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SIAF > SEC Filings for SIAF > Form 10-K/A on 4-Oct-2013All Recent SEC Filings

Show all filings for SINO AGRO FOOD, INC.

Form 10-K/A for SINO AGRO FOOD, INC.


4-Oct-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

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

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

Our failure to earn revenues or profits;

Inadequate capital to continue business;

Volatility or decline of our stock price;

Potential fluctuation in quarterly results;

Rapid and significant changes in markets;

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

Insufficient revenues to cover operating costs.

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

Consolidated Results of Operations

Part A.

Revenues

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

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

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

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

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

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

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

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

Cost of Goods Sold

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

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

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

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

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

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

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

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

Gross Profit

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

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

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

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

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

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

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

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

General and Administrative Expenses and Interest Expenses

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

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

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

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

Balance Sheet items (1) on total current assets:

                                                                        As of December
                                                                           31, 2012
                                                                              $

Cash and cash equivalents                                                     8,424,265
Inventories                                                                  17,114,755
Cost and estimated earnings in excess of billings on uncompleted
contracts                                                                     2,336,880
Deposits and prepaid expenses                                                47,308,857
Accounts receivable, net of allowance for doubtful debts                     52,948,350

Other receivables                                                             5,954,248
Total current assets                                                        134,087,355




Accounts Receivable:

                              At December 31, 2012

                                                                                                                      over 120 days
                                                                                                                           and
                                   Accounts receivable      Current     0-30 days      31-90 days    91-120 days     less than 1 year
Consulting and Service (from 6
contracts) totaling                          32,769,312                   6,524,405     18,420,793      1,811,533            6,012,581

Sales of Fish (from Farms and
from imports)                                 5,216,923                   1,612,905      1,726,826      1,877,192                    -

Sales of Cattle and Beef Meats
(from Enping Farm)                              610,880                     335,984        274,896              -                    -

Sales of HU Flowers (Dried)                   5,549,439                           -      2,538,175      2,749,650              261,614

Sales Fertilizer, Bulk Stock feed
and Cattle by SJYL                            6,795,524                   1,950,575      3,634,487         10,982            1,199,480

Sales Fertilizer from HAS                     2,006,272                     390,112      1,189,607        417,485                9,068

Total Accounts Receivable                    52,948,350                  10,813,981     27,784,784      6,866,842            7,482,743

Percentage of total                                 100 %                        21 %           52 %           13 %                 14 %

Provision for diminution in value of accounts receivable:

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

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

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

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

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

Deposits and Prepayments (Break-down)



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

Balance Sheet Item (2) on Current Liabilities:



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

Account payables and Accruals:

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

Trading environment of the following activities:

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

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

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

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

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

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

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

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

Segment of Revenue analysis and explanation:

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

The revenue from consulting and management service by segments has been reduced by 4% from 40% in 2011 to 36% in 2012 as shown in the table below. The reason for such decrease is primarily due to the increase of sales revenue of other segments (e.g., sales of fish, cattle and other goods), and this trend is expected to continue as more farms are anticipated to be developed and as the . . .

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