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SIAF > SEC Filings for SIAF > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for SINO AGRO FOOD, INC.


15-May-2013

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 2013 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.

Business Overview

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

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

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

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

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

Fishery Division

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

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

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

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

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

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

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

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

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

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

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

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

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

Beef Cattle Farm Division

We have three operations in this division that are vertically integrated with facilities and services spread over three provinces in China, consisting of the following:

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

2. Operation 2. Operation 2 is operated in Linli District, Hunan Province, by Hunan Shenghua A Power Agriculture Co. Ltd. China ("HSA"), a 76% owned subsidiary. HSA conducts the following business activities, both of which are in the development stage: (i) manufacturing and sales of organic and mixed fertilizer, and (ii) cultivation of pastures and crops in preparation for the establishment of beef cattle farm. On March 5, 2013, HSA secured the rights to use a well proven enzyme that, when applied to our organic fertilizer, converts part of the organic raw material into potash and phosphate without having to add chemically formulated potash and phosphate, such that our end fertilizer can be qualified as pure organic fertilizer made with 100% natural organic raw materials. Sales of pure organic fertilizer commenced during the fourth week of March, 2013.

3. Operation 3. Operation 3 has two sub-divisions:

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

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

Hylocereus Undatus ("HU") Plantation Division

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

SIAF

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

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

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

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

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

(5) The import and export trading operation.

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

Consolidated Results of Operations

Part A: The three months ended March 31, 2013 compared to the three months ended March 31, 2012

Revenue

Revenue increased by $39,127,735 or 244.85% to $55,107,751 for the three months ended March 31, 2013 from $15,980,016 for the three months ended March 31, 2012. The increase was primarily due to the natural growth of revenue generated from the fishery, organic fertilizer, beef and cattle farm, beef and the maturity of on-going divisional businesses improving their revenues.

The following chart highlights the changes by category for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

                         2013             2012
Category                  Q1               Q1           Difference
                           $                $                $
Fishery                31,867,295       11,094,609       20,772,686

Plantation                      -                -                -

Organic Fertilizer      8,082,062           13,061        8,069,001

Beef                    6,795,837        3,930,280        2,865,557

Cattle farm             8,362,557          942,066        7,420,491

Total                  55,107,751       15,980,016       39,127,735

Revenue- Fishery: Revenue from fishery increased by $20,772,686 or 187.23% to $31,867,295 for the three months ended March 31, 2013 from $11,094,609 for the three months ended March 31, 2012. The increase was primarily due to our increased contract service income from fishery and prawn development contracts and sale of fish for the three months ended March 31, 2013 versus consulting income and sale of fish for the three months ended March 31, 2012.

Revenue - Plantation: As usual there is no harvesting during this quarter and hence there is no revenue during the Q1 period of each year.

Revenue - Organic fertilizer: Revenue from organic fertilizer increased by $8,069,001 to $8,082,062 for the three months ended March 31, 2012 from $13,061 for the three months ended March 31, 2012. The increase was primarily due to the start-up new business of 100% pure organic mixed fertilizer during the three months ended March 31, 2013 of the HSA division.

Revenue - Beef: Revenue from beef increased by $2,865,557 to $6,795,837 for the three months ended March 31, 2013 from $3,930,280 for the three months ended March 31, 2012. The increase was primarily due to our increase of productivity of the cattle rearing division of SJAP and related sale of beef cattle.

Revenue - Cattle farm: Revenue from cattle farm increased by $7,420,491 to $8,362,557 for the three months ended March 31, 2013 from $942,066 for the three months ended March 31, 2012. The increase was primarily due to the continuation of our contract services in the cattle farm industry and the increase of production and sales of cattle in Cattle Farm 1 for the three months ended March 31, 2013.

Cost of Goods Sold

Cost of Goods Sold increased by $25,618,510 or 321.58% to $33,584,934 for the three months ended March 31, 2013 from 7,966,424 for the three months ended March 31, 2012. The increase was primarily due to the Company increasing its scale of operation - fishery, organic fertilizer, beef and cattle farm for three months ended March 31, 2013 as compared for the three months ended March 31, 2012.

The following chart highlights the changes by category for the three months ended March 31, 2013 compared to three months ended March 31 2012.

Cost of Goods Sold
                         2013            2012
Category                  Q1              Q1           Difference
                           $                $               $
Fishery                20,114,362       5,498,440       14,615,922

Plantation                      -               -                -

Organic Fertilizer      4,091,876          12,122        4,079,754

Beef                    3,780,657       2,303,183        1,477,474

Cattle farm             5,598,039         152,679        5,445,360

Total                  33,584,934       7,966,424       25,618,510

Cost of goods sold - Fishery. Cost of goods sold from fishery increased by $14,615,922 from $5,498,440 for the three months ended March 31, 2012 to $20,114,362 for the three months ended March 31, 2013. The increase in fishery was primarily due to an increase in the sales volume relating to fish and the expansion of contracted services for the three months ended March 31, 2013 compared to the three months ended March 31 2012.

Cost of goods sold - Plantation. As usual there is no harvesting this quarter hence there is no cost of goods sold during the Q1 period of each year.

Cost of goods sold - Organic fertilizer. Cost of goods sold from organic fertilizer increased by $4,079,754 to $4,091,876 for the three months ended March 31, 2013 from $12,122 for the three months ended March 31, 2012. The increase was primarily due to the start-up new business of 100% pure organic mixed fertilizer for the three months ended March 31, 2013 of the HSA division.

Cost of goods sold - Beef. Cost of goods sold from beef increased by $1,477,474 from $2,303,183 for the three months ended March 31 2012 to $3,780,657 for the three months ended March 31, 2013. The increase in cost of goods sold from beef was primarily due to the increase in sales of cattle, increasing the cost accordingly.

Cost of goods sold - Cattle farm. Cost of goods sold from cattle farm development increased by $5,445,360 from $152,679 for the three months ended March 31, 2012 to $5,598,039 for the three months ended March 31, 2013. The increase in cost of goods sold from cattle farm was primarily due to the corresponding increase in revenue from cattle.

Gross Profit

Gross profit increased by $ by $13,509,225 or 168.58% to $21,522,817 for the three months ended March 31, 2013 from $8,013,592 for the three months ended March 31, 2012. The increase was primarily due to the corresponding increase in revenues from fishery, organic fertilizer, beef and cattle farm operations.

The following chart highlights the changes by category for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

Gross profit
                                          2013             2012
Category                   Q1              Q1           Difference
                           $                $               $
Fishery                11,752,933       5,596,169        6,156,764

Plantation                      -               -                -

Organic Fertilizer      3,990,186             939        3,989,247

Beef                    3,015,180       1,627,097        1,388,083

Cattle farm             2,764,518         789,387        1,975,131

Total                  21,522,817       8,013,592       13,509,225

Gross profit - Fishery. Gross profit from fishery increased by $6,156,764 from $5,596,169 for the three months ended March 31 2012 to 11,752,933 for the three months ended March 31, 2013. 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 March 31, 2013 versus consulting income and sale of fish for the three months ended March 31, 2012.

Gross profit - Plantation. As usual, there is no harvesting and hence no gross profit during the first quarter of each year.

Gross profit - Organic fertilizer: Gross profit from organic fertilizer increased by $3,989,247 to $3,990,186 for the three months ended March 31, 2013 from $939 for the three months ended March 31, 2012. The increase was primarily due to the start up new business of 100% pure organic mixed fertilizer since Quarter 1, 2013.

Gross profit - Beef: Gross profit from beef increased by $1,388,083 from $1,627,097 for the three months ended March 31 2012 to $3,015,180 for the three months ended March 31 2013. The increase was primarily due to our increase of sale of beef cattle from the increase of productivity of the cattle farm.

Gross profit - Cattle farm. Gross profit from cattle farm development increased by $1,975,131 from $789,387 for the three months ended March 31, 2012 to $2,764,518 for the three months ended March 31, 2013. The increase in cattle farm was primarily due to the increase of cattle productivity of the cattle farm and related sale of cattle.

General and Administrative Expenses and Interest Expenses

General and Administrative expenses (including depreciation and amortization) in continuing operations decreased by $16,934, or 0.76%, to $2,205,388 for the three months ended March 31, 2013 from $2,222,322 for the three months ended March 31, 2012. The decrease was primarily due to a decrease in general office and corporate expenses, and wages and salaries amounting to $738,480 and $586,727, respectively.

The following chart highlights the changes by category for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

                                          2013               2012
Category                                   Q1                 Q1             Difference
                                           $                  $                   $
Office and corporate expenses               738,480            841,754            (103,274 )

Wages and Salaries                          586,727            945,085            (358,358 )

Traveling and related lodging                14,485             12,157               2,328

Motor vehicles expenses and local
transportation                               29,636             20,450               9,186

Entertainments and meals                     28,018             16,876              11,142

Others and miscellaneous                    223,054             32,316             190,738

Depreciation and amortization               584,988            353,684             231,304

Sub-total                                 2,205,388          2,222,322             (16,934 )

Interest expenses                            57,052                  -              57,052

Total                                     2,262,440          2,222,322              40,118

In this respect, total depreciation and amortization amounted to $644,942 for the year ended March 31, 2013, of which $584,988 was reported under general and administrative expenses and $59,954 was reported under cost of goods sold. Total depreciation and amortization was at $432,353 for the year ended March 31, 2012, of which $353,684 was reported under general and administrative expenses and $78,669 was reported under cost of goods sold.

Part B. More detailed segment information and analysis of the financial statements for the three months ended March 31, 2013.

This Part B discusses and analyzes certain items that we believe would assist our shareholders in obtaining a better understanding on the Company's operation and financial information by providing a breakdown for each category listed below:

(A) Balance Sheet items (1) comprising total current assets:

                                                     As at 31 March.
                                                          2013                 Note
                                                            $
Cash and cash equivalents                                  10,817,922
Inventories                                                17,052,765                   1
Costs and estimated earnings in excess of
billings on uncompleted contracts                           2,899,438
Deposits and prepaid expenses                              51,836,098                   2
Accounts receivable, net of allowance for
doubtful debts                                             71,460,325                   3
Other receivables                                           6,222,208                   4
                                                          160,288,756

Note (1): Inventories



                                                       As of March 31, 2013
                                                                 $
Fish (Sleepy cods)                                                  5,701,557
Bread grass                                                           877,590
Beef cattle                                                         2,664,901
Organic fertilizer                                                    854,985
Raw materials for bread grass and organic fertilizer                6,677,001
Immature seeds                                                        276,731
                                                                   17,052,765

Note (2) Deposits and Prepaid Expenses



                                                            As of March 31,
                                                                 2013           Note
                                                                   $

Deposits for
Deposits for Prepayments for purchases of equipment                 318,192
Deposits for- acquisition of land use right                       7,826,508      2A
Deposits for- inventory purchases                                 4,940,767
Deposits for- aquaculture contract                                7,062,600
Deposits for- building materials                                  2,000,000
Deposits for- proprietary technology                              2,254,839
Prepayments for construction in progress                         14,576,562
Shares issued for employee compensation and oversea
professional fee                                                    181,200
Temporary deposits payment for acquiring equity
investments                                                       7,704,670
Miscellaneous                                                     4,970,760
                                                                 51,836,098

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

As of March 31, 2013, we have $7,826,508 for deposit paid for the acquisition of "Land Use Right" derived from the following transactions;

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

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

* $4,453,398 (or RMB 27,989,606 equivalent) was the full payment Capital Award made for the purchase of the Land Use Right on a block of prime agriculture land measuring 235 Mu (or the equivalent of 38.5 acres) situated at the Cong Hua District Guangzhou City in late October 2010. This block of land is part of a larger block of land (of some 500 acres) that was applying for sub-division; . . .

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