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SIAF > SEC Filings for SIAF > Form 10-Q on 19-Aug-2013All Recent SEC Filings

Show all filings for SINO AGRO FOOD, INC.

Form 10-Q for SINO AGRO FOOD, INC.


19-Aug-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 "Quarterly 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 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 Quarterly 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 Quarterly 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 in Item 1 of this Quarterly Report.

Business Overview, Business Divisions and Progress reports

We introduced our business activity in China in 2006 as an engineering consulting company aiming to and specializing in building agriculture and aquaculture farms and the developments of related business operation using our expertise and knowhow in specific agriculture and aquaculture technologies (e.g., our A Power Re-circulating aquaculture system and technology and our cattle growing feeding and caring technology), engineering designs of, and, management systems for, in-door and outdoor fishery and cattle farms and vegetable farms (based on hydroponic technologies) adaptable to various climate and growing conditions, production of organic, green and natural agriculture produces after having developed many aquaculture fishery farms and cattle farms and related business developments including sales and marketing of produces and products in Australia and Malaysia since 1998.

In all these developments we were the master engineers pioneered the construction and building of farms from bear land into fully operational facilities covering the construction and building of infrastructures, staff quarters, offices, processing facilities, storages, and all related production facilities and their related managements responsible in developing all business activities into effective and efficient operation including all training of personnel.

During the past few years, our Company has matured into a company dedicated to the agriculture and aquaculture industry. We are currently maintaining our operation of the HU Plantation as well as our services in engineering consulting and specializing in the developments of two major products, namely meat derived from the rearing of beef cattle and seafood derived from the growth of fish, prawns (or shrimp) and other marine species having niche markets with revenues generated from activities that we divide into five standalone business divisions or units: (1) Fishery, (2) Cattle, (3) Organic Fertilizer, (4) HU Plantation and
(5) Marketing and Trading.

Tables of information: The tables below show:

(1) Table1Group Corporate Structure as of June 30, 2013, where the boxes marked "Unincorporated project companies" mean that their respective Sino Foreign Joint Venture Company ("SJVC") has not been formed officially, and that the Company has paida25% deposit as consideration toward their respective acquisitions pending the official formation of their corresponding SJVC scheduled to occur between December 31, 2013 and June 30, 2014, respectively.

(2) Table (2) shows the abbreviation of the names of the companies.

(3) Table (3) shows the location of the Company's businesses

(4) Table (4) shows the business activities of the Company's businesses.

SINO AGRO FOOD, INC.

TABLE 1: GROUP CORPORATE STRUCTURE As of June 30, 2013

[[Image Removed]]

                   TABLE 2: ABBREVIATED NAMES OF THE ENTITIES

   #      Abbreviation                 Names of entities               Date of formation

                                     Incorporated Companies

   1          SIAF                    Sino Agro Food, Inc.                   1974
   2           CA                      Capital Award Inc.                    2003
   3          MEIJI                 Macau EIJI Company Ltd.                  2005
   4          APWAM       A Power Agro Agriculture Development (Macau)       2007
                                              Ltd.
   5           TRW            Tri-way Industries Ltd. (Hong Kong)            2009
   6           CS                      Capital Stage Inc.                    2003
   7           CH                      Capital Hero Inc.                     2003
   8       JHST or HU       Jiangmen City Heng Sheng Tai Agriculture         2009
           Plantation                 Development Co. Ltd.
   9     JHMC or Cattle        Jiangman City Hang Mei Cattle Farm            2012
             Farm 1                   Development Co. Ltd.
  10          SJAP          Qinghai Sanjiang A Power Agriculture Co.         2009
                                              Ltd.
  11    JFD or Fish Farm   Jiangmen City A Power Fishery Development         2011
                1                           Co. Ltd.
  12           HSA        Hunan Shenghua A Power Agriculture Co. Ltd.        2011

                                Unincorporated Project Companies

  13    Wholesale Center    Guangzhou City A Power Nawei Trading Co.         2012
            1 or APNW                      Ltd. China
  14     ZSAPP or Prawn      Zhongshan A Power Prawn Culture Farms           2012
             Farm 2                Development Co. Ltd. China
  15     EBAPCD or Prawn       Enping City A Power Prawn Culture             2011
             Farm 1                Development Co. Ltd. China
  16      Cattle Farm 2    Enping City A Power Beef Cattle Farm 2 Co.        2011
                                           Ltd. China

All "Unincorporated Project Companies" are private companies formed in China with Chinese Citizen acting as their legal representatives as required by company law of China. These companies' names will be changed in accordance with the names granted by the relevant authorities once their corresponding Sino Foreign Joint Venture company will officially have been formed.

TABLE 3:MAP OF THE COMPANY'S ENTITIES

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             TABLE 4: BUSINESS ACTIVITIES OF THE COMPANY'S ENTITIES

     ABBREVIATION                         Business activities
         SIAF          Engineering consulting (in general types of developments),
                       business management, trading, sales and marketing

          CA           Engineering consulting (mainly in development of fishery),
                       management of fishery operation, marketing and sales of
                       fishery produces and products.

        MEIJI          Engineering consulting (mainly in cattle farming and
                       vegetable farming), management service and marketing and
                       sales of cattle and related products.

        APWAM          Holding Company
         TRW           Holding Company and holders of Technology Licenses.
          CS           Dormant
          CH           Dormant
JHST or HU Plantation  H U Plantation, Immortal Vegetable farming, processing and
                       sales of produces and products.

JHMC or Cattle Farm 1  Growing of cattle at Cattle Farm 1 which is a
                       demonstration farm

         SJAP          Existing activities:
                       Manufacturing of organic fertilizer, bulk and concentrated
                       livestock feed, and rearing of cattle and corporative
                       farming
                       Expected added activities by 2014
                       Slaughter and de-boning of cattle and value added
                       processing of beef products
                       Manufacturing of Enzyme
                       Electricity generation via Mash Gas Station

  JFD or Fish Farm 1   Growing of fish (sleepy cod species), eels (Flower Pattern
                       species) and prawns (or shrimp) at Fish Farm 1

         HSA           Existing Activities
                       Manufacturing of organic fertilizer, 100% pure organic
                       mixed fertilizer and lake fish farming organic fertilizer.
                       Expected added activities by 2014
                       Cattle farming

  Wholesale Center 1   Marketing, sales and distribution of seafood and meats and
                       related products.

ZSAPP or Prawn Farm 2  Hatchery and Nursery operation of prawns (or shrimp)
                       Growing of prawns (or shrimp) using open-dams applying
                       re-circulating filtration systems.

EBAPCD or Prawn Farm 1 Growing of prawns (or shrimp)

Cattle Farm 2 By year 2014 - Cattle Growing

SUMMARY OF OUR BUSINESS ACTIVITIES CARRIED OUT BY OUR EXISTING OR NEWLY FORMED
SUBSIDIARIES.

1. Fishery Division operated by Capital Award Inc. ("CA")

CA generates revenues from two main activities: "Engineering and Consulting Services" and "Marketing and Sales of Aquatic seafood" described below:

Engineering and Technology Services via Consulting and Service Contracts ("CSC's") for the development, construction, supplies of plants and equipment and management of fishery (and prawn or shrimp) farms and related business operation.

CA has entered into numerous CSC's; their information and status are shown in the table below:

Notes to the developments in progress:

                                                                                 (Estimated)
                                                                                development's
                                                                 Commencement    completion
Name of the    Location of   Land area or         Current          date of       date on or     Contractual   % of completion as at
developments   development   Built up area     Phase & Stage     development       before         amount           30.06.2013
                                                                                                     $
Fish Farm      Enping City     9,900 m2      fully operational    July. 2010       Jun-11          $5.3         Fully operational
(1)                                                                                               million

Prawn Farm     Enping City     23,100 m2         2 phases         Phase 1 on    Phase (1) on       $11.6          Phase (1) in
(1)                                                               June 2011     December 2012     million           operation

Fish Farm        Xin Hui       33,000 m2         3 Phases          Phase 1      Phase 1 June       14.9                35%
(2) "The        District,                                        January 15,        2014          million
Fish & Eel     Jiang Men.                                            2013
Farm

Prawn Farm      San Jiao      120,000 m2         2 phases         Phase (1)       Phase (1)      Phase (1)       Phase (1) fully
(2) The        Town, Zhong                                        and Phase     Dec. 2012 and   $8.5 m and    operational and Phase
Hatchery &      San City,                                        (2) May 2012     Phase (2)      Phase (2)           (2) 65%
Nusery &                                                                          December         8.67
Grow-out                                                                            2013.         Million
prawn farm

Prawn Farm       Xining       Expanded to        Phase (1)          41,122         Dec-14         Pending              10%
(3)               City,        10,560 m2                                                         approval
                 Qinghai

Wholesale       Guangzhou      5,000 m2          One Phase          41,030       March 2013        $3.2           in operation
Center (1)        City                                                                            million

(a) Phase 1 development work on a prawn hatchery and nursery farm (Prawn Farm
2) with Zhongshan A Power Prawn Culture Development Co. Ltd. ("ZSAPP") (a proposed name of this future SJVC), where the Company owns a direct 25% equity interest, was completed in May 2012. Prawn Farm 2 has generated income since May 2012. Phase 2 development works involves development of facilities for the production of prawns, brood stock, and associated expansion activities that were commenced in May 2012 and are expected to be completed during 2013. The work that has occurred during the second quarter of 2013 includes the development of: (i) an additional indoor prawn nurturing apartment, (ii) three brood stock open dams with all under-ground in built filtration systems that is capable to hold up to 3,000 mother prawns at a time, (iii) all external fences of the farm, and (iv) two open dams with all in built filtration systems that has the capacity to grow out up to 12 MT of fish per year and all associated infrastructure.

(b) 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 situated on an inlet and drainage is extremely difficult to resolve and costly to fix. We are engineering a solution that should resolve this problem. As of the date of this Quarterly Report, our engineering solution involves a semi-open dam and semi-enclosed farm concept built with groups of independent filtration and water recirculation systems that are suitable for the growing of prawns, fishes and/or eels in this farm. We are dividing work flow into phases and stages of work to yield the optimal financial efficiency and benefits. As of June 30, 2013 the revised development plan was finalized; as such the associated infrastructural work is anticipated to commence during the third quarter of 2013.

(c) 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 SJAP property. All engineering design and related pre-development work has been completed, with original plans to begin construction and infrastructure work in May 2013, after the winter season. However, management decided in February 2013 to relocate Prawn farm 3 to another block of land adjacent to SJAP's existing property consisting of a much bigger area to accommodate future expansion whenever necessary. This relocation will require the approval of local authorities, resulting in a delay and a new time schedule dependent on the approval by authorities and the said approval is still in progress as of June 30, 2013.

Pictures showing Fish Farm 1

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Views of the Fish Farm 1 complex situated on 9,900 m2 of land in district of Enping City. It is a fully self-contained complex showing as one of typical development models being developed in China.

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The farm has 16 grow-out APM tanks growing fish in-door and on land with the capacity to grow out over 1,000 MT of fish/year

Pictures showing Prawn Farm 1

[[Image Removed]]

Situated in the district of Enping City on 26,100 m2 of land is our Prawn Farm 1 with a capacity to grow-out 250/300 MT of prawns/year and again is contained in a fully self-serviced complex with office, staff quarters, laboratory, dried and cold storages, stand-by generators' room, heating rooms, water storage and tanks, landscaping gardens etc.

[[Image Removed]]

The plastic netting rolls are designed to provide shelter for the prawns and thus to increase the grow out capacity of the tanks.

Pictures showing Prawn Farm 2

[[Image Removed]]

Prawn Farm 2 has much bigger land bank of 120,000 m2 because apart from its core function of being the hatchery and nursery operation to supply quality prawn fingerling, the farm is now developing open grow-out dams that have in built RAS filtration systems to save on water consumption as well as to provide cleaner water aimed at reducing the impact of pollution.

[[Image Removed]]

The tanks in the picture are nursery tanks. Each tank has the capacity to nurture up to 10 million prawns every 5 days per 30 cubic liters (or 30 MT) of water. Prawn Farm 2 is also built as a fully self-contained complex with all associated facilities.

Marketing and Sales of aquatic seafood:

CA is the sole marketing, sales and distribution agent of the Re-circulating Aquaculture System ("RAS") fishery and prawn (or shrimp) farms, such that it purchases all marketable sized fish and prawns (or shrimp) from the farms and in term sells them to the wholesale markets and at the same time supplies the farms with fingerling, baby or adult fish or prawns and stock feed.

Our RAS farms do not produce enough fish or prawns (or shrimp) to warrant the establishment and sales of value added processing products or facilities given that the Chinese markets pay the best prices for live fish and prawns (or shrimp). Therefore, currently CA sells only live fish and prawns (or shrimp).

In this respect, CA generates revenues from the sales of seafood brought from farms that are either a subsidiary of the Company or an incorporated project company and contracted growers in the manner described below:

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

Fish Farm 1 complex represents our typical model of developments and is built on a block of land measuring 9,900 m2 containing staff quarters providing accommodation for up to 15 workers, a self-contained office, a laboratory, external live bait holding tanks, all season red worms nurturing tanks, dry and cold storages, workshops, processing facilities, a heating room, 500 MT of water holding tanks, landscape gardens, standby generator and rooms, all related underground and on land infrastructure and a fish grow-out farm of 4,000 m2 that has all associated facilities to support 16 RAS tanks with each tank measuring 10 meter (m) x 10 m x 3 m in depth holding up to 240,000 liters (or 240 Metric Tons (MT) of water and has the production capacity to grow up to 80 MT of aquatic animals per year depending on its stocking cycles (or frequency of stocking of fish) and the initial size of the fish being stocked at each cycle. In other words, if the initial stocked fingerling is around 30/40 mm per fish, then it will take over 12 months to grow the fish into a marketable fish (averaging over 500 gram/fish) such that its annual production is only up to 30/35 MT/tank; however if the initial fish being stocked are at an average of 200 to 300 grams each then its stocking and harvesting cycle is 4 times per year, enhancing annual production capacity at up to 80 MT/tank. Initially, Fish Farm 1 was designed to grow sleepy cod, which had a niche market with most attractive prices in Chinese markets.

However, sleepy cod does not have a large market share in China compared to the carp species. Our market research of the sleepy cod market size in 2012 shows that total annual domestic production is about 25,000/28,000 MT distributed to more than 100 wholesale markets throughout many provinces, with the markets at Guangzhou City, Southern Coastal towns of Guangdong and markets in Shanghai City comprising the dominant markets. From the time we started stocking sleepy cod in 2011 until the end of year 2012, live sleepy cod constituted a niche market in China and sold at wholesale for an average price of US$27/Kg until the cheaper imports from other Asian countries were permitted to be imported to China at low import tax starting in January 2013, such that the wholesale prices fell sharply to an average of US$15/Kg. We mainly had fed live bait fish to our baby sleepy cod (250 to 300 gram each) that we bought from our contracted suppliers at around US$5/fish grown at average feed to weight gain conversion rate of 2.5 Kg of live bait to 1 kg of weight gained. As such, when we purchased our supplies of live bait at an average of US$1.65/Kg, and low mortality rate at the average below 8% coupled with our recorded 3.5 stocking and harvesting cycles per year, Fish Farm 1 consistently achieved good sales revenues with gross profit margin of 50/55 % in 2011 and 2012. However its gross profit margin fell in 2013 to between 35/40 % while the cost of supplies of baby sleepy cod and live bait fell correspondingly by an average of only 10%.

In this respect and in mitigating such situation, during the first quarter of 2013 we stepped up the modification of our RAS tanks to adapt to the growing of eels with 4 tanks and prawns (or shrimp) with 8 tanks and the expansion program in the Research and Development Station to accommodate the nurturing of Flower Pattern Eels' fingerlings to grow into adult eels (of 500 gram/eel and upward) that would be supplied to Fish Farm 1 to grow the adult eels into marketable sized eels (around 1.5 kg/eel and larger) which at present are selling at high prices between US$27/28 per Kg. Fish Farm 1 is now stocked with and growing Flower Pattern eels, prawns and sleepy cod.

Prawn Farm 1 (or EBAPCD): EBAPCD is the proposed name of the future SJVC (subject to approval by relevant Chinese authorities under our application for SJVC status), established to own and operate Prawn Farm 1. EBAPCD will generate revenue starting during the third quarter of 2013. Capital Award will recognize income from purchases of prawns from Prawn Farm 1 and selling them to the wholesale markets.

On April 22, 2013, we placed our first 500,000 (Mexican White) prawn fingerling in Prawn Farm 1, and as of the date of this Quarterly Report management reported that prawns are meeting growth benchmarks with low mortality reaching around 15 cm/prawn in size. The Company believes that its Prawn Farm 1 represents the first indoor RAS prawn farm in Asia. Going forward, Prawn Farm 1 will carry out its rotational stocking and harvesting program targeting to produce between 250/ 300 MT of live prawns in 2013.

We have seen a rapid increase in live prawn prices in the first quarter of this year (averaging 100% increases in prices compared to the corresponding period last year) with current wholesale price averaging US$15/Kg for size of 80s (equivalent to 80 to 90 pieces of prawn/Kg), and prices going up proportionately to sizes of Mexican White prawns, and at a premium rate for popular, but rarer species (e.g., our big giant prawns, Green Prawn, Banana Prawns and Tiger Prawns). The average time required to grow prawns (of Mexican White Species or Big Giant Prawns) from 14-day old fingerlings to marketable sizes in commercial scale at the Prawn Farm 1 under our RAS system is estimated conservatively between 60/70 days, 90/100 days and 120/130 days for sizes of 80s, 60s and 40s, respectively. We believe, but cannot assure you, that we should be able to reduce this estimated grow-out period under our RAS system since the said grow-out period was calculated from and based on information of open-dam prawn farms as we do not have any conclusive commercial grow-out statistic being recorded at Prawn Farm 1 yet. However, we are confident that we shall be able to experience a much lower mortality rate, between 10/20 %, compared to the 50/60% at the open-dam farms.

Prawn Farm 2(or ZSAPP): ZSAPP is also an intended 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 2. ZSAPP has been generating revenues since May 2012. However, ZSAPP's financial statements will not be consolidated with ours until approval of this SJVC is formalized, and one of our subsidiaries acquires a majority equity interest therein. However, Capital Award recognizes income from commissions earned from ZSAPP's sales of prawn fingerling to regional growers who constitute its sole marketing and sales agent.

ZSAPP has been successful during the first quarters of 2013, producing LawZi Prawn (or the Big Giant Prawns) fingerling from the 5,000 pieces breeding stock that were imported from South-East Asian countries. By the second quarter of 2013, the reproduction of the Big Giant Prawns fingerling had become consistent; consequently, we intend to market the Big Giant Prawn flies beginning during the third quarter of 2013 together with the Mexican White fingerling which constituted our main sales in 2012. During the past two years, our research confirmed that the demand and prices of the Big Giant Prawns in the local domestic markets were high (at between RMB450 to 550/10,000 flies in 2012) because supplies of quality Big Giant Prawn fingerling is competitively low compared to Mexican White (at averaged price between RMB150 to 170/10,000 flies in 2012), due to problems of inbreeding. As such, we expect high demand for our Big Giant Prawn flies by the regional prawn growers as they will be the offspring from our 2nd generation breeding stock free from inbreeding problems.

Fish sales generated from purchases with other open-dam growers contracted by Capital Award. Capital Award has been contracting with local aquaculture farms to grow sleepy cod since 2012to present based on a fixed production cost, with recently added eel growing contracts commenced in the first quarter of 2013. There are existing contracts that will provide up to 800,000 pieces of sleepy cod and 600,000 pieces of eels to be sold by Capital Award between 2013 through the early part of 2014. However, Capital Award is exploring similar new contracts consistent with local reliable growers who meet our quality standards targeting to increase its fish sales revenue whenever the opportunity presents itself.

2. The Beef Cattle business of MEIJI:

Similarly to CA, MEIJI has two sources of revenues, its Engineering and Services revenues and its marketing and sales of cattle;

2.1. Engineering and services revenues. These revenues are generated from the Construction and development of Cattle Farm 1 and Cattle Farm 2.

The MEIJI table below shows the latest status of their developments:

. . .

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