Prawn Farm 1). Enping A Power Prawn Culture Co. Ltd. is a tentative name subject to approval granted by relevant Chinese authorities under the Company's application for the formation of a Sino Joint Venture Company ("SJVC 1") to own and operate Prawn Farm 1. EAPPC expects to generate revenue during the fourth quarter of 2012. However, EAPPC's financial statements will not be included in the Company's consolidated account until such time as SJVC 1 is formalized, and one of the Company's subsidiaries acquires a majority equity interest in it.

1.2.3. Zhong Shan A Power Prawn Farms Development Co. Ltd. ("ZSAPP") or (Prawn Farm 2): Zhong Shan A Power Prawn Farms Development Co. Ltd. is also a tentative name subject to approval by relevant Chinese authorities on its application for the formation of a Sino Joint Venture Company ("SJVC 2") to own and operate Prawn Farm 2. ZSAPP has been generating revenues since May 2012. However ZSAPP's financial statements will not be included in the Company's consolidated account until such time as SJVC 2 is formalized and one of the Company's subsidiaries acquires a majority equity interest in it. In the meantime, CA recognizes income from the sale and marketing of its prawn flies as its marketing and sales agent.

2. Beef Cattle Farms' operation and division: (Categorized as "Beef" in accounting tables below except for manufacturing and sales of fertilizer and item 2.3.2 hereof)

There are three divisional operations spread over three provinces in China targeting to generate revenues ultimately from the sale of beef cattle supported by fully integrated facilities and services;

2.1 Division (1) is operated from Huangyuan District of Xining City, Qinghai Province by QingHai Sanjiang YiLi Agriculture Co. Ltd.("SJYL"), a subsidiary of the Company incorporated in China in 2009.

As of September 30, 2012, SJYL has the following business activities that are generating revenues:

*Manufacturing and sales of organic fertilizer(categorized as Fertilizer in the accounting tables below).

* Manufacturing and sales of livestock feed.

* Rearing and sales of beef cattle.

As of September 30, 2012, SJYL has the following business activities that are in development stage:

* Manufacturing and sales of Enzyme.

* Manufacturing and sales of concentrated livestock feed for husbandry animals.

* A mash gas station to generate electricity.

* A slaughterhouse with a boning facility to support sales of value added beef and beef by-products.

2.2 Division (2) is operated in Hunan Province, Linli District by Hunan Shanghua Yi Li Agriculture Co. Ltd. ("HSYLA"), a subsidiary of the Company majority owned jointly by the Company and HSJYLA.

As of September 30, 2012 HSYLA has the following business activities that are in the development stage:

* Manufacturing and sales of organic and mixed fertilizer. Although the main components of its fertilizer-factory are still under construction, as of September 30, 2012 HSYLA has generated sales revenues from over 4,000 MT of fertilizer.

* Cultivation of pastures and crops in preparation for the establishment of beef cattle farm.

2.3 Division (3) has two sub-divisions:

2.3.1 Division (3a) is a beef cattle farm (Cattle Farm 1) situated at Guangdong Province, Enping City, owned and operated by Jiangman Hang Meiji Cattle Farm Co. Ltd. ("HMCF"), a name officially approved by the Company Registrar of Guangdong Government in April 2012. On September 17, 2012, its application to become a Sino Joint Venture Company (SJVC 3) was approved and granted by the relevant Chinese authorities.

Please refer to the HMCL "Statutory Documents "attached to this Form 10-Q as Exhibit 10.8

On September 17, 2012, the Company, through Macau MEIJI Company Limited ("MEIJI") a wholly owned subsidiary of the Company incorporated in Macau, China, acquired a total of 75% equity interest in and became the controlling shareholder of HMCF; as such, the Company's consolidated financial statements include the financial statements of HMCL beginning with the third quarter of 2012.

2.3.2 Division (3b) (Categorized as "Cattle Farm" in the accounting table below) is operated in Guangdong Province, Guangzhou City by MEIJI.

As of September 30, 2012, MEIJI generates revenues through engineering and technology services obtained through consulting and servicing contracts and management fees. In this respect MEIJI has (i) completed the contract to develop Cattle Farm 1 in the first quarter of 2012, and (ii) began work under another contract to build a second cattle farm (Cattle Farm 2) in another district within Enping City, Guangdong Province during the second quarter of 2012 with work in progress continuing throughout the third quarter of 2012; the Company anticipates completing Cattle Farm 2 by mid-year 2014.

MEIJI is the marketing and distribution agent for all cattle farms that are and will be developed by MEIJI using its "Semi-free growing" management systems and aromatic-feed programs and systems to grow beef cattle.

MEIJI started the deboning activity of and sales of beef to various restaurants in the Guangzhou City during the second quarter of 2012.

3. HU plantation operations (categorized as "Plantation" in the accounting tables below)

Hang Sang Tai Agriculture Development Co. Ltd. ("HST"), a Sino Joint Venture Company that is majority owned by MEIJI, is the owner and operator of the HU Plantation situated at Enping City, Guangdong Province. The plantation was developed in 2008 with revenues generated since year 2009.

As of September 30, 2012, HST has two types of operations;

* Growing and sales of HU Flowers; and

* Drying and value added processing and sales of HU flower products.

Consolidated Results of Operations for the Three Months ended September 30, 2012 Compared to the Three Months ended September 30, 2011

Revenue

Revenue including continued and discontinued operations increased by $ 27,650,222 or 133.57% to $48,350,688 for the three months ended September 30, 2012 from $20,700,466 for the three months ended September 30, 2011. The increase was primarily due to the natural growth of revenue generated from the fishery, plantation, organic fertilizer, cattle farms, beef and the maturity of on-going divisional businesses improving their revenues. The Company earned no revenue for the three months ended September 30, 2012 and 2011 respectively from the discontinued segment - dairy. There is one new development project undertaken by CA that started during the third quarter of 2012.

There is one new development project undertaken by CA that started during the third quarter of 2012. This new development project is opening a "Marketing, distribution, beef packaging and sales complex" (Wholesale Center 2), also situated in the LiWan District, Guangzhou City, Guangdong province, PRC. It is a new wholesale market but on a different block than (e) above consisting of 26 shops; development work commenced on August 16, 2012.

The following chart illustrates the changes by category from the three months ended September 30, 2012, compared to the three months ended September 30, 2011.

Revenue
                         2012             2011
Category                  Q3               Q3           Difference
                          $                $                $
Fishery                27,088,699       10,789,890       16,298,809

Plantation              7,236,186        3,240,399        3,995,787

Organic Fertilizer      1,710,686                -        1,710,686

Cattle farm             8,529,153        2,078,099        6,451,054

Beef (SJYL)             3,785,964        4,592,078         (806,114 )

Total                  48,350,688       20,700,466       27,650,222

Fishery: Revenue from fishery increased by $16,298,809 or 151.06% to $27,088,699 for the three months ended September 30, 2012 from $10,789,890 for the three months ended September 30, 2011. The increase was primarily due to our increased contract service income from fishery, Wholesale Center 1 and prawn development contracts and sale of fish for the three months ended September 30, 2012 versus consulting income and sale of fish for the three months ended September 30, 2011.

Plantation: Revenue from plantation of flowers increased by $3,995,787 or 123.31% to $7,236,186 for the three months ended September 30, 2012 from $3,240,399 for the three months ended September 30, 2011. The increase was primarily due to the increase of wholesale prices in fresh and dried flowers during the three months ended September 30, 2012.

Organic fertilizer: Revenue from organic fertilizer increased by $1,710,686 for the three months ended September 30, 2012 from $0 for the three months ended September 30, 2011. The increase was primarily due to the start-up of the new business of organic fertilizer during the first quarter of 2012.

Cattle farm: Revenue from the cattle farm increased by $6,451,054 or 310.43% to $7,266,365 for the three months ended September 30, 2012 from $2,078,099 for the three months ended September 30, 2011. The increase was primarily due to increased development contract service of cattle farms for the three months ended September 30, 2012.

Beef: Revenue from beef decreased by $806,114, or 17.55%, to $3,785,964 for the three months ended September 30, 2012 from $4,592,078 for the three months ended September 30, 2011. The decrease was primarily due to the fact that calves grow and become salable beef cattle during this quarter.

Cost of Goods Sold

Cost of goods sold included in continued and discontinued operations increased by $11,602,369 or 105.52% to $22,597,855 for the three months ended September 30, 2012 from $10,995,486 for the three months ended September 30, 2011. The increase was primarily due to the Company increasing its scale of operations from continuing operations in terms of its fishery, plantation, cattle farm and beef operations for three months ended September 30, 2012 as compared for the three months ended September 30, 2011 and the new organic fertilizer division that began to operate during the first quarter of 2012.

The following chart illustrates the changes by category from the three months ended September 30, 2012 to three months ended September 30, 2011.

Cost of Goods Sold



                         2012             2011
Category                  Q3               Q3           Difference
                          $                $                $
Fishery                12,077,613        7,000,004        5,077,609

Plantation              2,915,191          858,473        2,056,718

Organic Fertilizer      1,532,639                -        1,532,639

Cattle farm             3,293,875          926,423        2,367,452

Beef                    2,778,536        2,210,586          567,950

Total                  22,597,854       10,995,486       11,602,368

Fishery: Cost of goods sold from fishery increased by $5,077,609 or 72.54% to $12,077,613 for the three months ended September 30, 2012 from $7,000,004 for the three months ended September 30, 2011. The increase was primarily due to an increase in the sales volume relating to fish and the expansion of contracted services for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Plantation: Cost of goods sold from plantation of flowers increased by $2,056,718 or 239.58% to $2,915,191 for the three months ended September 30, 2012 from $858,473 for the three months ended September 30, 2011. The increase was primarily due to cost increases in farm labor, logistic and associated general overhead of operations.

Organic fertilizer. Cost of goods sold from organic fertilizer increased by $1,532,639 to $1,532,639 for the three months ended September 30, 2012 from $0 for the three months ended September 30, 2011. The increase was primarily due to the start-up of the new business of organic fertilizer during the third quarter of 2012.

Cattle farm. Cost of goods sold from cattle farm development increased by $2,367,452 or 255.55% to $3,293,875 for the three months ended September 30, 2012 from $926,423 for the three months ended September 30, 2011. The increase was primarily due to increased development contract service of cattle farm for the three months ended September 30, 2012.

Beef: Cost of goods sold from beef increased by $567,950 or 25.69% to $2,227,536 for the three months ended September 30, 2012.from $2,210,586 for the three months ended September 30, 2011. The increase was primarily due to the increased sales of beef, which led to a corresponding increase in the cost of such sales.

Gross Profit

Gross profit, including continued and discontinued operations, increased by $16,047,854 or 62.31% to $25,752,834 for the three months ended September 30, 2012 from $9,704,980 for the three months ended September 30 2011. The increase was primarily due to the corresponding increases in revenues from our fishery, plantation, organic fertilizer, cattle farm and beef operations.

The following chart illustrates the changes by category from the three months ended September 30, 2012 to the three months ended September 30, 2011.

Gross Profit



                         2012            2011
Category                  Q3              Q3           Difference
                          $                $               $
Fishery                15,011,086       3,789,886       11,221,200

Plantation              4,320,995       2,381,926        1,939,069

Organic Fertilizer        178,049               -          178,049

Cattle farm             5,235,278       1,151,676        4,083,602

Beef                    1,007,428       2,381,492       (1,374,064 )

Total                  25,752,834       9,704,980       16,047,854

Fishery: Gross profit from fishery increased by $11,221,200 or 296.08% to $15,011,086 for the three months ended September 30, 2012 from $3,789,886 for the three months ended September 30, 2011. The increase was primarily due to our increased contract service income from fishery and prawn development contracts and sale of fish for the three months ended September 30, 2012 versus consulting income and sale of fish for the three months ended September 30, 2011.

Plantation: Gross profit from the plantation of flowers increased by $1,939,070 or 81.41% to $4,320,995 for the three months ended September 30, 2012 from $2,381,926 for the three months ended September 30 2011. The increase was due mainly to the increase of wholesale prices both on dried and fresh flowers in the third quarter of 2012.

Organic fertilizer: Gross profit from organic fertilizer increased by $178,047 to $178,047 for the three months ended September 30, 2012 from $0 for the three months ended September 30, 2011. The increase was primarily due to the start-up of our new business of organic fertilizer during the third quarter of 2012.

Cattle farm: Gross profit from cattle farm development increased by $4,083,602 or 354.58% to $5,235,278 for the three months ended September 30, 2012 from $1,151,676 for the three months ended September 30, 2011. The increase was primarily due to the fact that consulting services provided to the Cattle Farm 2 were done by our in-house staff. As a result, our cost of consulting services was reduced, leading to higher gross profit margins.

Beef: Gross profit from beef decreased by $1,374,064 or 57.7%, to $1,007,428 for the three months ended September 30, 2012 from $2,381,492 for the three months ended September 30, 2011. The decrease was primarily due to the fact that calves grow and become salable beef cattle during this quarter.

General and Administrative Expenses and Interest Expenses

General and administrative expenses (including depreciation and amortization) in continuing operations decreased by $390,477, or 22.85%, to $1,317,759 for the three months ended September 30, 2012 from $1,708,236 for the three months ended September 30 2011. The decrease was primarily due to a decrease in office and corporate expenses wages and salaries, and other miscellaneous costs amounting to $302,971, $413,606 and $27,314, respectively.

The following chart illustrates the changes by category from the three months ended September 30, 2012 compared to the three months ended September 30 2011.

Category                                             2012 Q3         2011 Q3         Difference
                                                     $               $               $
Office and corporate expenses                            254,802         557,773        (302,971 )

Wages and salaries                                       416,489         830,095        (413,606 )

Travel and related lodging                                42,806          31,592          11,214

Motor vehicles expenses and local transportation          22,438          20,778           1,660

Entertainment and meals                                   36,373          33,164           3,209

Others and miscellaneous                                  47,930          75,244         (27,314 )

Depreciation and amortization                            496,921         159,590         337,331

Sub-total                                              1,317,759       1,708,236        (390,477 )

Interest expenses                                          5,630                           5,630

Total                                                  1,323,389       1,708,236        (384,847 )

Gain (loss) of extinguishment of debts

Any deficit (excess) of the fair value of the shares over the carrying cost of the debt has been reported as a gain (loss) on the extinguishment of debts of $641,831 and $49,265 has been credited (charged) to operations for the three months ended September 30, 2012 and 2011, respectively.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenues

Revenues including continued and discontinued operations increased by $59,151,625 or 193.77% to $89,678,991 for the nine months ended September 30, 2012 from $30,527,367 for the nine months ended September 30, 2011. The increase was primarily due to the increase of revenue generated from the fishery, plantation, beef and the maturity of other sectors' businesses improving their revenues.

The following chart illustrates the changes in revenue by category from the nine months ended September 30, 2012 to September 30, 2011.

Category                 2012             2011          Difference
                     Q1 -Q3           Q1 -Q3

Fishery              $ 53,983,072     $ 14,905,109     $ 39,077,963

Plantation              9,318,049        4,462,640        4,855,409

Organic fertilizer      3,893,903                         3,893,903

Cattle farm            11,252,579        3,032,676        8,219,903

Beef                   11,231,388        8,126,942        3,104,446

Total                  89,678,991       30,527,367       59,151,624

Fishery. Revenues from fishery increased by $39,077,963 or 262.18% to $53,983,072 for the nine months ended September 30, 2012 from $14,905,109 for the nine months ended September 30, 2011. The increase in fishery was primarily due to our increased contract service income from fishery and prawn development contract for the three months ended September 30, 2012.

Plantation. Revenues from plantation of flowers increased by $4,855,409 or 108.80% to $9,318,049 for the nine months ended September 30, 2012 from $4,462,640 for the nine months ended September 30, 2011. The increase in plantation was primarily due to the increase of wholesale prices in fresh and dried flowers in the first half year.

Organic fertilizer. Revenue from organic fertilizer increased by $3,893,903 to $3,893,903 for the nine months ended September 30, 2012 from $0 for the nine months ended September 30, 2011. The increase was due to thestart-up of the new business of organic fertilizer during the nine months ended September 30, 2012.

Cattle farm. Revenue from cattle farm development increased by $8,219,903 or 271.04% to $11,252,579 for the nine months ended September 30, 2012 from $3,032,676 for the nine months ended September 30, 2011. The increase was primarily due to the additional amount of work involved in the consulting and servicing contracts for developing Cattle Farm 1 and Cattle Farm 2 provided during the nine months ended September 30, 2012.

Beef. Revenue from beef increased by $3,104,446 or 38.20% to $11,231,388 for the nine months ended September 30, 2012 from $8,126,942 for the nine months ended September 30, 2011. The increase in beef was primarily due to the increase in consumer demand and our installment of new weather insulated facilities to maintain production.

Cost of Goods Sold

Cost of goods sold increased by $27,286,568 or 181.09% to $42,354,317 for the nine months ended September 30, 2012 from $15,067,749 for the nine months ended September 30, 2011. The increase was primarily due to the Company's increased scale of operation from fishery, plantation, organic fertilizer, cattle farm and beef for nine months ended September 30, 2012 as compared for the nine months ended September 30, 2011.

The following chart illustrates the changes in cost of goods sold by category from the nine months ended September 30, 2012 to September 30, 2011.

Category                 2012            2,011          Difference
                     Q1 -Q3           Q1 -Q3
. . .
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