XNYS:GRO Agria Corp ADR Annual Report 20-F Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

 

 

FORM 20-F

 

 

 

(Mark One)

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2012.

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report ___________

Commission file number: 001-33766

 

AGRIA

CORPORATION

 

(Exact name of Registrant as specified in its charter)

 

N/A

 

(Translation of Registrant’s name into English)

 

Cayman Islands

 

(Jurisdiction of incorporation or organization)

 

Room 1206, Huantai Building

12, Zhongguancun South Street

Haidian District

Beijing 100081

People’s Republic of China

 

(Address of principal executive offices)

 

 
 

 

John Layburn, Chief Financial Officer

Phone: +86 (10) 8438 1031

Email: john.layburn@agriacorp.com

 

David Pasquale, Senior Vice President

Phone: +1 914 337 1117

Email: david.pasquale@agriacorp.com

     

Room 1206, Huantai Building
12, Zhongguancun South Street, Huadian District,
Beijing 10081, People’s Republic of China

 

Two Park Place

Bronxville, New York 10708

United States of America

 

 

 

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each class   Name of Each Exchange on Which Registered
     

American Depositary Shares, each representing

two ordinary shares, par value $0.0000001

per share

  New York Stock Exchange

 

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

 

(Title of Class)

 

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 110,766,600 ordinary shares, par value US$0.0000001 per share, as of June 30, 2012.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer þ

 

 
 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP þ

International Financial Reporting Standards as issued

by the International Accounting Standards Board ¨

Other ¨

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 ¨ Item 18 ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

 

 
 

 

TABLE OF CONTENTS

 

INTRODUCTION   1
PART I   2
ITEM 1. Identity of Directors, Senior Management and Advisers   2
ITEM 2. Offer Statistics and Expected Timetable   2
ITEM 3. Key Information   2
ITEM 4. Information on the Company   26
ITEM 4A. Unresolved Staff Comments   42
ITEM 5. Operating and Financial Review and Prospects   42
ITEM 6. Directors, Senior Management and Employees   67
ITEM 7. Major Shareholders and Related Party Transactions   74
ITEM 8. Financial Information   80
ITEM 9. The Offer and Listing   80
ITEM 10. Additional Information   81
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk   89
ITEM 12. Description of Securities Other than Equity Securities   90
PART II   91
ITEM 13. Defaults, Dividend Arrearages and Delinquencies   91
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds   91
ITEM 15. Controls and Procedures   91
ITEM 16A. Audit Committee Financial Expert   92
ITEM 16B. Code of Ethics   92
ITEM 16C. Principal Accountant Fees and Services   92
ITEM 16D. Exemptions from the Listing Standards for Audit Committees   93
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers   93
ITEM 16F. Change In Registrant’s Certifying Accountant   93
ITEM 16G. Corporate Governance   94
PART III   94
ITEM 17. Financial Statements   94
ITEM 18. Financial Statements   94
ITEM 19. Exhibits   94

 

 
 

 

INTRODUCTION

 

Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:

 

“we,” “us,” “our company,” “the Company,” “our” and “Agria” refer to Agria Corporation, a Cayman Islands company, and its predecessor entities, subsidiaries and, unless the context indicates otherwise, Guanli, our consolidated affiliated entity, and its subsidiaries and associates (including its 49% owned associate Wuwei Ganxin Seeds Company Limited, or Ganxin);

 

“P3A” refers to Taiyuan Primalights III Agriculture Development Co., Ltd., a limited liability company established in China, which was one of our consolidated affiliated entities until it was disposed of in July 2010;

 

“Guanli” refers to our consolidated affiliated entity, Shenzhen Guanli Agricultural Technology Co., Ltd., which is a limited liability company established in China;

 

“PGW” refers to PGG Wrightson Group, in which we hold a 50.22% equity interest;

 

“China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this annual report, Taiwan, Hong Kong Special Administrative Region and Macau Special Administrative Region;

 

“shares” or “ordinary shares” refers to our ordinary shares, and “preferred shares” refers to our series A redeemable convertible preferred shares, all of which were converted into our ordinary shares upon the completion of our initial public offering on November 13, 2007;

 

“ADSs” refers to our American depositary shares, each of which represents two ordinary shares; and

 

all references to “RMB” or “Renminbi” are to the legal currency of China; all references to “$,” “US$,” “dollars” and “US dollars” are to the legal currency of the United States; and all references to “NZ$” is to the legal currency of New Zealand.

 

FORWARD-LOOKING STATEMENTS

 

This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts can be forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

You can identify forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations, estimates and projections about future events and financial trends that we believe may affect our financial condition, results of operations, liquidity, business strategy and financial needs. We believe that the following important factors, among others, in some cases have affected, and in the future could affect our consolidated results and could cause our actual consolidated results for the fiscal year ended June 30, 2012 and any other future period to differ materially from those described in any forward-looking statements made by us:

 

our future business development, results of operations and financial condition;

 

changes in our revenues, cost and expense items;

 

our anticipated development strategies, which may include potential acquisitions and divestitures, expanding into new sectors within the agricultural industry, expanding sales into new regions, and expanding our product offerings;

 

1
 

 

our strategy to expand our research and development capability;

 

the growth in demand in China for corn and vegetable seeds;

 

our ability to attract customers and end users and enhance our brand recognition;

 

future changes in government regulations affecting our business;

 

trends and competition in the agricultural industry, particularly in China, New Zealand, Australia and South America; and

 

our ability to retain and motivate existing management and other key personnel and to recruit and integrate additional qualified personnel into our operations.

 

You should thoroughly read this annual report and the documents that we refer to in this annual report with the understanding that our actual future results may be materially different from or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

PART I

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable.

 

ITEM 2OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

ITEM 3.KEY INFORMATION

 

A. Selected Financial Data

 

The following table presents selected consolidated financial information for our company. The consolidated statements of operations data for the years ended December 31, 2009 and 2010, the six months ended June 30, 2011 and the year ended June 30, 2012 and our balance sheet data as of June 30, 2011 and 2012 included elsewhere in this annual report have been derived from our consolidated financial statements for the relevant periods, and are prepared and presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The consolidated statements of operations data for the year ended December 31, 2008 have been derived from our audited consolidated financial statements for the year December 31, 2008, which are not included in this annual report. Our historical results do not necessarily indicate results expected for any future periods. You should read the following information in conjunction with our consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.

 

Our consolidated financial statements for the year ended December 31, 2010, the six months ended June 30, 2011 and the year ended June 30, 2012 have been audited by GHP Horwath, P.C. and our consolidated financial statements for the years ended December 31, 2008 and 2009 have been audited by Ernst & Young Hua Ming. Both GHP Horwath and Ernst & Young Hua Ming are independent registered public accounting firms.

 

2
 

 

   

For the Year Ended December 31,

   

For the Year Ended June 30,

   

For the Six Months Ended

June 30,

 
   

2008

   

2009

   

2010

   

2012

   

2011

 
   

RMB

   

RMB

   

RMB

   

RMB

   

$

   

RMB

 
                                     
    (In thousand, except share, per share and per ADS data)  
Consolidated Statements of Operations Data:                                                
Revenue     3,000       3,013       29,022       6,918,807       1,089,061       1,026,168  
Cost of revenue     (2,651 )     (5,285 )     (17,345 )     (5,383,062 )     (847,326 )     (779,114 )
Gross profit     349       (2,272 )     11,677       1,535,745       241,735       247,054  
Operating expenses:                                                
Selling, general and administrative expenses     (864,771 )     (89,619 )     (98,671 )     (1,361,201 )     (214,261 )     (271,112 )
Research and development expenses     (1,932 )     (1,156 )     (114 )     (32,037 )     (5,043 )     (7,033 )
Total operating expenses     (866,703 )     (90,775 )     (98,785 )     (1,393,238 )     (219,304 )     (278,145 )
Operating profit/(loss)     (866,354 )     (93,047 )     (87,108 )     142,507       22,431       (31,091 )
Other income (expenses):                                                
Interest income     33,744       8,489       22,448       57,494       9,050       14,123  
Interest expense     (26 )     (40 )     (2,266 )     (118,548 )     (18,660 )     (22,316 )
Exchange gain/(loss)     (11,812 )     (16,602 )     (2,843 )     9,153       1,441       (12,834 )
Unrealized (loss) gain in investment           (548 )     1,946                   55,542  
Other expense     (2,119 )     (33 )     (1,341 )     (35,443 )     (5,579 )     (3,162 )
Other income     90       2,799       20,634       29,057       4,574       2,251  
Gain/(loss) from equity investments                 (2,223 )     (1,924 )     (303 )     10,232  
Income/(loss) before income tax     (846,477 )     (98,982 )     (50,753 )     82,296       12,954       12,745  
Income tax     (25,577 )     (10,915 )     (7,104 )     (13,630 )     (2,145 )     1,096  
Income/(loss) from continuing operations     (872,054 )     (109,897 )     (57,857 )     68,666       10,809       13,841  
Income (loss) from discontinued operations     121,053       (25,378 )     (1,314 )                 (2,852 )
Net income/(loss)     (751,001 )     (135,275 )     (59,171 )     68,666       10,809       10,989  
Less net income, or addition of net loss, attributable to the non controlling interest                       (84,648 )      (13,325 )      7,377  
Net income (loss) attributable to Agria Corporation     (751,001 )     (135,275 )     (59,171 )     (15,982 )     (2,516 )     18,367  

 

3
 

 

   

For the Year Ended December 31,

   

For the Year Ended June 30,

   

For the Six Months Ended

June 30,

 
   

2008

   

2009

   

2010

   

2012

   

2011

 
   

RMB

   

RMB

   

RMB

   

RMB

   

$

   

RMB

 
                                     
    (In thousand, except share, per share and per ADS data)  
Loss per ordinary share:                                                
Income/(loss) per share from continuing operations — basic and diluted     (6.91 )     (0.88 )     (0.49 )     (0.14 )     (0.02 )     0.18  
Income (loss) per share from discontinued operations — basic and diluted     (0.96 )     (0.20 )     (0.01 )                 (0.01 )
Net income (loss) per share — basic and diluted     (5.95 )     (1.08 )     (0.50 )     (0.14 )     (0.02 )     0.17  
Weighted average number of ordinary shares outstanding:                                                
Basic     126,262,529       125,271,946       118,377,357       110,766,600       110,766,600       110,766,600  
Diluted     126,262,529       125,271,946       118,377,357       110,766,600       110,766,600       110,766,600  

 

The following table presents a summary of our consolidated balance sheet data as of December 31, 2008, 2009 and 2010 and June 30, 2011 and 2012:

 

    As of December 31,     As of June 30,  
    2008     2009     2010     2011     2012  
    RMB     RMB     RMB     RMB     RMB     $  
    (In thousand)  
Consolidated Balance Sheets Data:                                                
Cash and cash equivalents     1,176,767       737,825       358,228       93,771       164,890       25,955  
Accounts receivable     162,820       109,265       284       1,122,810       970,839       152,816  
Total assets     2,077,762       2,006,153       1,617,750       8,023,491       5,219,806       821,629  
Total current liabilities     53,056       94,129       153,992       4,012,362       1,793,590       282,322  
Ordinary shares                                    
Additional paid-in capital     2,368,520       2,381,377       2,285,611       2,271,492       2,275,099       358,114  
Total shareholders’ equity     1,835,560       1,712,486       1,463,758       1,439,728       1,449,015       228,084  

 

Exchange Rate Information

 

This annual report contains translations of RMB amounts into US dollars at specific rates solely for the convenience of the reader. The conversion of RMB into US dollars in this annual report is based on the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from RMB to US dollars and from US dollars to RMB in this annual report were made at a rate of RMB6.3530 to $1.00, the noon buying rate in effect as of June 29, 2012. We make no representation that any RMB or US dollar amounts could have been, or could be, converted into US dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On September 28, 2012, the noon buying rate was RMB6.2848 to $1.00.

 

4
 

 

   Noon Buying Rate 
Period  Period End  

Average(1)

   Low   High 
   (RMB per $1.00) 
                 
2007   7.2946    7.5806    7.8127    7.2946 
2008   6.8225    6.9193    7.2946    6.7800 
2009   6.8259    6.8295    6.8470    6.8176 
2010   6.6000    6.7603    6.8330    6.6000 
2011   6.2939    6.4475    6.6364    6.2939 
Six Months ended June 30, 2012   6.3530    6.3166    6.3703    6.2790 
2012                    
April   6.2790    6.3043    6.3150    6.2790 
May   6.3684    6.3242    6.3684    6.3052 
June   6.3530    6.3633    6.3703    6.3530 
July   6.3610    6.3717    6.3879    6.3487 
August   6.3484    6.3593    6.3738    6.3484 
September   6.2848    6.3200    6.2848    6.3489 

 

 

 

(1)Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

 

This annual report contains translations of New Zealand dollar amounts into US dollars at specific rates solely for the convenience of the reader. The conversion of New Zealand Dollars into US dollars in this annual report is based on the noon buying rate in The City of New York for cable transfers of New Zealand dollars as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from New Zealand dollars to US dollars and from US dollars to New Zealand dollars in this annual report were made at a rate of $0.8027 to NZ$1.00, the noon buying rate in effect as of June 29, 2012.

 

B. Capitalization and Indebtedness

 

Not Applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D. Risk Factors

 

Risks Related to Our Business

 

Extreme weather conditions and other natural or man-made disasters could damage our production, which would cause a material reduction in revenues.

 

The seeds sold by our China seeds business are produced primarily on leased land and through a network of multiple village collectives and production companies in Gansu and other provinces in China. Our production bases are invariably subject to the risks associated with agriculture, including extreme weather conditions and other natural disasters such as drought, flood, snowstorm, earthquake, pestilence, plant diseases and insect infestations. The quality, cost and volume of seeds that we produce could be materially adversely affected by extreme weather conditions or natural disasters, harming our sales and profitability. For example, in November 2009, unexpected snow storms across northern China caused severe damage and disruptions to wide sections of the agricultural industry in Shanxi, where our operations were previously concentrated. Man-made disasters, such as arson or other acts that may adversely affect our inventory in the winter storage season, may also damage our products or our production facilities. Furthermore, natural or man-made disasters may cause farmers to migrate from their farmland, which would decrease the number of end users of our products. We are particularly susceptible to disasters or other incidents in Gansu and Xinjiang provinces, where we have the greatest concentration of our operations. In the event of a widespread failure of a seed crop in these provinces, we would likely sustain substantial loss of revenues and suffer substantial operating losses. We do not have insurance to protect against such risks.

 

5
 

 

Ganxin primarily relies on arrangements with village collectives to produce the corn seed products and we rely on contracts with production companies to produce our edible corn seed products. If we were unable to continue these arrangements or enter into new arrangements with other village collectives or other production companies, our total land acreage devoted to corn seed production would decrease and our growth would be inhibited.

 

During the year ended June 30, 2012, we outsourced the production of our edible corn seeds to production companies in Gansu and Xinjiang provinces, including our associate, Ganxin, which in the year ended June 30, 2012 had access to approximately 5,410 acres of farmland in Gansu province primarily through contractual arrangements with village collectives for corn seed production. Approximately 1,200 acres of this farmland was used for production of our field corn seeds and approximately 400 acres of this land was used for production of our edible corn seeds, with the remainder used for production of third party seeds. In the event that prices for other crops increase, these village collectives and production companies may decide to farm other crops in breach of our leases and seed production agreements with them or, following the expiration of our leases, lease the land to our competitors or other parties. If the land policy changes so that we are unable to continue to lease land, if a significant number of village collectives refuse to lease land to us upon the expiration of their current leases or if a significant number of production companies are unable to fulfill their contractual obligations to us, our business and results of operations would be materially and adversely affected. Any of these disruptions could materially and adversely affect our supply of seeds and our revenues. Such disruptions could also damage our relationships with our distributors and customers if we cannot supply them with the quantities and varieties of seeds that they expect. Moreover, due to competition for land suitable for leasing, we may be unable to lease the same land or other land at commercially reasonable prices. In the event that we have to pay more to lease land or are unable to lease sufficient land, our results of operations may be materially and adversely affected.

 

If our rights to lease land from village collectives were subject to a dispute, if the legality or validity of these rights were challenged or if we are unable to identify commercial uses or generate revenue from tland we have retained from the P3A divestiture, our operations could be disrupted and we may not be able to recover the prepayments made or suffer substantial write-downs or write-offs from our investments in the land use rights.

 

PRC law provides for the registration of land ownership and land-use rights and for the issuance of certificates evidencing land ownership or the right to use land. See “Item 4. Information on the Company—B. Business Overview—Regulation—Land Use Rights.” However, the administrative system for the registration of land ownership and land-use rights is not well-developed in rural areas where we produce most of our corn seed. As a result, we are generally not able to verify the ownership or land-use rights of the parties from whom we have leased land through the land registry system. Despite our efforts to obtain representations from the village collectives that they own the land, possess land-use rights or have the right to sub-contract the land-use right on behalf of the holder of such rights, there is a risk that they have not legally and validly granted the right to use the land to us.

 

In addition, under PRC law, if a village collective plans to enter into a lease with a party that does not belong to the collective, the contract must first be approved by at least two-thirds of the members of the village assembly or representatives of the villagers. The lease must then be submitted to the township government for approval before it becomes effective. There is a risk that the village collectives with which we have entered into leases, and which have generally advised us that the required village assembly meetings were convened and the leases were approved by the township government, have in fact not undertaken all required actions prior to entering into leases with us.

 

As of June 30, 2012, we had prepaid all of the rent due under certain leases granting access to approximately 13,500 acres of land, which were formerly held by P3A and have been retained by us following the divestiture of P3A in July 2010. The leases have remaining terms of between approximately 8 and 26 years. We are not currently using this land and are in the process of assessing appropriate revenue generating opportunities that will make use of the land. If we do not identify such opportunities, we intend to rent the land to as yet unidentified third parties. If we are unable to identify revenue generating use for the land and are unable to identify parties to whom to rent the land or if we were to lose our rights to this land, we may not be able to recoup the prepayments made and be forced to dispose of the land and incur substantial write-downs or write-offs, which may materially and adversely affect our business, financial condition and results of operations.

 

6
 

 

There is a risk that the legality or validity of our leases will be disputed or challenged with respect to P3A’s original rights to the land or P3A’s transfer of the rights to the leased land to us. If our leases are disputed or challenged, we may have to suspend our operations on such leased land. We could also lose our rights to use such land which would in turn reduce the amount to which we would be able to recoup the prepayments made and materially and adversely affect our business, financial condition and results of operations.

 

The highly fragmented agriculture industry in China makes it difficult to evaluate our future prospects and results of operations.

 

You should consider our future prospects in light of the risks and uncertainties facing companies in the highly fragmented agricultural industry in China. Some of these risks and uncertainties relate to our ability to:

 

maintain our competitive position in China and compete in each of our business segments with Chinese and international companies, many of which have longer operating histories and greater financial resources than we do;

 

offer commercially successful seed products to attract and retain direct customers and ultimate users;

 

retain access to the farmland we currently use and obtain access to additional farmland for expansion;

 

continue our existing arrangements with village collectives that grow our corn seed products and enter into new arrangements with additional village collectives;

 

maintain effective control of our costs and expenses; and

 

retain and motivate our management and skilled technical staff and recruit and integrate additional qualified personnel into our operations.

 

If we are unsuccessful in addressing any of these risks and uncertainties, our business, financial condition and results of operations may be materially and adversely affected.

 

Future acquisitions or divestitures could materially change our business and materially and adversely affect our results of operations and financial condition.

 

Our key strategic priorities require our ongoing efforts in pursuing strategic acquisitions, investments and strategic partnerships both in China and internationally. In May 2011, we acquired 50.01% of equity interest in PGW, New Zealand’s largest rural services business, which offers a wide range of products, services and solutions to farmers, growers and processors in New Zealand and internationally. In October 2009, we also entered into a strategic cooperation framework agreement with China National Academy of Agricultural Sciences, or CNAAS, providing for future cooperation across the spectrum of agricultural research. In addition, we entered into an investment agreement with CNAAS and its affiliates to invest RMB35.0 million into Beijing Zhongnong Seed Industry Co., Ltd., or Zhongnong, a company wholly owned by CNAAS and its affiliates. In September 2009, we acquired Beijing Nong Ke Yu Seeds International Co., Ltd., or Nong Ke Yu, a company engaged in research and development, production, distribution and sale of edible corn seeds, and in January 2010, we acquired Tianjin Beiao Seed Technology Development Co., Ltd., or BeOK, a company engaged in research, production and marketing of vegetable seeds. In September 2010, we acquired a 49% equity interest in Ganxin, a corn seed research, development, production and sales company based in Gansu. We are also at various stages of discussions regarding potential investments in seed companies with proprietary seed varieties.

 

7
 

 

Presented with appropriate opportunities, we may acquire businesses or assets that we believe complement our existing business. Any such acquisitions are invariably subject to associated execution risk including issues relating to the integration of new operations and personnel, geographical coordination, retention of key management personnel, systems integration and the reconciliation of corporate cultures. The acquisition and integration could cause the diversion of management’s attention or resources from our existing business or cause a temporary interruption of, or loss of momentum in, our business. We could also lose key personnel from the acquired companies. There may be unforeseen or hidden liabilities or we may not be able to generate sufficient revenue to offset new costs of acquisitions, investments and strategic partnerships. The execution of international expansion of our operations exposes us to a number of additional risks including difficulties in staffing and managing overseas operations, fluctuations in foreign currency exchange rates, increased costs associated with maintaining the ability to understand local trends, difficulties and costs relating to compliance with the different commercial, legal and regulatory requirements of the overseas locations in which we operate, failure to develop appropriate risk management and internal control structures tailored to overseas operations, inability to obtain, maintain or enforce intellectual property rights, unanticipated changes in economic conditions and regulatory requirements in overseas environment. These risks associated with strategic repositioning, future acquisitions, investments and strategic partnerships could have a material and adverse effect on our business, results of operations, financial condition or liquidity.

 

In July 2010, we divested P3A to Mr. Zhixin Xue, the president and a director of P3A, by transferring all of our interest in P3A to Mr. Xue. Following the completion of the divestiture, we acquired from Mr. Xue and cancelled shares representing 11.5% of our issued and outstanding share capital immediately prior to the transaction. The leases over nine parcels of land totaling approximately 13,500 acres previously held by P3A have been retained by us.

 

Any acquisitions and divestitures may materially affect our operations and business mix. We may also incur costs, suffer losses or incur liabilities in connection with these acquisitions or divestitures. Any acquisitions and divestitures could also result in reduction in our ADS price as result of any of the foregoing or because of market reaction to a transaction and diversion of management’s attention from other concerns. Any such acquisition or divestiture could materially and adversely affect our business, results of operation and financial condition.

 

Any plans to increase our production capacity and expand into new markets may not be successful, which could adversely affect our operating results.

 

We have increased production of certain corn and vegetable seed products and develop new seed varieties to our product portfolio. In September 2009, we acquired Nong Ke Yu, a company engaged in research and development, production, distribution and sale of edible corn seeds based in Beijing; in January 2010, we acquired BeOK, a company engaged in research, production and marketing of vegetable seeds based in Tianjin; and in September 2010, we acquired a 49% equity interest in Ganxin, a corn seed research, development, production and sales company based in Gansu. We may make other acquisitions or expansions in the future, which may place substantial demand on our managerial, operational, technological and other resources. Our failure to manage our product offerings, operations and distribution channels effectively and efficiently could materially adversely affect our operating results.

 

As part of our development, we may expand the geographic areas in which we sell or produce our products. Expansion into new markets may present operating and marketing challenges that differ from those that we currently encounter in our existing markets. For example, in April 2011, we completed a transaction to increase our shareholding in PGW from 19% to a controlling 50.01%. In March 2011, we established Shanxi Jufeng Seeds Co., Ltd., in Shanxi province, China, for an initial investment of RMB1.11 million. This new company began operations in a seeds business in Shanxi. However, as we were unable to reach a commercially viable long-term supply arrangement with our primary supplier, we ceased operations of this entity in June 2012. If we are unable to anticipate the changing demands that our expanding operations will impose on our management capacities, production systems and distribution channels, or if we fail to adapt our production systems and distribution channels to changing demands in a timely manner, our revenues could decline, our expenses could rise and our results of operations could be materially adversely affected.

 

Our business depends substantially on the continuing efforts of our management, and our business may be severely disrupted if we lose their services.

 

Our future success depends significantly upon the continued services of our management, including the management of our operating entities. We rely on our management’s experience in product development, business operations and sales and marketing, as well as on their relationships with distributors and relevant government authorities. If one or more of our key management personnel is unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all. On October 9, 2012, our board of directors accepted the notices of resignation of Messrs. Xie Tao and John Layburn from their positions as Chief Executive Officer and Chief Financial Officer, respectively, who have expressed their wishes to pursue other opportunities, effective October 10, 2012. Our board of directors has organized a selection committee and a transition committee, each comprising Mr. Guanglin Lai, the chairman of our board of directors, and two independent directors, Messrs. Sean Shao and Wah Kwong Tsang. The selection committee will work with a global executive search firm in identifying suitably qualified candidates to fill these positions. Additionally, in the interim, the transition committee will oversee the management transition process. However, we may not be able to find suitable replacements for Messrs. Xie and Layburn on a timely basis. The loss of the services of our key management personnel, in the absence of suitable replacements, could materially adversely affect our operations and financial condition, and we may incur additional expenses to recruit and train personnel. Each member of our management team has entered into an employment agreement with us, which contains confidentiality and non-competition provisions. If disputes arise between our management and us in light of the uncertainties within the PRC legal system, there is a risk that some of the provisions of these agreements may not be enforced or enforceable in China, where our managers reside and hold most of their assets.

 

8
 

 

We rely on contractual arrangements with Guanli for our China operations, which may not be as effective in providing control over our operating entity as direct ownership.

 

Because PRC regulations currently restrict foreign ownership of corn seed companies directly in China, we have no equity ownership interest in Guanli and must rely on contractual arrangements to control and operate it. The contractual arrangement with Guanli may not be as effective in providing control over the entity as direct ownership. In the future, Guanli may fail to take actions required for our business despite its contractual obligation to do so. Guanli is able to transact business with parties not affiliated with us. If Guanli fails to perform under its agreements with us, we may have to rely on legal remedies under Chinese law, which we cannot be sure would be available. In addition, we cannot be certain that the individual equity owners of Guanli would always act in our best interest.

 

Our growth prospects may be materially and adversely affected if we are unable to develop or acquire new products.

 

The majority of the products provided by our China seeds business are upstream products ultimately used by farmers in China. The profitability of our business depends on sustained and recurring orders from our direct customers, which include distributors, breed improvement and reproductive stations and other intermediaries. Reorder rates are uncertain due to several factors, many of which are beyond our control. These factors include changing customer preferences, competitive price pressures, failure to develop new products to meet the evolving demands of farmers in China, the development of higher-quality products by our competitors and general economic conditions. If we are unable to develop or acquire additional products that meet the demands of farmers in China, or if our competitors develop products that are favored by farmers in China, our growth prospects may be materially and adversely affected and our revenues and profitability may decline.

 

One or more of our distributors could engage in activities that are harmful to our brand and to our business.

 

Our seed products are sold primarily through distributors, and those distributors are responsible for ensuring that our products have the appropriate licenses to be sold to farmers in their provinces. If those distributors do not obtain the appropriate licenses, their sales of our products in those provinces may be illegal, and we may be subject to government sanctions, including confiscation of illegal revenues and a fine of between two and three times the amount of such illegal revenues. Unlicensed sales in a province may also cause a delay for our other distributors in receiving a license from the authorities for their provinces, which could further adversely impact our sales. In addition, distributors may sell our products under another brand licensed in a particular province if our product is not licensed there. If our products are sold under another brand, the purchasers will not be aware of our brand name, and we will be unable to cross-market other seed varieties or other products as effectively to these purchasers. Moreover, our ability to provide appropriate customer service to these purchasers will be negatively affected, and we may be unable to develop our local knowledge of the needs of these purchasers and their environment. Furthermore, if any of our distributors sell inferior seeds produced by other companies under our brand name, our brand and reputation could be harmed, which could make marketing of our branded seeds more difficult.

 

Our operating results may fluctuate due to a number of factors, some of which are beyond our control, and you may not be able to rely on our historical operating results as an indication of our future performance.

 

Our operating results may fluctuate due to a number of factors, some of which are beyond our control. Our quarterly and annual revenues and costs and expenses as a percentage of our revenues may differ significantly from our historical rates. Our operating results in future quarters may fall below expectations. Business disruption in key sales periods may significantly impact our full year results. Any unexpected seasonal or other fluctuations could adversely affect our business and results of operations. Future acquisitions or divestitures may also materially change our business mix and adversely affect our results of operations and financial condition.

 

9
 

 

Our future profitability depends on our ability to secure sufficient orders from customers. An adverse change in market conditions may materially adversely affect our operating results if we cannot adjust our operating and marketing strategy to respond to such changes. Our results of operations may be materially and adversely affected by reduced orders and profit margins in the event of a slowdown in market demand, an increase in business competition, a decrease in government subsidies to farmers, increased costs, or other reasons. As such, we may not be able to maintain a similar level of profitability and you may not be able to rely on our historical operating results as an indication of our future performance.

 

A severe or prolonged downturn in the global economy or the markets that we primarily operate in could materially and adversely affect our revenues and results of operations.

 

The global financial markets have experienced significant disruptions since 2008 and the effects of the crisis have persisted to the present. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility and diminished expectations for economic growth around the world. The grim economic outlook has negatively affected business and consumer confidence and contributed to volatility of unprecedented levels.

 

We and our subsidiary PGW primarily operate in China, New Zealand, Australia and South America. Weak economic conditions and decreasing agricultural commodity demand and prices across the world may have a negative impact on agricultural production and the rural economies in China, New Zealand, Australia and South America. Lower commodity prices reduce farmers’ income and weaken their confidence in the development of agricultural business. In turn, this may limit their ability or lessen their willingness to use more expensive agricultural products, including the ones we produce. There are still great uncertainties regarding economic conditions and the demand for agricultural commodities. Continued turbulence in the international markets and economies and prolonged declines in agricultural commodity demand and prices in China, New Zealand, Australia and South America may adversely affect our business, revenues and results of operations.

 

We have limited insurance coverage on our assets in China and any uninsured loss or damage to our property, business disruption or litigation may result in our incurring substantial costs.

 

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. Other than automobile insurance on certain vehicles and property and casualty insurance for some of our assets, we do not have insurance coverage on our assets or inventories, nor do we have any business interruption, product liability or litigation insurance for our operations in China. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured loss or damage to property, business disruption or litigation may result in our incurring substantial costs and the diversion of our resources, which may materially adversely affect our results of operations, financial condition and/or liquidity.

 

The PRC agricultural market is highly competitive and our growth and results of operations may be adversely affected if we are unable to compete effectively.

 

The agricultural market in China is highly fragmented, largely regional and highly competitive, and we expect competition to increase and intensify within the sector. We face significant competition in our corn seed and sheep lines of business. Many of our competitors have greater financial, research and development and other resources than we have. Competition may also develop from consolidation within the corn seed industry in China or the privatization of corn seed producers that are currently operated by local governments in China. According to the Opinion on Enhancement of Market Supervision regarding Seed Administration Reform issued by the General Office of the PRC State Council in May 2006, local government agricultural administrative offices were required to separate their governmental administrative functions from seed production activities by the end of June 2007 and, therefore, more privately-owned seed companies may emerge in the future. Our competitors may be better positioned to take advantage of industry consolidation and acquisition opportunities than we are. The reform and restructuring of state-owned equity in seed enterprises will likely lead to the reallocation of market share in the seed industry, and our competitors may increase their market share by participating in the restructuring of state-owned seed companies. Such privatization would likely result in increased numbers of market participants with more efficient and commercially viable business models. In addition, the PRC government currently restricts foreign ownership of any domestic seed development and production business to no more than 50%. When and if such restrictions are lifted, multinational corporations engaged in the seed business may expand into the agricultural market in China. These companies have significantly greater financial, technological and other resources than we do and may become our major competitors in China. As competition intensifies, our margins may be compressed by more competitive pricing and we may lose our market share and experience a reduction in our revenues and profit.

 

10
 

 

If we are unable to estimate farmers’ future needs accurately and to match our production levels to meet the demand of our direct customers, our business, financial condition and results of operations may be materially and adversely affected.

 

Due to the nature of the seed industry, we normally produce seeds according to our production plan before we sell them to distributors, which are our direct customers. Farmers, who are the end users of our seeds, generally make purchasing decisions for our products based on market prices, economic and weather conditions as well as other factors that we and our distributors may not be able to anticipate accurately in advance. If we fail to accurately estimate the volume and types of products sought by farmers, we may produce seeds that are not in demand. Unsold inventory could eventually be sold as field corn to end users at much lower prices than those of field corn seeds. Aged inventory could result in asset impairment, which would cause us to suffer a loss and incur an increase in our operating expenses. Conversely, if we underestimate demand, we may not be able to satisfy our distributors’ demand for corn seeds, and as a result damage our customer relations and end-user loyalty. Failure to estimate farmers’ future needs and to match our production to our direct customers’ demands may materially and adversely affect our business, financial condition and results of operations.

 

If Ganxin is not able to recover all of the advances paid to village collectives or if a substantial number of our customers fail to pay for our products, our liquidity and financial condition may be materially and adversely affected.

 

Ganxin provides cash advances to the village collectives that grow field corn seeds for it so they can purchase fertilizer and other production materials. At the end of the growing season, after taking delivery of corn seeds, Ganxin credits the advances against the purchase prices payable to the village collectives. If the village collectives fail to produce or deliver the contracted amounts of corn seeds by the end of each growing season, Ganxin may not be able to recover all of the advances paid to the village collectives and its financial condition may be materially and adversely affected.

 

The resources we devote to research and development may not result in commercially viable or competitive products.

 

Our success depends in part on our ability to develop new products. Research and development in the seed industries is generally expensive and prolonged. For example, seed development takes at least five years, as measured from the selection of the variety of seed for product development to the launch of a new seed product on the market. Due to the uncertainties and complexities associated with seed and biotechnological research, seed products may not survive the development process, may not ultimately be commercially viable or may not pass government testing in the relevant provinces. In addition, we have significantly fewer financial resources than many of our international competitors. If the resources we devote to research and development do not result in products that survive the development stage, do not result in products that we can sell to our customers or do not pass government testing, our results of operations may be materially and adversely affected.

 

We may be subject to intellectual property claims in the future which could result in substantial costs and divert our financial and management resources away from our business.

 

We are subject to the risk that the products, technology and processes that we have developed in collaboration with institutes and universities will infringe upon patents, copyrights, trademarks or other third-party intellectual property rights. We may be subject to legal proceedings and claims relating to the intellectual property of others. If any such claims arise in the future, litigation or other dispute resolution proceedings may be necessary to allow us to retain our ability to offer our products. Even if we prevail in contesting such claims, this could result in substantial costs and divert our management’s resources and attention. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property rights, incur additional costs to license or develop alternative products and be forced to pay fines and damages, any of which could materially and adversely affect our business and results of operations.

 

11
 

 

Failure to protect our intellectual property rights may undermine our competitive position, and legal action to protect our intellectual property rights may be costly and divert our management’s resources.

 

We rely primarily on trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection, and the actions we take to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could materially adversely affect our business, financial condition or operating results. Preventing unauthorized use of proprietary technology can be difficult and expensive. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The outcome of such litigation may not be in our favor. Such litigation may be costly and may divert management’s attention as well as consume resources which could otherwise have been devoted to our business. An adverse determination in any such litigation would impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would bear all costs arising from such litigation to the extent that we are unable to recover them from other parties. The occurrence of any of the foregoing may materially adversely affect our business, results of operations and financial condition.

 

Historically, implementation of PRC intellectual property laws has been lacking, primarily because of ambiguities in PRC law and difficulties of enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as those in the United States or other countries, which increases the risk that we may not be able to adequately protect our intellectual property.

 

We face risks and costs associated with our strategic partnership and investment that may negatively impact our business, results of operations and financial condition.

 

In October 2009, we entered into a strategic cooperation framework agreement with CNAAS, which provides for future cooperation across the spectrum of agricultural research. In addition, we entered into an investment agreement with CNAAS and its affiliates to invest RMB35.0 million into Zhongnong, a company wholly owned by CNAAS and its affiliates. The strategic cooperation framework grants Zhongnong preferential rights to the commercialization of research undertaken by CNAAS. We may not realize the anticipated benefits of our strategic partnership and we face risks, uncertainties and disruptions associated with the integration process, such as diversion of our management’s attention from other business concerns. In addition, our operating results may suffer because of costs related to the strategic partnership and potential additional investments required to commercialize the research. Furthermore, notwithstanding Zhongnong’s preferential rights, CNAAS may partner with other companies in commercializing some of their research.

 

In April 2011, we increased our shareholding in PGW to 50.01%. PGW is a public company listed on the New Zealand Stock Exchange and is subject to a different set of rules and regulations from U.S. securities laws and the Corporate Governance Rules of the New York Stock Exchange. Therefore, rules and regulations applicable to PGW may prohibit or restrict our ability to take actions with respect to PGW. Any failure to successfully manage our strategic partnership and investment may have a material adverse effect on our business and results of operations.

 

We face risks related to PGW’s management, business and operations that may adversely affect our results of operations and financial condition.

 

We expect a substantial portion of our revenues to be derived from PGW, and therefore our revenues have been and will continue to be directly tied to the business and operations of PGW. PGW is New Zealand’s leading provider of agricultural services and its business is spread across the agriculture, livestock, merchandising, insurance, real estate, irrigation and pumping and financial services sectors, all of which may be subject to various risks and factors beyond our control. If PGW’s business and operations are not as successful as we expect or its revenues do not reach levels that we expected when we acquired our shareholding in it, or if PGW’s business and operations are disrupted by changes to its key management without suitable replacements, our results of operations and financial condition may be materially and adversely affected.

 

12
 

 

We are dependent on the rural sectors in the markets where PGW operates.

 

Our revenues and results of operations depend significantly on the prospects of the New Zealand, Australian and South American rural sectors where PGW operates.  Our prospects also depend to a significant extent on positive farmer sentiment both in New Zealand and the other countries where PGW operates, which can be affected by a wide range of factors outside our control.  The following are key factors and risks that can have a material impact on the performance of the rural sector and farmer sentiment and in turn PGW’s business performance:

 

·Fonterra milksolids payout:  The dairy sector in New Zealand is heavily influenced by the Fonterra payout announcements each year, which determine dairy farmers’ cash flows and returns for the upcoming season.  Farm financial performance is heavily determined by this metric and drives on-farm investment and expenditure decisions and subsequent demand for PGW’s products and services.

 

·Climate conditions: The rural sectors in the markets where PGW operates are exposed to volatile climate conditions, particularly given the adverse effects on farming caused by droughts or floods.  The Australian rural sector is particularly susceptible to drought, which has the potential to result in a material adverse impact on that country’s agricultural revenue.

 

·Commodity price and volume: Prices and sales volumes for agricultural commodities such as lamb, beef, wool and dairy products are key factors affecting farm financial performance.  Farm financial performance dictates farmer expenditure, which significantly influences demand for PGW’s products and services and, in turn, our revenues and results of operations.  

 

·Regulatory changes: Changes to the regulatory structure of the New Zealand, Australian or South American rural economies could either expand or reduce the range of products and services required by farmers and other rural sector participants.

 

·Animal health and crop conditions: An outbreak of animal or crop disease may dramatically reduce production or restrict the ability of PGW’s clients to sell their stock or production on domestic and international markets.

 

·International trade barriers: Barriers in the form of foreign government subsidies and quota restrictions can restrict the ability of New Zealand, Australian and South American industries to sell their agricultural commodities in international markets and can also affect the price at which such commodities are sold.

 

·Environmental regulations: Changes to environmental regulations and the resulting compliance burdens on PGW or its customers could adversely impact PGW’s future performance.

 

Our ability to cause PGW to act solely in our interest may be restricted by agreements with the minority shareholders of Agria Asia Investments Limited and other factors.

 

We control PGW through our majority ownership of Agria Asia Investments Limited, or Agria Asia, which indirectly holds a 50.22% shareholding in PGW. However, we have entered into shareholder agreements with Ngai Tahu Capital Limited, or Ngai Tahu, and New Hope International (Hong Kong) Limited, or New Hope International, the minority shareholders of Agria Asia, which contain provisions protecting the rights of minority shareholders, including those that would require the unanimous shareholder approval for certain decisions. Additionally, certain decisions with respect to PGW may require super-majority shareholder approval, which our 50.22% shareholding does not ensure. Furthermore, we may be ineligible to vote on related party transactions between PGW and us, and such related party transactions may not be approved by PGW’s remaining shareholders. As such, restrictions on our ability to exercise control over PGW may adversely affect our business, results of operations and financial condition.

 

13
 

 

PGW is subject to regulatory oversight in its business operations and as a listed issuer.

 

PGW is subject to regulatory oversight both in its business operations and as a listed issuer on the New Zealand Stock Exchange.  PGW’s businesses are required to comply with a wide range of New Zealand statutory and regulatory requirements.  A material failure to comply with these requirements could cause material damage to PGW’s reputation and expose PGW to the risk of financial or other penalties. Additionally, the introduction of new, or the variation of existing, standards and regulations in the countries in which PGW operates may require changes to its methods of operation, product performance or specifications.  Any such changes are likely to require capital and other expenditures to be incurred by PGW and us to meet any new compliance requirements.

 

PGW is subject to movements in raw material prices and relies on key suppliers for its raw materials.

 

PGW is subject to movements in the underlying prices for the raw materials used in the manufacture of its products, commodities related to the distribution of its products and for commodities sold through its stores. Increases in these raw material and commodity prices may adversely affect PGW’s profitability, which will adversely affect our results of operations. We and PGW may not be able to pass on increased costs to consumers, which may have a material adverse effect on our profitability and results of operations.

 

Additionally, PGW has key suppliers of raw materials, products and services in several of the markets which it serves. PGW does not have long-term supply contracts with all of its key suppliers. If any of these key suppliers become unable or unwilling to supply PGW with its products at commercially acceptable prices, or at all, PGW’s business and our results of operation may be materially and adversely affected.

 

Contractual agreements with the other shareholders of Ganxin may affect our shareholding and level of influence in Ganxin.

 

Under the terms of contractual agreements we have entered into with the other shareholders of Ganxin, these shareholders have the right to purchase our shares in Ganxin in certain circumstances and the right to require us to purchase their shares in Ganxin in certain circumstances. The circumstances under which we buy or sell shares of Ganxin under these contractual arrangements may not be commercially favorable to us. The price or consideration for which we purchase or sell shares of Ganxin may not reflect the true value of those shares. If we are required to sell our shares of Ganxin to the other shareholders of Ganxin, our field corn seed product business would be directly impacted and our business, results of operations and financial condition may be adversely affected.

 

We may not possess all of the licenses required to operate our business, or we may fail to maintain the licenses we currently hold. This could subject us to fines and other penalties, which could materially adversely affect our results of operations.

 

We are required to hold a variety of permits and licenses to conduct our corn seed and seedling businesses in China. We may not possess all of the permits and licenses required for each of our business segments. In addition, the approvals, permits or licenses required by governmental agencies may change without substantial advance notice, and we could fail to obtain the approvals, permits or licenses required to expand our business. If we fail to obtain or to maintain such permits or licenses, or if renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality of the products that we could offer. As a result, our business, results of operations and financial condition could be materially and adversely affected.

 

We may be subject to product quality or liability claims, which may cause us to incur litigation expenses and to devote significant management time to defending such claims, and if such claims are determined adversely to us we may be required to pay significant damage awards.

 

In addition to the genetic traits and the quality of our products, the performance of our products depends on climate, geographic conditions, cultivation method, farmers’ degree of knowledge and other factors. At the same time, the viability of some farmland in China has deteriorated due to toxic and hazardous materials from farmers’ overuse of herbicides. Moreover, different production methods might result in inconsistent quality. These factors can result in sub-optimal production yields. Farmers generally attribute sub-optimal production yields to lower quality agricultural raw materials. In addition, inconsistent quality of products may also result in the unwillingness of consumers to purchase products or pay for products already purchased that they consider to be sub-standard.

 

14
 

 

We may be subject to legal proceedings and claims from time to time relating to the quality of our products. The defense of these proceedings and claims could be both costly and time-consuming and significantly divert the efforts and resources of our management. An adverse determination in any such proceeding could subject us to significant liability. In addition, any such proceeding, even if ultimately determined in our favor, could damage our reputation and prevent us from maintaining or increasing sales and market share. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase of our products.

 

Seed prices and sales volumes may decrease in any given year with a corresponding reduction in sales, margins and profitability.

 

There have been periods of instability during which seed and other commodity prices and sales volumes have fluctuated significantly. Commodities can be affected by general economic conditions, weather, outbreaks of disease and factors affecting demand, such as the availability of financing, competition and trade restrictions. Our attempts to differentiate our products from those of other seed producers have not prevented some seed markets from having the characteristics of a commodity market. As a result, the price that we are able to demand for our seed depends on the amount of seed available from other producers. Therefore, prices may be volatile even in the absence of significant external events that might cause volatility. As a result, the amount of revenue that we receive in any given year is subject to change. As production levels are determined prior to the time that the volume and the market price for orders is known, we may have too much or too little product available, which may materially and adversely affect our revenues, margins and profitability.

 

The advent of the genetic modification of corn seeds in China could adversely affect our business, causing us to lose business opportunities, market share and revenues.

 

We rely upon traditional methods of creating corn seed hybrids to develop new products. There has been a worldwide increase in the development and application of genetically modified agricultural products to increase the quality and quantity of crop yields. Advances in technology are increasingly allowing the use of gene modification to produce seeds that are superior to those produced by traditional methods. The production and commercial sale of genetically modified corn seed have not yet obtained public acceptance and are not encouraged by government authorities in China. However, if government attitude changes to encourage genetically modified corn seeds, demand may develop for these products, and we expect that we will need to produce genetically modified products to meet customer demands.

 

Should the Chinese government change its attitude with respect to genetically modified corn seeds, our current steps to respond to the potential competitive threat posed by genetically modified agricultural products, including our research and development activities with respect to genetically modified corn seeds, may not allow us to compete successfully. In particular, our competitors may have more advanced technology or may market genetically modified seed more successfully than we do.

 

Our growth prospects may be affected if we are unable to obtain extensions to or additional capital to finance new acquisitions or existing facilities used to make historical acquisitions.

 

We may require additional cash resources in order to make acquisitions. In general, we do not know the cost of an acquisition until we analyze the opportunity, complete due diligence and begin negotiations. If the cost of any such acquisition exceeds our cash resources, we will need to seek additional cash resources, and may seek to sell additional equity or debt securities or borrow under credit facilities. The sale or issuance of additional equity securities could dilute our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. For example, both Agria Asia, our subsidiary that ultimately holds our investment in PGW, and PGW had substantial indebtedness as of the date of this annual report. Depending on the amount and timing of cash flows arising from its indirect holding in PGW, we may need to refinance some or all of the debt in Agria Asia. Furthermore, New Hope International has the right to sell its shares in Agria Asia to Agria Group Limited, or Agria Group, on the terms and conditions provided in the shareholders agreement at a certain repurchase price determined pursuant to a supplemental agreement entered into between Agria Group and New Hope International in June 2011. The obligation of Agria Group in connection with this put option held by New Hope International may be on terms that are not commercially favorable to us. Additionally, we funded our equity investment in Agria Asia through letters of credit and bank loans secured by our RMB cash deposits. Our existing debt may also have an adverse effect our ability to obtain financing in amounts or on terms acceptable to us, if we are able to obtain financing at all.

 

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We funded the acquisition of PGW partly through debt that matures between October 2012 and February 2014, and partly through equity financing in Agria Asia Investments through New Hope International, which holds an option to require us to repurchase its shares in Agria Asia Investments between May 2013 and May 2014. In order to meet these repayment and repurchase obligations, we may need to extend our existing credit facilities or obtain new credit facilities. Additionally, with respect of our acquisition debt that matures in October 2012, which was provided by a bank loan from a New Zealand bank and a subordinated loan from Livestock Investment Corporation Limited, or LIC, we have received approval from the New Zealand bank to extend the terms of our remaining loan and are in the process of negotiating suitable arrangements with LIC for the repayment of their subordinated loan or otherwise extend the loan consistent with the terms of subordination arrangements between us, the New Zealand bank and LIC. If we are unable to extend existing facilities or obtain new ones, we may be required to sell a portion of our shares in PGW, which may lead to us no longer consolidating PGW’s results of operation, which would in turn have a material impact on our future reported results of operation. We may also not be able to secure, repay or refinance debt incurred to fund acquisitions and purchases of equity interests, especially if the acquisition or equity interest purchase does not result in the benefits anticipated. As a result, our operating results and financial condition may be materially and adversely affected.

 

Failure to properly manage our storage system may damage our products, resulting in operating losses.

 

Seed storage entails significant risks associated with the storage environment, including moisture, temperature and humidity levels, deviations in which may result in damage to seeds in stock. Any significant damage to the products we have in storage could materially and adversely affect our results of operations.

 

Failure to achieve and maintain effective internal controls could materially adversely affect the trading price of our ADSs.

 

We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, has adopted rules requiring public companies to include a report of management on the effectiveness of such companies’ internal control over financial reporting in their annual reports. In addition, an independent registered public accounting firm for a public company must report the effectiveness of our company’s internal control over financial reporting. We became subject to these requirements from the fiscal year ended December 31, 2008.

 

As of December 31, 2008, we and our independent registered public accounting firm identified a number of control deficiencies, including a material weakness, in our internal control over financial reporting. The material weakness observed was that controls designed to ensure that significant transactions, accounting estimates, and other adjustments were properly reviewed, analyzed and monitored by sufficient and appropriate accounting staff on a timely basis did not operate effectively. Additionally, our management concluded that our internal control over financial reporting was not effective as of December 31, 2009. When finalizing the financial statements for the year end December 31, 2009, our auditors identified a material misstatement from the misapplication of U.S. GAAP on the presentation of expenses, recorded by our consolidated affiliate, comprising impairment charges to damaged inventories and long-lived assets caused by extreme weather conditions, which constituted a material weakness. As a result, an audit adjustment was required to reclassify non-operating expenses to operating expenses. Management recorded the audit adjustment, which did not result in any change to net income reported by us. In response to these material weaknesses, our management took remediation measures in 2010, including strengthening our monitoring control over financial reporting, implementing a series of review and monitoring controls over the financial statement closing process, appointed external consultants with relevant expertise and experience in U.S. GAAP and internal control over financial reporting and strengthening our internal audit team. Management has tested the effectiveness of these newly implemented controls and found them to be operating effectively for a sufficient period of time to reduce the possibility of a material misstatement to less than a reasonably possible likelihood. As a result, management has concluded that, as of December 31, 2010, the material weakness disclosed in our Form 20-F for the year ended December 31, 2009 had been remediated. Our management has concluded that our internal control over financial reporting was effective as of June 30, 2012. See “Item 15. Controls and Procedures.”

 

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If we fail to maintain effective internal controls over financial reporting in the future, we may not be able to produce reliable financial reports and prevent fraud and investors may lose confidence in the reliability of our financial statements, which would negatively impact the trading price of our ADSs. Our reporting obligations as a public company, including our efforts to comply with Section 404 of the Sarbanes-Oxley Act, will continue to place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

 

If we grant additional employee share options, restricted shares or other share incentives in the future, our net income could be adversely affected.

 

We have adopted a share incentive plan and granted share options under the plan. We are required to account for share-based compensation in accordance with Accounting Standards Codification, or ASC, 718-10, “Compensation-Stock Compensation: Overall,” which requires a company to recognize, as an expense, the fair value of share options and other share-based compensation to employees based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. If we grant additional options, restricted shares or other equity incentives in the future, we could incur significant compensation charges equal to the fair value of the additional options, restricted shares and other equity incentives, and our net income could be adversely affected.

 

We do not maintain insurance on our seed storage facilities; therefore, if a fire or other disaster damages some or all of our stored seeds, we will not receive any compensation.

 

We store a portion of our seed products from February to September. We do not maintain insurance on our storage facilities. A fire or other natural or man-made disaster may damage our stored products, particularly if such event occurs shortly before the peak season for the sales of seeds products, which could materially adversely affect our operating results and financial condition.

 

Risks Related to Doing Business in China

 

If the PRC government finds that the agreements that establish the structure for operating our Chinese businesses do not comply with PRC governmental restrictions on foreign investment in the seed industry, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Most of our operations are conducted through our contractual arrangements with our affiliated entities and their shareholders in China. PRC regulations currently restrict foreign ownership of corn seed companies. For a description of these regulations, see “Item 4. Information on the Company—B. Business Overview—Regulation—Seed Law, Animal Husbandry Law and Other Relevant Regulations—Seed Law and Other Relevant Regulations.” We have entered into contractual arrangements with our affiliated entity, Guanli, and its shareholders, all PRC citizens, which enable us to, among other things, exercise effective control over the affiliated entities. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Guanli and Its Shareholders” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Agria Agriculture and Zhongyuan and Their Respective Shareholders.”

 

If we or either of our PRC subsidiaries or affiliated entity or our corporate structure is found to be in violation of any existing or future PRC laws or regulations (for example, if we are deemed to be holding equity interests in an entity in which direct foreign ownership is restricted), the relevant PRC regulatory authorities, including the State Administration of Industry and Commerce, the State Administration of Foreign Exchange, or SAFE, and relevant agencies of the Ministry of Commerce, would have broad discretion in dealing with such violations, including:

 

revoking Guanli’s business and operating licenses;

 

confiscating relevant income and imposing fines and other penalties;

 

prohibiting or restricting Guanli’s operations in China;

 

requiring us or Guanli to restructure Guanli’s ownership structure or operations;

 

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restricting or prohibiting our use of the proceeds from our initial public offering to finance our businesses and operations in China; or

 

imposing conditions or requirements with which we or our subsidiaries or Guanli may not be able to comply.

 

The imposition of any of these penalties could materially adversely affect our ability to conduct our business.

 

The shareholders of Guanli may breach our agreements with them or may have potential conflicts of interest with us, and we may not be able to enter into agreements to derive economic benefits from Guanli, which may materially and adversely affect our business and financial condition.

 

The shareholders of Guanli, our consolidated affiliated entity in the PRC, may breach or refuse to renew the existing contractual arrangements with us that allow us to effectively control Guanli, and receive economic benefits from their operations. They may not always act in the best interests of our company. We do not have existing arrangements to address potential conflicts of interest between these individuals and our company. We rely on these individuals to abide by the contract laws of China and to honor their contracts with us in order for us to effectively control Guanli and to receive the economic benefits of Guanli. If we cannot resolve any conflicts of interest or disputes that may arise between us and the shareholders of Guanli or if the shareholders breach our agreements with them, we would have to rely on legal proceedings, which may disrupt our business. There is also substantial uncertainty as to the outcome of any such legal proceedings.

 

Any limitation of PRC law and regulations on the ability of our subsidiaries and affiliated entity to distribute dividends or make other payments to us could materially adversely affect our ability to conduct our business.

 

Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries and our affiliated entity in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital, and to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the shareholders’ meeting or the board. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries and our affiliated entity in China incur debt on their own behalf in the future, the loan agreements governing that debt may restrict their ability to pay dividends or make payments to us according to the contractual agreements. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we have in place in a manner that would materially and adversely affect our subsidiaries’ ability to pay dividends and other distributions to us. Any limitation on the ability of our subsidiaries and our affiliated entity to distribute dividends or other payments to us could materially limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, or otherwise fund and conduct our business.

 

Pursuant to the new PRC enterprise income tax law that became effective on January 1, 2008, or the 2008 EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered as a resident enterprise and will be subject to a PRC income tax on its global income. According to the implementing rules of the 2008 EIT Law, or the Implementing Rules, “de facto management bodies” refer to “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” On April 22, 2009, the State Administration of Taxation promulgated a circular setting out the criteria for determining whether “de facto management bodies” are located in China for overseas incorporated, domestically controlled enterprises. However, as this circular only applies to enterprises incorporated under the laws of foreign countries or regions that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “de facto management bodies” for overseas incorporated enterprises that are not controlled by PRC enterprises or groups of PRC enterprises like us. Accordingly, we may be considered a resident enterprise and may therefore be subject to a PRC income tax on our global income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiaries, such PRC income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

 

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Under the applicable PRC tax laws in effect before January 1, 2008, dividend payments to foreign investors made by foreign-invested enterprises are exempt from PRC withholding tax. Pursuant to the 2008 EIT Law and the Implementing Rules effective as of January 1, 2008, however, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign investors are considered non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where we are incorporated, does not have such a tax treaty with China. China Victory International Holdings Limited, or China Victory, our wholly owned subsidiary and the direct holder of 100% equity interest in Aero Biotech Science & Technology Co., Ltd., or Agria China, and Agria Brother Biotech (Shenzhen) Co., Ltd., or Agria Brother, is incorporated in Hong Kong. According to the Arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, or the Mainland and Hong Kong Taxation Arrangement, and the Notice in Relation to the Dispatch of Schedule of Agreed Tax Rates on Dividends issued by the State Administration of Taxation (State Taxation Circular No. 112 (2008)), dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise).

 

On October 1, 2009, the Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation) became effective. Under these measures, our Hong Kong subsidiary needs to obtain approval from the competent local branch of the State Administration of Taxation in order to enjoy the preferential withholding tax rate of 5% in accordance with the tax treaty. In February 2009, the State Administration of Taxation issued Notice No. 81. According to Notice No. 81, in order to enjoy the preferential treatment on dividend withholding tax rates, an enterprise must be the “beneficial owner” of the relevant dividend income, and no enterprise is entitled to preferential treatment pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the major purpose of which is to obtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the applicable tax rates, if it determines that any taxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. In October 2009, the State Administration of Taxation issued Notice No. 601 to provide guidance on the criteria to determine whether an enterprise qualifies as the “beneficial owner” of the PRC sourced income for the purpose of obtaining preferential treatment under tax treaties. Pursuant to Notice No. 601, the PRC tax authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the “substance over form” principle in the review. Notice 601 specifies that a beneficial owner should generally carry out substantial business activities and own and have control over the income, the assets or other rights generating the income. Therefore, an agent or a conduit company will not be regarded as a beneficial owner of such income. Since the two notices were issued, it has remained unclear how the PRC tax authorities will implement them in practice and to what extent they will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in China to our Hong Kong subsidiary. Under the 2008 EIT Law and the Implementing Rules, if China Victory is regarded as a resident enterprise, the dividends payable to China Victory from Agria China and Agria Brother will be exempt from the PRC income tax. If China Victory is regarded as a non-resident enterprise and the relevant tax authority determines that China Victory does not qualify as the “beneficial owner” of the dividend income it receives from our PRC subsidiaries and therefore is subject to the higher 10% withholding tax rate, the amount of funds available to us to meet our cash requirements, including the payment of dividends to our shareholders, could be reduced correspondingly.

 

In addition, because uncertainty remains regarding the interpretation and implementation of the 2008 EIT Law and the Implementing Rules, if we are regarded as a PRC resident enterprise, then any dividends to be distributed by us to our non-PRC shareholders or any gains realized by non-PRC shareholders or ADS holders from transfer of our shares or ADSs may be subject to PRC withholding tax. If we are required under the 2008 EIT Law to withhold PRC income tax on the above dividends or gains, the investment in our shares or ADSs may be materially and adversely affected.

 

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We benefit from certain PRC government incentives. Expiration of, changes to, disputes over or challenges against these incentives or protectionism arising from the incentives could adversely affect our operating results.

 

Prior to January 1, 2008, companies established in China were generally subject to a state and local enterprise income tax, or the EIT, at statutory rates of 30% and 3%, respectively. However, the Chinese government has provided incentives to high-technology companies and agricultural companies in order to encourage the development of the high-technology and agricultural industries. These incentives include reduced tax rates, subsidies and other measures. Agria China, our wholly-owned subsidiary established in March 2007 in China, was initially granted a full exemption from the EIT for the fiscal years 2007 to 2009. As a result of the 2008 EIT Law and its Implementing Rules, Agria China’s EIT exemption ended on December 31, 2007, and Agria China is subject to EIT at a rate of 25% from 2008 onwards.

 

Under the 2008 EIT Law, the Implementing Rules, the State Council circulars on implementation of enterprise tax transition preferential policy and relevant rules, foreign-invested enterprises, such as our subsidiary, Agria China, and domestic companies would be subject to EIT at a uniform rate of 25%. Preferential tax treatments will continue to be granted to entities that are classified as “high and new technology enterprises strongly supported by the State” or conduct business in encouraged sectors, whether foreign-invested enterprises or domestic companies. Furthermore, enterprises that were established and that have already enjoyed preferential tax exemption or reduction for a specified term will continue to enjoy them until the expiration of such term. Uncertainty remains with respect to their interpretation and implementation. If the PRC central government challenges the preferential tax treatment enjoyed by some of our subsidiaries and consolidated affiliates, our effective tax rate applied to our income in China will likely increase to a maximum of 25%, which could materially adversely affect our financial condition and results of operations.

 

The PRC government has in recent years reduced taxes and increased subsidies and other support across the agricultural industry. For instance, the government subsidizes farmers for their seed purchases, and has increased spending on rural infrastructure. Sales of agricultural products from producers to intermediaries or to farmers are exempt from PRC value-added tax, or VAT. Discontinuance of preferential treatments granted by the Chinese government to the seed industry could adversely affect our earnings.

 

In addition, subsidies may adversely affect our ability to market our products, especially in provinces other than Shanxi where we are planning to increase our sales. Farmers can buy corn seeds designated as “high-quality” at subsidized prices, but the designation of seeds as “high-quality” is at the discretion of the local government, companies owned by the local government and local private seed companies. Because of local protectionism, this policy could result in preferential treatment for local seed producers, with locally produced seeds being designated as “high-quality”, while ours are not designated as such. If such preferential treatment were to occur, the price for our seeds to farmers in those provinces would be higher than the subsidized local seeds, and our sales in those provinces could suffer, which could materially and adversely affect our results of operations.

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct our business primarily through our subsidiaries and affiliated entity in China. Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China, and in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the violation. In addition, any litigation in China, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention.

 

SAFE regulations relating to offshore investment activities by PRC residents may increase our administrative burden and restrict our overseas and cross-border investment activity. If our shareholders and beneficial owners who are PRC residents fail to make required applications and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.

 

SAFE has promulgated several regulations, including Circular No. 75 issued in November 2005, requiring registrations with, and approvals from, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents. These regulations apply to our shareholders and beneficial owners who are PRC residents.

 

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The SAFE regulations require registration of direct or indirect investments made by PRC residents in offshore companies. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of that offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.

 

We have requested our shareholders and beneficial owners who are PRC residents to make the necessary applications and filings as required under these regulations and under any implementing rules or approval practices that may be established under these regulations. However, due to the lack of implementing rules and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how these regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. There is a risk that not all of our shareholders and beneficial owners who are PRC residents will comply with our request to make or obtain any applicable registration or approvals required by these regulations or other related legislation. The failure or inability of our PRC resident shareholders and beneficial owners to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected. See “Item 4. Information on the Company—B. Business Overview—Regulation—Foreign Exchange.”

 

In addition, under the Implementation Rules of the Administrative Measures for Individual Foreign Exchange, or the Individual Foreign Exchange Rules, issued on January 5, 2007 by SAFE, PRC citizens who are granted shares or share options by an overseas listed company according to its employee share option or share incentive plan are required, through the PRC subsidiary of such overseas listed company or any other qualified PRC agent, to register with SAFE and complete certain other procedures related to the share option or other share incentive plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas listed company may be remitted into a foreign currency account of such PRC citizen or be exchanged into Renminbi. Our PRC citizen employees who have been granted share options, or PRC option holders, are subject to the Individual Foreign Exchange Rules. If we or our PRC citizen employees fail to comply with these regulations, we or our PRC option holders may be subject to fines and legal sanctions.

 

Restrictions on currency exchange may limit our ability to utilize our revenues effectively.

 

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all of our revenues in RMB. Under our current structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB are to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

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Fluctuation in the value of the Renminbi and other currencies may materially adversely affect your investment.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the current policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Between July 21, 2005 and June 29, 2012, the RMB appreciated by approximately 23.2% against the U.S. dollar, although the pace of appreciation was uneven during the period.

 

Our financial statements are expressed in Renminbi, which is our reporting currency. Our functional currency and the functional currency of Aero-Biotech Group Limited (currently known as Agria Group Limited), China Victory, Agria Hong Kong Ltd., or Agria Hong Kong, Agria Asia, Agria Biotech Overseas Ltd., or Agria Overseas, Agria Asia Investment and Agria (Singapore) Pte. Ltd., or Agria Singapore, is the United States dollar. The functional currency of Agria New Zealand and PGW is the New Zealand dollar. The functional currency of Agria China, Agria Brother and our variable interest entities is the Renminbi. The revenues and most of the expenses of our China Seeds division, which are derived from Guanli, our consolidated affiliated entity, are denominated in Renminbi. To the extent that we need to convert US dollars into Renminbi for our operations, appreciation of the Renminbi against the US dollar would adversely affect the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into US dollars for the purpose of dividend distribution or for other business purposes, appreciation of the US dollar against the Renminbi would negatively affect the US dollar amount available to us. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue which will be exchanged into US dollars and earnings from and the value of any US dollar-denominated investments we make.

 

PGW uses derivative financial instruments to manage its exposure to interest rate and foreign currency risks arising from operational, financing and investment activities. However, limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. Additionally, the effectiveness of these hedges may be limited so that we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. Additionally, we are exposed to fluctuations in the value of the New Zealand dollar, the Australia dollar and the Euro through our subsidiary PGW. As a result, fluctuations in exchange rates may materially adversely affect your investment.

 

We face risks related to health epidemics and other outbreaks or acts of terrorism in China, which could result in reduced demand for our products or disrupt our operations.

 

Our business could be materially and adversely affected by an outbreak of H1N1 influenza A, avian flu, severe acute respiratory syndrome or another epidemic, or an act of terrorism. From time to time, there have been reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases and deaths. Since 2009, human cases of H1N1 influenza A virus infection have been identified internationally. Any prolonged recurrence of H1N1 influenza A, avian flu, severe acute respiratory syndrome or other adverse public health developments in China or elsewhere in Asia may have a material and adverse effect on our business operations. In addition, terrorist attacks, such as those that took place on September 11, 2001, geopolitical uncertainty and international conflicts, could adversely affect our business operations. Any of these events could adversely affect China’s economy and cause an immediate and prolonged drop in consumer demand. An immediate and prolonged drop in consumer demand could severely disrupt our business operations and adversely affect our results of operations. Furthermore, a significant portion of our revenues are derived from government customers, which may reduce their spending on our products during a crisis, which could adversely affect our results of operations and could probably be difficult to recover once the threat has subsided.

 

The PRC Property Rights Law may affect the perfection of the pledge in our pledge agreement with Guanli and its shareholders.

 

Under the equity pledge agreement among Guanli, the shareholders of Guanli and Agria Brother, the shareholders of Guanli have pledged all of their equity interests in Guanli to Agria Brother. The equity pledge agreement was duly created by recording the pledge on the register of shareholders of Guanli in accordance with the PRC Security Law and the PRC Contract Law. The purpose of the Guanli equity pledge agreement is to guarantee Guanli’s performance of its obligations under the exclusive technology development, technical support and service agreement, the exclusive call option agreement and the loan agreement. However, according to the PRC Property Rights Law, which became effective as of October 1, 2007, a pledge is not effective without being registered with the relevant local Administration for Industry and Commerce. Guanli has attempted to register the pledge, but the applications for registration have not been processed due to the lack of registration procedures. Guanli will continue to make efforts to register such pledge when the local Administration for Industry and Commerce implements registration procedures. If Guanli is unable to do so, the pledge itself may be deemed ineffective under the PRC Property Rights Law. If Guanli or its shareholders breach their obligations under the agreements with Agria Brother, there is a risk that Agria Brother may not be able to successfully enforce the pledge and would need to resort to legal proceedings to enforce its contractual rights.

 

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Risks Related to the ADSs

 

The trading price of our ADSs has been and continues to be highly volatile.

 

The trading price of our ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:

 

announcement of securities law class action lawsuits against us and our directors and officers;

 

delays in our periodic earnings announcements;

 

announcements of technological or competitive developments;

 

regulatory developments in our target markets affecting us, our customers or our competitors;

 

actual or anticipated fluctuations in our quarterly operating results;

 

changes in financial estimates by securities research analysts;

 

changes in the economic performance or market valuations of our seeds;

 

additions to or departures of our executive officers and key personnel;

 

fluctuations in the exchange rates between the US dollar and RMB; and

 

sales or anticipated sales of additional ADSs.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially adversely affect the market price of our ADSs.

 

Substantial future sales or perceived sales of our ADSs in the public market or substantial cancellation of our ADSs could cause the price of our ADSs to decline.

 

Additional sales of our ADSs in the public market or the perception that these sales could occur could cause the market price of our ADSs to decline. A substantial repurchase of our ADSs may adversely affect the liquidity of our shares. As of the date of this annual report, we had 110,766,600 ordinary shares outstanding, of which 48,830,000 ordinary shares were represented by 24,415,000 ADSs. All ADSs are freely transferable without additional registration requirements under the Securities Act. Since the 180-day lock-up period of our initial public offering has expired, the remaining ordinary shares not represented by ADSs are available for sale subject to the volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. Risks associated with a substantial sale or cancellation of our ADSs could materially and adversely affect the market price of our ADSs and liquidity.

 

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We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.

 

Based on the market price of our ADSs and the value and composition of our assets, we believe we were not a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for the taxable year ended June 30, 2012. However, we believe we were a PFIC in certain previous taxable years. A non-U.S. corporation will be a PFIC for any taxable year if either (1) at least 75% of its gross income for such year is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs or ordinary shares, our PFIC status will depend in large part on the market price of the ADSs or ordinary shares, which may fluctuate significantly. Certain adverse U.S. federal income tax consequences could apply to U.S. Holders (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation”) of our ADSs or ordinary shares with respect to any “excess distribution” received from us and any gain from a sale or other disposition of the ADSs or ordinary shares if we are a PFIC during any taxable year during which you hold ADSs or ordinary shares. See “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

 

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

 

Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee to vote the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote and you may not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice that contains, among other things, a statement as to the manner in which you may give your voting instructions, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affects the rights of shareholders.

 

Under our deposit agreement, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote, unless we have instructed the depositary that we do not wish a discretionary proxy to be given or under any of the other situations specified under the deposit agreement. The effect of this discretionary proxy is that you cannot prevent ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may be more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

 

Your right to participate in any future rights offerings may be limited, which may dilute your holdings, and you may not receive cash dividends if it is impractical to make them available to you.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute that property and you will not receive that distribution.

 

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We are a Cayman Islands company and because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under U.S. law, you may have less protection for your shareholder rights than you would under U.S. law.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

 

As a result of all of the above, public shareholders of our company may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders of our company than they would as shareholders of a U.S. public company.

 

We are controlled by a small group of shareholders, whose interests may differ from other shareholders.

 

As of the date of this annual report, our principal shareholder, Mr. Guanglin Lai, beneficially owned 43.9% of our total outstanding shares with another 20.6% owned by the next three biggest shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. In addition, because these shareholders could collectively control our company, they would be able to take actions that may not be in the best interests of other shareholders. These actions may be taken even if they are opposed by our other shareholders. We do not have any existing arrangements with any of our shareholders to address potential conflicts of interests between these shareholders and our company, and none of our shareholders, other than our officers pursuant to the terms of their service agreements, has entered into non-compete agreements. There is a risk that our existing shareholders may not always act in the best interests of our company.

 

Our memorandum and articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and ADSs.

 

Our memorandum and articles of association include the following provisions that may have the effect of delaying or preventing a change of control of our company:

 

Our board of directors has the authority to establish from time to time one or more series of shares, including preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series, including the designation of the series; number of shares of the series; dividend rights, dividend rates, conversion rights, voting rights; and rights and terms of redemption and liquidation preferences.

 

Our board of directors may issue a series of preferred shares without action by our shareholders to the extent of available authorized but unissued shares. Accordingly, the issuance of preferred shares may adversely affect the rights of the holders of the ordinary shares. Issuance of preference shares may dilute the voting power of holders of ordinary shares.

 

Subject to applicable regulatory requirements, our board of directors may issue additional ordinary shares or rights to acquire ordinary shares without action by our shareholders to the extent of available authorized but unissued shares.

 

By discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction, our memorandum and articles of association could deprive our shareholders of the opportunity to sell their shares at a premium over the prevailing market price.

 

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You may have difficulty enforcing judgments obtained against us.

 

We are a Cayman Islands company and most of our assets are located outside of the United States. We conduct most of our operations are in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts.

 

Our ADSs may not comply with the minimum listing requirements of the New York Stock Exchange. Delisting could adversely affect the liquidity of our ADSs and the market price of our ADSs could decrease, and our ability to obtain adequate financing for the continuation of our operations would be substantially impaired.

 

Our ADSs are currently listed on the New York Stock Exchange. The New York Stock Exchange has minimum requirements that a company must meet in order to remain listed on the New York Stock Exchange. These requirements include maintaining a minimum average closing price of $1.00 per share over a period of consecutive 30 trading days. On June 27, 2012, we received notice from the NYSE that the price of our ADSs was below listing requirements. We have six months from receipt of the notification to bring our ADS price and average ADS price back above $1.00. We previously fell below NYSE minimum requirements in July 2011 and regained compliance in October 2011. If our ADSs are delisted as a result of our failure to comply with any of the New York Stock Exchange’s minimum listing requirements, the liquidity of our ADSs would be adversely affected, the market price of our ADSs could further decrease, and our ability to obtain adequate financing for the continuation of our operations would be substantially impaired, which could have a material adverse effect on our financial condition and results of operations.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

We are a Cayman Islands incorporated holding company that conducts operations in China and internationally. Our China operations are primarily undertaken through our wholly-owned subsidiaries and through our contractual arrangements with Guanli, our consolidated affiliated entity. Our international operations are undertaken through our majority shareholding in PGW, New Zealand’s largest agricultural services company.

 

We commenced operations in January 2004 through P3A, a limited liability company incorporated under the laws of the PRC in 2000. We established a holding company, Agria Group, under the laws of the British Virgin Islands in July 2005 to facilitate our future international fund-raising activities. We formed Agria China in Beijing, China as a wholly-owned subsidiary under the laws of the PRC in March 2007 to focus on research and development and other corporate activities.

 

We incorporated Agria Corporation under the laws of the Cayman Islands in May 2007. Agria Corporation became the holding company of Agria Group in June 2007 when all of the shareholders of Agria Group exchanged their shares in Agria Group for shares of Agria Corporation on a pro rata basis. In April 2008, we formed Agria Brother in Shenzhen, China, as a wholly-owned subsidiary under the laws of the PRC to engage in research and development and other activities. In August 2009, we entered into contractual arrangements with Guanli to hold our future investments in the agricultural industry in China.

 

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We formed Southrich Limited, a wholly-owned subsidiary of Agria Group, in September 2009 under the laws of the British Virgin Islands to hold our convertible redeemable notes issued by PGW in 2010. Agria Singapore, a wholly-owned subsidiary of Southrich Limited, was incorporated in November 2009 under the laws of Singapore to hold our 19.01% equity interest in PGW. In January 2010, Southrich Limited changed its name to Agria Asia . In January 2011, Agria Singapore made a partial takeover offer to the shareholders of PGW to acquire an additional 31.0% of the shares in PGW at an offer price of NZ$0.60 per share. On April 29, 2011, we completed this acquisition and increased our shareholding of PGW to 50.01%. In April 2011, New Hope International invested $20 million in the equity of Agria Asia, upon which our equity interest in Agria Asia was 88.05%. In April 2011, we also entered a conditional sale and purchase agreement to sell a 7.24% stake in Agria Asia to Ngai Tahu. This sale was completed in July 2011, and our equity interest in Agria Asia decreased to 80.81%.

 

In July 2010, we divested P3A to Mr. Zhixin Xue, the president and a director of P3A. Agria China assigned to Mr. Xue all of our rights, interests, duties, liabilities and obligations under our contractual agreements with P3A in exchange for 11.5% of our issued and outstanding share capital immediately prior to the transaction. As a result of the divestiture, we ceased to operate the seed, sheep and seedling businesses that were previously operated through P3A.

 

In September 2010, we acquired a 49% equity stake in Ganxin for RMB40.0 million. Ganxin is a corn seed research, development, production and sales company based in the Gansu Province of China.

 

In August 2011, we sold our subsidiary, PGG Wrightson Finance Limited, or PWF, to Heartland Building Society, or Heartland, for NZ$98.2 million ($78.8 million), to the value of the adjusted net tangible assets of PWF as the settlement date. As part of this transaction and simultaneously with the completion of this transaction, we agreed to purchase 13,333,333 shares in Heartland New Zealand Limited for NZ$0.75 ($0.60) per share. Additionally, in connection with this transaction, PWF transferred certain excluded loans to PGW’s wholly-owned subsidiary, PGW Rural Capital Limited, which is working to realize or refinance these facilities over the short to medium term. Finally, as part of this transaction, PGW provided a guarantee with respect to certain loans acquired by Heartland with a total value of approximately NZ$29.0 million ($23.3 million) as of June 30, 2012. The guarantee is contingent upon individual loans becoming impaired and put back to PGW during the three year guarantee period.

 

In September 2011, we disposed of our 50% interest in Velvet Logistics Limited for NZ$1,000 ($802). In December 2011, we disposed of our 33% interest in NZ Velvet Marketing Company Limited for nil consideration. The disposal costs of exiting these investments were $0.3 million.

 

In July 2012, we acquired 100% of Xinjiang Ruide Ltd, a corn seed producer based in Xinjiang province, China as a production base for our NongKeYu seeds. The total consideration payable was RMB17.0 million ($2.7 million), of which RMB4.0 million ($0.6 million) had been paid as of the date of this annual report.

 

In August 2012, our subsidiary Agri-feeds Limited, or Agri-feeds, entered into an incorporated joint venture for the molasses liquid feed business. This transaction involved our divestiture of certain assets, including intangibles from Agri-feeds, into the joint venture company, 4Seasons Feeds Limited, which will create a molasses supply chain that will import, transport and distribute molasses through the former Agri-feeds channel. Agri-feeds is included in our International Seeds segment for reporting purposes.

 

B. Business Overview

 

Overview

 

We are an agriculture company with operations in China and internationally. We operate three principal business lines: China seeds, international seeds and AgriServices. We operate our China seeds business through our PRC subsidiaries, which engage in research and development, production and sale of seed products, including field corn seeds, edible corn seeds and vegetable seeds. We operate our international seeds and AgriServices businesses through our subsidiary PGW, New Zealand’s largest agricultural services company. Our total revenues increased from RMB29.0 million in the year ended December 31, 2010 to RMB6,918.8 million ($1,089.1 million) in the year ended June 30, 2012. We had a net loss attributable to shareholders of RMB59.2 million in the year ended December 31, 2010, compared to a net loss attributable to shareholders of RMB15.9 million ($2.5 million) in the year ended June 30, 2012.

 

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China Seeds

 

Our China seed business consists primarily of research and development, production, marketing and distribution of three types of seeds: field corn seeds, edible corn seeds and vegetable seeds. We operate our China seed business through four of our subsidiaries and associates described below:

 

We conduct sales, marketing and distribution of our corn seed products through Nong Ke Yu. Nong Ke Yu was established in 1998 in Beijing. In September 2009, we acquired 100% of Nong Ke Yu’s equity for a cash consideration of RMB5 million.

 

We hold a 49% equity interest in Ganxin, which was established in January 2005 in Wuwei, Gansu Province. Ganxin serves as one of our production bases for our field corn seed products.

 

We conduct research and development and sales of vegetable seeds through BeOK. BeOK was established in August 2008 in Tianjin. In January 2010, we acquired 100% of BeOK’s equity for a cash consideration of RMB1 million.

 

In October 2009, we entered into an investment agreement with CNAAS and its affiliates, under which we agreed to invest RMB35.0 million (of which RMB11.0 million has been paid as of June 30, 2012) for 53.84% of equity interest of Zhongnong, a company wholly owned by CNAAS and its affiliates. Zhongnong’s business is to hold the priority rights to accept the transfer of all existing and future cultivated seed varieties owned by CNAAS and its affiliates for the purposes of commercialization.

 

In March 2011, we established Shanxi Jufeng Seeds Co., Ltd., in Shanxi province, China, for an initial investment of RMB1.11 million. This new company began operations in a seeds business in Shanxi. However, as we were unable to reach a commercially viable long-term supply arrangement with our primary supplier, we ceased operations of this entity in June 2012.

 

In July 2012, we committed RMB6.4 million ($1.0 million) to enter into a 55% owned joint venture named Zhuhai Agria NKY Seeds Ltd., which will expand our China edible seeds operations into the sweet corn segment, which is popular in southern China.

 

Products and Production

 

Our seeds products primarily consist of field corn seeds sold to farmers growing corn for animal feed and industrial uses, as well as edible corn seeds and vegetable seeds sold to farmers growing food for human consumption.

 

We invested in Ganxin, a corn seed research, development, production and sales company based in the Gansu province, China, in September 2010 to make it the primary production base for our field corn seed products. Ganxin was formed in 2005 and produces corn seeds through arrangements with farmers in Gansu province, which is regarded as the leading area for corn seed production in China. Ganxin’s rights to produce and sell three varieties of corn seeds have been approved by relevant government authorities. This includes the variety Jixiang No. 1, which has features of high productivity and strong resistance to disease and is well regarded with a significant market share in China. Under the investment agreement, we received a 49% equity stake in Ganxin.

 

We also entered into an exclusive sales agency agreement with Ganxin, whereby the entire production volume of all current and future varieties of seeds owned or developed by Ganxin will be sold by us, acting as Ganxin’s exclusive agent.

 

In July 2012, we commenced the purchase and sales of corn seeds produced by Xinjiang Ruide Ltd, a corn seed producer based in Xinjiang province, China. In August 2012, we acquired 100% of Xinjiang Ruide Ltd. to serve as an additional production base for our NongKeYu seeds. In January 2012, following commencement of purchase arrangements with Xinjiang Ruide Ltd., we suspended our exclusive sales agreement with Ganxin.

 

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Xinjiang Ruide Ltd. and Ganxin provide parent seeds to village collectives through arrangements where it leases land from local village collectives and distributes corn seeds within the village collectives. The village collectives in turn arrange for the farmers in the village to work on the land and produce corn seeds under the terms of our contractual arrangements. Cash advances are generally provided to the farmers for their purchase of fertilizer and other production materials. At the end of each growing season, Xinjiang Ruide Ltd. and Ganxin purchase the seeds that the village collectives produce on the leased land and deduct payment for the parent seeds and other advances provided.

 

We operate our edible corn seed business through Nong Ke Yu and our vegetable seed business through BeOK, both of which use outsourced production models. In 2010 we outsourced production of edible corn seeds to two production companies in Gansu, one of which is Ganxin, and one production company in Xinjiang which we acquired in January 2012, and we outsourced production of vegetable seeds to one production company in each of Shandong, Tianjin and Inner Mongolia. Under these contractual outsourcing arrangements, we provide parent seeds, technical guidance and supervision to farmers and agree to buy the seeds from them at harvest. We processed and packaged these seed products and sold them to local and regional distributors. Our pipeline edible corn seed products won three of the top four positions at China’s 7th National Edible Corn Conference in 2011 out of 160 edible corn seed varieties. Our sticky edible corn seeds business focuses on the North China market, while our sweet edible corn seeds business focuses on the South China market and is under development by Zhuhai Agria NKY Seeds Ltd., our joint venture entity.

 

Through our relationship with Zhongnong and CNAAS, we were licensed the commercial rights to Zhong Dan 909, a high-yield, anti-viral, anti-insect field corn seed variety. ZhongDan909 was launched in October 2011, and for the past two years was ranked as the number one field corn variety in national certification tests held by the PRC Ministry of Agriculture.

 

Sales and Marketing

 

We market our seed products through pre-sale training, demonstrations and presentations to distributors, farmers and other potential customers.

 

Our field corn seeds are primarily sold to distributors, who in turn sell them to the farmers. As of June 30, 2012, we had approximately 285 field corn seed products distributors in China, who usually place orders two months before deliveries. Our edible corn seeds are primarily sold to distributors, who in turn sell them to farmers or processing factories. As of June 30, 2012, we had approximately 160 edible corn seed products distributors and 444 processing factory customers in China. Sales of both our field corn seeds and edible corn seeds are primarily conducted by Nong Ke Yu. Our vegetable seeds are primarily sold to distributors, who in turn sell them to farmers. As of June 30, 2012, we had approximately 71 vegetable seed products distributors in China. We sell varieties of vegetable seeds in nine categories, including broccoli, celery, chili, Chinese cabbage, cucumber and tomato.

 

As of June 30, 2012, our sales and marketing team comprised 32 employees.

 

Research and Development

 

We conduct research and development primarily in cooperation with our associate Zhongnong and with various universities and research institutions. See “—Intellectual Property.” We have also acquired a number of technologies and varieties of corn from third parties.

 

Our research and development team currently consists of 15 research professionals and staff who work in conjunction with us and CNAAS and an additional nine research professionals and staff employed by Zhongnong. We have experimental breeding and testing bases for new corn varieties in Beijing and Hainan for our edible corn seeds business and in Beijing, Hainan and Shanxi for our field corn business.

 

In October 2009, we entered into a strategic cooperation framework agreement with CNAAS, providing for future cooperation across the spectrum of agricultural research. Under this agreement, we have preferential rights to partner with CNAAS in commercializing their research results. Established in 1957, CNAAS comprises 39 research institutes across China, covering all major areas of the agricultural sector, including advanced research in the development of horticulture and livestock. CNAAS employs over 5,000 scientists and research engineers and controls one of the largest germplasm banks in the world.

 

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Additionally, we collaborate with a number of universities and research institutions to develop advanced technologies, including the Beijing Academy of Agricultural Sciences, Baotou Agricultural Science Institution of Inner Mongolia, Tianjin Vegetable Research Institution and Shenyang Agricultural University.

 

As of June 30, 2012, through acquisitions and self-development efforts, we own the rights to three proprietary edible corn seed varieties, namely JKN2000, JKN120 and JingZiNuo218. In 2011, we acquired the rights to two proprietary field corn seeds varieties, namely BaYu11 and ZhongDan909. Ganxin is currently applying for the proprietary right for JiXiang No. 1, a field corn seed variety. We also employed a breeder to carry out our own breeding programs. We have established 92 testing sites for testing and selection of new varieties.

 

International Seeds

 

We conduct our international seeds business through our subsidiary PGW, New Zealand’s leading provider of agricultural services to growers, farmers and processors in New Zealand and internationally. PGW has more than 2,100 employees and its revenues amounted to over NZ$1.3 billion for the fiscal year ended June 30, 2012. PGW has two major business divisions: AgriTech, which engages in the seed, nutrition and grain businesses, and AgriServices, which engages in merchandising, livestock, insurance, real estate, irrigation and pumping and PWF. PGW’s AgriTech division comprises the following businesses:

 

Seeds

 

PGW’s seed business is the largest southern hemisphere supplier of commodity and proprietary forage seed primarily to New Zealand, Australia, South America and various international markets. PGW’s seed product range includes grass seeds, seed treatment products, forage legumes, forage brassicas, herb seeds, pea seeds and turf seeds. PGW is a market leader in New Zealand in forage, brassicas and turf, in Australia in proprietary and commodity forage products and a strong presence in South America through various investments in Uruguay, Argentina and Brazil. PGW’s seed products are focused on improving overall farm productivity and performance. The business is also involved in the turf seeds market in New Zealand and Australia for application in sports grounds, parks and lawns. The seeds division is supported by a strong research base and commercializes new products through internal research and development, breeding and evaluation programs and joint venture research partnerships. The seeds business has a number of proprietary seeds that provide superior margins. In addition, it has a large number of new cultivars in development.

 

Nutrition

 

The nutrition business, or Agri-Feeds, is a leading importer and wholesaler of liquid animal feeds based on sugar cane molasses. Agri-Feeds also manufactures and supplies products for treating facial eczema in livestock. In August 2012, our subsidiary Agri-feeds entered into an incorporated joint venture for the molasses liquid feed business. This transaction involved our divestiture of certain assets, including intangibles from Agri-feeds, into the joint venture company, 4Seasons Feeds Limited, which will create a molasses supply chain that will import, transport and distribute molasses through the former Agri-feeds channel.

 

Grain

 

PGW’s grain business is New Zealand’s largest domestic grain brokerage and marketing service. The business specializes in the supply of cereal seeds to arable farmers together with crop drying and storage activities in maize in the North Island and grain brokerage services throughout New Zealand. Key product categories include feed wheat, milling wheat, malting barley, feed barley, maize and proprietary cereals. The grain division has strong relationships with growers via a network of field representatives throughout key cropping areas.

 

AgriServices

 

We conduct our AgriServices business through PGW’s AgriServices division, which focuses on the end customer and PGW’s distribution network. The AgriServices business provides complimentary agricultural products and services to New Zealand customers and international distributors. The AgriServices division includes the following products and services:

 

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Rural Supplies

 

PGW’s rural supplies business provides goods and services to the rural sector, including agri-chemicals, stockfeed and fencing. Currently, on-farm technical sales representatives providing advice and technical assistance in conjunction of product orders account for approximately 70% of revenue from the rural supplies business, and network of 91 retail stores in New Zealand account for the remaining 30% of revenue. The rural supplies business currently has approximately 350 employees and 40,000 customer accounts across New Zealand.

 

Fruitfed Supplies

 

PGW’s fruitfed supplies business is a horticulture service and supply business providing grower clients with agronomic advice, technical expertise and products such as chemicals, fertilizers, pollination products and frost protection products. The fruitfed supplies business is run through 18 retail outlets in New Zealand supported by 60 technical field staff that provide advice on soil, irrigation design, pest and disease identification, treatment plans and monitoring systems.

 

Livestock

 

PGW’s livestock business comprises New Zealand’s largest group of livestock representatives (more than 250 in total) managing a variety of relationships between farmers, meat processors, livestock exporters and stud-stock breeders and buyers. PGW’s livestock representatives also facilitate the buying and selling of livestock on behalf of clients (at auction or privately on-farm), and provide advice in relation to livestock genetics, stocking and animal evaluation, valuation and selling and buying strategies.

 

Insurance

 

PGW offers a range of specialized insurance products delivered in conjunction with New Zealand insurance broker, AON. Insurance products include farm insurance, domestic insurance, livestock insurance, crop insurance and business insurance.

 

Real Estate

 

PGW operates a national rural real estate business conducted through a team of sales representatives with specialized knowledge of the rural property market.

 

Irrigation and Pumping

 

Irrigation and Pumping is an integrated irrigation business including system design, construction and service with a primary focus on the design and installation of “turnkey” irrigation and pumping projects for arable, pastoral and dairy platforms.

 

Other AgriServices

 

PGW has several other investments, advances and ventures which are grouped under the AgriServices division including investments in: Wool Partners International; The New Zealand Merino Company; and Agriculture NZ.

 

PWF

 

PWF is a non-bank specialist rural finance company offering a range of financial products and services including term loans, seasonal finance, livestock, wool, crop and farm input advances. We disposed of PWF in August 2011.

 

Structure of our investment in PGW

 

In October 2009, we entered into agreements to invest in and form a strategic partnership with PGW. Between November 2009 and December 2009, through equity purchases and participation in a rights issue, we invested a total of NZ$83.9 million and acquired a 19.01% stake in PGW. This stake was held by Agria Singapore, a wholly owned subsidiary of Agria Asia, which in turn was a 100% owned subsidiary of Agria.

 

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On January 15, 2010, pursuant to a subscription agreement dated November 18, 2009, we subscribed for convertible redeemable notes issued by PGW in an aggregate principal amount of approximately NZ$33.8 million. This note was held by Agria Asia and was redeemed for 102% of its face value in cash in December 2011.

 

In January 2011, Agria Singapore made a partial takeover offer for an additional 31.0% of the shares in PGW at the offer price of NZ$0.60 per share to in order to bring its total shareholding in PGG Wrightston to 50.01%. The total consideration paid by Agria Singapore, excluding transaction expenses for the shares acquired under the partial offer, was NZ$141.0 million.

 

Between January 2011 and April 2011, Agria Group, Agria Asia and Agria Singapore entered into a number of financing arrangements between ourselves and also with New Hope International, a subsidiary of New Hope Group to provide equity funding to Agria Singapore to complete such partial takeover. Agria Asia and its wholly owned subsidiaries also raised bank acquisition finance and debt from New Zealand-based LIC, who agreed to support our partial takeover offer.

 

Under our equity funding arrangements, in addition to the 19.01% stake in PGW already owned by Agria Singapore and the convertible redeemable notes held by Agria Asia, Agria Group subscribed for additional equity in Agria Asia valued at $55.3 million for a combination of cash, expenses already incurred on behalf of Agria Asia and expenses that we agreed to incur on behalf of Agria Asia. At the date of completion of the partial offer we held 88.05% of Agria Asia.

 

Under New Hope International’s equity funding arrangements, New Hope International subscribed for equity in Agria Asia valued at $20.0 million for cash. New Hope International hold 11.95% of Agria Asia.

 

In April 2011, we also entered into a share purchase agreement with Ngai Tahu, a long-term strategic investor with a particular focus on New Zealand’s South Island commercial and rural ventures. In July 2011, Ngai Tahu purchased from us 7.24% of the total shares of Agria Asia for a consideration of NZ$15.0 million ($11.5 million). After the completion of this sale, the equity interest in Agria Asia was as follows:

 

   % 
Agria Group   80.81 
New Hope International   11.95 
Ngai Tahu   7.24 

 

New Hope Group is one of China’s largest agricultural and food corporations. The company employs more than 60,000 staff and engages in agribusiness and food, chemicals and resources, finance and investment, and real estate and infrastructure. The agribusiness and food sector of New Hope Group is the largest animal feed producer and one of the largest suppliers of meat, egg and dairy products in China. New Hope Group also has extensive chemical and resource interests in the areas of potassium, phosphorous and coal, and is the largest producer of high-potassium hydrogen and phosphate in Asia. In addition, New Hope Group is the largest shareholder of MinSheng Bank, China’s seventh largest commercial bank.

 

In June 2011, we entered a new shareholders agreement with New Hope International. Under this agreement, we granted New Hope International the rights of first offer in the event that Agria Corporation proposes to transfer all or part of its shares in Agria Group, as well as the tag-along rights in the event that Agria Group proposes to transfer all or part of its shares in Agria Asia. Furthermore, New Hope International has the right to sell its shares in Agria Asia to Agria Group on the terms and conditions provided in the shareholders agreement at a certain repurchase price to be determined pursuant to a supplemental agreement entered into between Agria Group and New Hope International in June 2011. Under the supplemental agreement, Agria Group agreed to provide guarantee to New Hope International for a minimal level of dividends to be distributed by Agria Asia to New Hope International. If Agria Group makes any payment to New Hope International under that guarantee, New Hope International will remit such payment to Agria Group once cumulative dividends distributed by Agria Asia to New Hope International exceeds the minimal guaranteed level. To secure the performance of Agria Group’s obligation in connection with this put option held by New Hope International, in June 2011, Agria Group pledged its shares in Agria Asia to New Hope International and Mr. Guanglin Lai, the chairman of our board, made a personal guarantee to New Hope International for Agria Group’s payment obligation in the event that New Hope International exercises its put option. Agria Corporation agreed to indemnify Mr. Lai against all the obligations, losses, costs, damages, expenses, liabilities, actions and demands that he may incur or sustain in connection with his personal guarantee.

 

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Divestiture of P3A

 

Historically, our principal operating entity was P3A, which had three production lines: corn seeds, sheep products and seedlings. P3A’s financial and operating performance had declined since 2007. On June 29, 2010, we announced we had reached an agreement in principle to divest P3A to Mr. Zhixin Xue, the president and a director of P3A. On July 9, 2010, our audit committee approved the transaction and we entered into definitive agreements to divest P3A, to Mr. Zhixin Xue. The divestiture of P3A was completed in July 2010.

 

Through the transaction, we acquired from Mr. Xue and cancelled shares representing 11.5% of our issued and outstanding share capital immediately prior to the transaction in exchange for the transfer of all of Agria’s interest in P3A to Mr. Xue. Immediately following the proposed transaction, Mr. Xue held approximately 7% of our ordinary shares.

 

The leases over nine parcels of land totaling approximately 13,500 acres previously held by P3A have been retained by us. We are not currently using this land and are in the process of assessing appropriate revenue generating opportunities that will make use of the land.

 

Investments and Strategic Partnerships

 

In September 2009, we entered into an agreement to acquire Nong Ke Yu. Under the terms of the agreement, Guanli, our consolidated affiliated entity acquired 100% of the equity of Nong Ke Yu for RMB5.0 million. Previously, in June 2008, we had purchased the production and sales rights to two corn seeds owned by Nong Ke Yu, JKN2000 and JKN120.

 

In October 2009, we entered into a strategic co-operation framework agreement with CNAAS, which provides for future co-operation across the spectrum of agricultural research. In October 2009, we agreed to invest RMB35 million in Zhongnong a seed company based in China, for a 53.84% equity interest in Zhongnong. As of December 31, 2010, we had invested RMB7 million in Zhongnong. Zhongnong’s business is to hold the priority rights to accept the transfer of all existing and future cultivated seed varieties owned by CNAAS and its affiliates for the purposes of commercialization.

 

In January 2010, we entered into an agreement to acquire 100% of the equity of BeOK for RMB1.0 million. BeOK is primarily engaged in the research and development and sale of vegetable seeds and is based in Tianjin.

 

In September 2010, we completed our strategic investment in Ganxin. Pursuant to the share purchase agreement dated June 13, 2010 by and between Guanli and Ganxin, Guanli acquired a 49% equity interest in Ganxin for a consideration of RMB40.0 million. Under the share purchase agreement, we have the right to appoint two directors, and the original shareholders have the right to appoint one director, to the board of directors which consists of three directors. A majority of votes, including that of the director appointed by the original shareholders must be obtained in order for the board to pass a resolution. As a result, we have board representation sufficient to enforce veto rights on all decisions. Nong Ke Yu has entered into an exclusive sales agency agreement with Ganxin to act as its exclusive agent and sell the entire production volume of all current and future varieties of seeds owned or developed by Ganxin.

 

In July 2012, we acquired 100% of Xinjiang Ruide Ltd, a corn seed producer based in Xinjiang province, China, as a production base for our NongKeYu seeds. The total consideration payable was RMB17.0 million ($2.7 million), of which RMB4.0 million ($0.7 million) had been paid as of the date of this annual report.

 

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Intellectual Property

 

We conduct research and development primarily in cooperation with our associate Zhongnong and with various universities and research institutions. We have also acquired a number of technologies and varieties of corn from third parties. In New Zealand, Australia and Uruguay, much of our research is undertaken by our international seeds business segment, including its turf division, which is supported by a strong research base and commercializes new products through internal R&D, breeding and evaluation programs and joint venture research partnerships.

 

Many elements of our proprietary information, such as production processes, technologies, know-how and data are not patentable in China. We rely primarily on a combination of trade secrets, trademarks, and confidentiality agreements with employees and third parties to protect our intellectual property. While we cannot assure you that our efforts will deter others from misappropriating our intellectual property rights, we will continue to create and protect our intellectual property rights in order to maintain our competitive position.

 

Legal Proceedings

 

On February 3, 2009, a consolidated class action lawsuit in the United States District Court for the Southern District of New York was filed, alleging violations of various sections of the Securities Act, against us, our executive officers, our directors and other defendants. The lawsuit alleges that our initial public offering registration statement and prospectus failed to disclose certain alleged discussions between two Agria executives relating to requests for additional compensation and a threatened resignation.

 

On December 1, 2009, the U.S. District Court for the Southern District of New York dismissed the consolidated class action against the Company and the underwriters defendants, and the Court issued a judgment in favor of the Company and the underwriter defendants.

 

On June 4, 2010, we entered into a memorandum of understanding with the lead plaintiff reflecting an agreement in principle and agreed to pay $3.75 million to settle all claims asserted in the class action lawsuit. On September 20, 2010, the court granted a preliminary approval of the settlement. The deadline for filing objections to the Settlement, Plan of Distribution of settlement proceeds, and attorneys’ fee and expense request by Lead Plaintiff’s counsel expired on January 7, 2011, and no such objections were filed by Class Members.

 

On June 7, 2011, the court granted final approval of the settlement and entered a final judgment resolving the case. The settlement amount is within the limit of our applicable insurance policies, and the settlement did not have any impact on our financial position, results of operation or cash flows.

 

Regulation

 

Agriculture Law

 

On July 2, 1993, the PRC promulgated the Agriculture Law which sets forth certain principles and various measures designed to ensure the steady development of the agricultural industry. For example, the production and operation of agricultural products that affect the health of people or animals, such as seeds, must meet registration and approval requirements under PRC laws and regulations. The Agriculture Law was revised on December 28, 2002 and became effective as of March 1, 2003.

 

Seed Law, Animal Husbandry Law and Other Relevant Regulations

 

Seed Law and Other Relevant Regulations

 

The crop seed business is a highly regulated industry in the PRC. In July 2000, the Seed Law was enacted to promote the use of seed resources; to control the selection, production and use of seeds and regulate related business operations; to protect the legal rights of producers, business operators and users of seeds; to promote seed quality; to drive the industrialization processes of seeds and to accelerate the development of the planting and forestry industries. The Seed Law became effective on December 1, 2000 and was amended on August 28, 2004.

 

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Under the Seed Law, major crop seeds and tree varieties are subject to examination and approval as a pre-condition of their popularization. An applicant may apply directly for examination and approval at either the national or provincial level. Committees composed of professional experts have been established separately by the State Council’s agriculture and forestry administrative departments and the provincial governments for the examination and approval of crop and tree varieties. Major crop seed varieties that are verified and approved by the State Council’s committee and the National Crop Variety Examination and Approval Committee may be marketed and distributed nationwide. Varieties that receive provincial approval are only permitted to be marketed and distributed within the province that granted the approval.

 

For seed production, a permission-based system is currently in practice pursuant to the Administrative Regulation on Permission of Production and Operation of Crop Seeds, which was issued on February 26, 2001 and revised on July 1, 2004. A company engaged in the production of seeds must obtain a production license, which is issued at either the provincial or the local level, entitling the licensee to engage in seed production in the permitted area. The level of issuing authority required for a production license varies based on the types of seeds to be produced. The production license also specifies the types of seeds the license holder may produce, the geographic region where seeds can be produced and the term of the production license.

 

For seed distribution, a company must obtain a distribution license in order to distribute seeds in permitted areas. Generally, a distribution license may be issued at the county level or above. A seed company must obtain a distribution license from the provincial government to distribute major crop seeds in that province and a distribution license from the national government for national distribution.

 

Animal Husbandry Law and Other Relevant Regulations

 

According to the PRC’s Animal Husbandry Law, which was promulgated on December 29, 2005 and became effective on July 1, 2006, popularization of any new variety of livestock is subject to examination and approval by the National Commission of Animal Genetic Resources. Approved varieties are announced by the Ministry of Agriculture and be eligible for popularization.

 

Pursuant to the Animal Husbandry Law, entities or individuals engaged in production of breeder livestock or poultry, or engaged in the commercial production of new-born livestock or poultry, must obtain a Permit for the Production and Business Operation of Breeding Livestock and Poultry, or the Husbandry Permit. Entities and individuals engaged in the production of ova, frozen sperm, embryos or other genetic materials must obtain a Husbandry Permit from the State Council’s stockbreeding and veterinary administrative departments through their respective provincial agencies. The approval level of the Husbandry Permit varies depending on the permitted scope and content.

 

In addition to the Animal Husbandry Law, the Administrative Regulation of Breeders was issued on April 15, 1994 and revised on January 8, 2011. These regulations specify conditions and requirements that must be satisfied by breeding farms regarding their technologies, facilities, quarantine measures, livestock and poultry inspection systems and livestock and poultry distribution. We believe our sheep farms meet the conditions required under the applicable regulations.

 

Supervision of Agricultural Products Quality and Safety

 

On March 10, 2005, the Ministry of Agriculture issued the Administrative Measures for the Supervision and Spot Check of Agricultural Seed Quality, which became effective on May 1, 2005, and which permit the government’s administrations of agriculture at the county level or above to organize relevant seed administration and seed quality inspection institutions to sample and inspect agricultural seeds that are produced and sold. A seed production and operation company that does not meet inspection standards must recall any seeds that have been sold. Such companies may not conduct sales until they meet inspection standards. A legal representative of the seed company must circulate information on the inspection to all employees, and the company must determine why the seeds failed to meet inspection standards and implement corrective measures. Such measures include improving quality control processes, submitting rectification reports and submitting to subsequent examinations by the administration of agriculture.

 

Under the PRC Law on Agricultural Product Quality Safety, issued on April 29, 2006 and declared effective on November 1, 2006, an entity engaged in the production of agricultural products must maintain production records and retain data relating to production for 2 years.

 

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Under the PRC Law on Animal Epidemic Prevention, issued on July 3, 1997 and revised on August 30, 2007, animals and/or animal products to be sold or transported require quarantine certificates and quarantine inspection marks or seals. Shanxi province’s Regulations on Animal Epidemic Prevention require business operators to report to their local supervisory institutions or animal quarantine officers of animal epidemic prevention where such operators are domiciled, and to submit to inspections and quarantines of animals and animal products. The level of inspection varies depending on the uses for such animals or animal products.

 

Under the Regulations on Plant Quarantine, issued on January 3, 1983 and revised on May 13, 1992, plants and plant products listed in quarantine catalogues are subject to quarantine inspections before they are transported from a county administration area where an epidemic occurs. Plant seeds, seedlings or other propagating materials are subject to quarantine inspections prior to transportation.

 

Land Use Rights

 

All land in the PRC is either state-owned or collectively owned, depending on the location of the land. All land in the urban areas of a city or town is state-owned, and all land in the rural areas of a city or town and all rural land are, unless otherwise specified by law, collectively owned. The state has the right to reclaim land in accordance with law if required for the benefit of the public. Although all land in the PRC is owned by the state or by collectives, private individuals and businesses and other organizations are permitted to hold, lease and develop land for which they are granted land use rights.

 

National Legislation on Land

 

In April 1988, the constitution of the PRC was amended by the National People’s Congress to allow for the transfer of land use rights for value, and in December 1988, the Land Administration Law of the PRC was similarly amended. The Land Administration Law of the PRC was further amended in August 1988 and August 2004.

 

Under the Interim Regulations of the People’s Republic of China on Grant and Transfer of the Right to Use State-owned Urban Land, or Interim Regulations on Grant and Transfer, promulgated in May 1990, local governments at or above the county level have the power to grant land use rights for specific purposes and for a definite period to a land user pursuant to a contract for the grant of land use rights against payment of a grant premium.

 

Under the Interim Regulations on Grant and Transfer, all local and foreign enterprises are permitted to acquire land use rights unless the law provides otherwise. The state may not reclaim lawfully granted land use rights prior to the expiration of the term of grant. If public interest requires repossession by the state under special circumstances during the term of grant, compensation will be paid by the state. A land grantee may lawfully transfer, mortgage or lease its land use rights to a third party for the remainder of the term of grant.

 

Upon expiration of the term of grant, renewal is possible subject to the execution of a new contract for the grant of land use rights and payment of a premium. If the term of the grant is not renewed, the land use rights and ownership of any buildings erected on the land will revert to the state without compensation.

 

Transfer and Lease of State-owned Land Use Rights

 

After the state had granted land use rights relating to a particular area of land, unless any restriction is imposed, the party to whom such land use rights have been granted may transfer, lease or mortgage such land use rights for a term not exceeding the term which has been granted by the state. The difference between a transfer and a lease is that a transfer involves the vesting of the land use rights by the transferor in the transferee during the term for which such land use rights were vested in the transferor. A lease, on the other hand, does not involve a transfer of such rights by the lessor to the lessee. Furthermore, a lease, unlike a transfer, does not usually involve the payment of a premium. Instead, a rent is payable during the term of the lease. Land use rights cannot be transferred, leased or mortgaged if the provisions of the land grant contract, with respect to the prescribed period and conditions of investment, development and use of the land, have not been complied with. In addition, different areas of the PRC have different conditions which must be fulfilled before the respective land use rights can be transferred, leased or mortgaged.

 

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All transfers, mortgages and leases of land use rights must be evidenced by a written contract registered with the relevant local land bureau at the municipality or the county level. Upon a transfer of land use rights, all rights and obligations contained in the contract pursuant to which the land use rights were originally granted by the state are deemed to be incorporated as part of the terms and conditions of such transfer, depending on the nature of the transaction.

 

Under Article 38 of the PRC Law on Administration of Urban Real Estate, or the Urban Real Estate Law, issued on July 5, 1994 and revised on August 30, 2007, real property that has not been registered and for which a title certificate has not been obtained in accordance with the law cannot be transferred. Under Article 39 of the Urban Real Estate Law, if land use rights are acquired by means of grant, the following conditions must be met before the land use rights may be transferred: (1) the premium for the grant of land use rights must have been paid in full in accordance with the land grant contract and a land use rights certificate must have been obtained; (ii) investment or development must have been made or carried out in accordance with terms of the land grant contract; (iii) where the investment or development involves a real estate construction project, more than 25% of the total amount of investment or development must have been made or completed; and (iv) where the investment or development involves a large tract of land, conditions for use of the land for industrial or other construction purpose must have been confirmed.

 

Regulation of Collective-owned Land

 

According to the PRC Law on Land Administration, adopted by the National People’s Congress on June 25, 1986 and amended on August 28, 2004, land in rural and suburban areas, except for that stipulated by law as being owned by the state, is collectively owned by rural residents. Land collectively owned by rural residents is contracted to and operated by members of the respective collective economic entity for uses such as plantation, forestry, livestock husbandry or fishery production. Before any land collectively owned by rural residents is contracted to a unit or individual not from the collective economic entity, at least two-thirds of the members of the villager committee meeting or at least two-thirds of the village representatives must agree, and it must be submitted to the people’s government at the township level for approval. The land use rights of collectively owned land must not be granted, assigned or leased to any party for any non-agricultural uses.

 

Foreign Ownership Restrictions in the Seed Industry

 

The PRC restricts foreign ownership of domestic businesses engaged in the seed industry. According to the Foreign Investment Industrial Guidance Catalogue, the latest revision of which became effective on January 30, 2012, the selection and breeding of new breeds of crops and the development and production of seeds fall into the category of a restricted foreign investment industry. In addition, the breeding and planting of China’s rare and peculiar breeds (including quality gene cultivation, animal husbandry and aquatic products) and the production and development of genetically modified plant seeds, breeding livestock and poultry and aquatic seedlings are considered prohibited foreign investment industries. PRC law currently prohibits a foreign entity or person from owning over 50% of any seed development and production business in China and prohibits a foreign entity or person from owning any sheep business in China.

 

In accordance with the Regulation on the Approval and Registration of Foreign Investment Enterprises in the Agricultural Seed Industry, issued and effective on September 8, 1997, investors may establish foreign-invested crop seed companies provided that they have satisfied the following requirements: (i) the company’s PRC investors must have obtained necessary approvals for crop seed production and operation and submitted the business to any necessary examinations; (ii) the foreign investors must be equipped with relatively advanced research breeding capabilities, seed production technologies and good corporate management and possess a positive business reputation; (iii) the investors must be able to introduce or adopt outstanding domestic or foreign species or seed resources and advanced seeds technologies and facilities; (iv) the registered capital of companies engaged in the production of cereal, cotton and oil products seeds must be no less than $2 million, and the registered capital of companies engaged in the production of other crop seeds must be no less than $0.5 million; and (iv) the company’s PRC investors’ equity ownership in the foreign-invested cereal, cotton and oil products seeds enterprises must be more than 50%. Pursuant to this regulation, foreign investors are not permitted to establish foreign-invested crop seed distribution enterprises or wholly foreign-owned crop seed enterprises in China.

 

Intellectual Property

 

The PRC Trademark Law, adopted on August 23, 1982 and revised on October 27, 2001, protects the proprietary rights of registered trademarks. The State Administration for Industry and Commerce’s Trademark Office handles trademark registrations and grants an initial term of ten years to registered trademarks. Upon the initial term’s expiration, a second term of ten years may be granted under a renewal. Trademark license agreements must be filed with the Trademark Office or a regional office. In addition, if a registered trademark is recognized as a well-known trademark, the proprietary right of the trademark holder may be extended beyond the registered scope of products and services to which the trademark relates.

 

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Under the PRC Patent Law, which was adopted on March 12, 1984 and revised on December 27, 2008, animal and plant varieties may not be protected under patents, but the production methods of animal and plant varieties may be patented. Producers of plant varieties may seek protection for their rights to new varieties under the Protection of New Varieties of Plants Regulation.

 

The Protection of New Varieties of Plants Regulation was promulgated by the State Council on March 20, 1997, and became effective on October 1, 1997. The administrative departments of the State Council in charge of agriculture and forestry are, according to their respective functions, jointly responsible for the acceptance and examination of applications for the rights to new varieties of plants and grant such rights to new varieties of plants which satisfy the requirements under the regulations. An entity or individual that has completed the production, sale or dissemination of a new variety of plant which has been granted a variety right will have an exclusive right in its protected variety. Unless otherwise provided for in these regulations, without a license from the owner of the variety right, no other entity or individual may use such variety for commercial purposes.

 

Foreign Currency Exchange

 

Under the Foreign Currency Administration Rules promulgated on January 29, 1996 and amended on August 5, 2008, the foreign exchange incomes of domestic entities and individuals can be remitted into China or deposited abroad, subject to the conditions and time limits to be issued by SAFE. According to the Foreign Currency Administration Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, securities investment, derivative transactions and repatriation of investment, however, is still subject to the approval of, and/or the registration with, SAFE or its local branches.

 

Dividend Distribution

 

The principal regulations governing distribution of dividends of wholly foreign-owned enterprises include the Wholly Foreign-owned Enterprise Law, promulgated by the National People’s Congress on April 12, 1986 and amended on October 31, 2000, and the Wholly Foreign-owned Enterprise Law Implementing Rules, promulgated by the National People’s Congress on December 12, 1990 and amended on April 12, 2001. Under these regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, wholly foreign-owned enterprises are required to set aside at least 10% of their after-tax profits each year, if any, to contribute to certain reserve funds until the cumulative amounts in such reserve funds have reached 50% of the registered capital of such enterprises. These reserves are not distributable as cash dividends.

 

Pursuant to the 2008 EIT Law and the Implementing Rules effective on January 1, 2008, dividends payable by a foreign-invested enterprise to its foreign investors who are non-resident enterprises will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between the Mainland and Hong Kong Special Administrative Region in August 2006 and the Notice in Relation to the Dispatch of Schedule of Agreed Tax Rates on Dividends issued by the State Administration of Taxation (State Taxation Circular No. 112 (2008)), dividends payable by a foreign-invested enterprise to its foreign investors will be subject to a 5% tax provided that such foreign investor directly owns at least 25% of the equity interests of the foreign-invested enterprise.

 

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On October 1, 2009, the Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation) became effective. Under these measures, our Hong Kong subsidiary needs to obtain approval from the competent local branch of the State Administration of Taxation in order to enjoy the preferential withholding tax rate of 5% in accordance with the tax treaty. In February 2009, the State Administration of Taxation issued Notice No. 81. According to Notice No. 81, in order to enjoy the preferential treatment on dividend withholding tax rates, an enterprise must be the “beneficial owner” of the relevant dividend income, and no enterprise is entitled to preferential treatment pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the major purpose of which is to obtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the applicable tax rates, if it determines that any taxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. In October 2009, the State Administration of Taxation issued Notice No. 601 to provide guidance on the criteria to determine whether an enterprise qualifies as the “beneficial owner” of the PRC sourced income for the purpose of obtaining preferential treatment under tax treaties. Pursuant to Notice No. 601, the PRC tax authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the “substance over form” principle in the review. Notice 601 specifies that a beneficial owner should generally carry out substantial business activities and own and have control over the income, the assets or other rights generating the income. Therefore, an agent or a conduit company will not be regarded as a beneficial owner of such income. Since the two notices were issued, it has remained unclear how the PRC tax authorities will implement them in practice and to what extent they will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in China to our Hong Kong subsidiary. Under the 2008 EIT Law and the Implementing Rules, if China Victory is regarded as a resident enterprise, the dividends payable to China Victory from Agria China and Agria Brother will be exempt from the PRC income tax. If the relevant tax authority determines that our Hong Kong subsidiary is a conduit company and does not qualify as the “beneficial owner” of the dividend income it receives from our PRC subsidiaries, the higher 10% withholding tax rate may apply to such dividends.

 

Pursuant to the 2008 EIT Law which became effective on January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered as a resident enterprise and will be subject to PRC income tax on its global income. According to the Implementing Rules, “de facto management bodies” refer to establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise. On April 22, 2009, the State Administration of Taxation promulgated a circular setting out the criteria for determining whether “de facto management bodies” are located in China for overseas incorporated, domestically controlled enterprises. However, as this circular only applies to enterprises incorporated under the laws of foreign countries or regions that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “de facto management bodies” for overseas incorporated enterprises that are not controlled by PRC enterprises or groups of PRC enterprises like us. Accordingly, we may be considered a resident enterprise and may therefore be subject to PRC income tax on our global income.

 

Moreover, under the EIT law, if we are classified as a PRC resident enterprise and such income is deemed to be sourced from within the PRC, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares.

 

Foreign Exchange

 

In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005, and was further supplemented by an implementation notice issued by SAFE on November 24, 2005. SAFE Notice 75 suspends the implementation of two prior regulations promulgated in January and April of 2005 by SAFE. SAFE Notice 75 states that PRC residents, whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them. The term “PRC legal person residents” as used in SAFE Notice 75 refers to those entities with legal person status or other economic organizations established within the territory of the PRC. The term “PRC natural person residents” as used in SAFE Notice 75 includes all PRC citizens and all other natural persons, including foreigners, who habitually reside in the PRC for economic benefit. The SAFE implementation notice of November 24, 2005 further clarifies that the term “PRC natural person residents” as used under SAFE Notice 75 refers to those “PRC natural person residents” defined under the relevant PRC tax laws and those natural persons who hold any interests in domestic entities that are classified as “domestic-funding” interests.

 

PRC residents are required to complete amended registrations with the local SAFE branch upon: (i) injection of equity interests or assets of an onshore enterprise to the offshore entity, or (ii) subsequent overseas equity financing by such offshore entity. PRC residents are also required to complete amended registrations or filing with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers, long-term equity or debt investments, and granting security interests. PRC residents who have already incorporated or gained control of offshore entities that have made onshore investment in the PRC before SAFE Notice 75 was promulgated must register their shareholding in the offshore entities with the local SAFE branch on or before March 31, 2006.

 

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Under SAFE Notice 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under SAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction.

 

M&A Rule

 

On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or the CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The M&A Rule purports, among other things, to require offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by special purpose vehicles seeking CSRC approval of their overseas listings.

 

While the application of this new regulation remains unclear, we believe, based on the advice of our PRC counsel, King & Wood Mallesons, that CSRC approval was not required in the context of our initial public offering because we established our PRC subsidiaries by means of direct investment other than by merger or acquisition of PRC domestic companies. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through acquisitions.

 

C. Organizational Structure

 

The following diagram illustrates our corporate structure, including our principal subsidiaries, as of June 30, 2012:

 

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We conduct our business in China through contractual agreements with our consolidated affiliated entities, Guanli, Shenzhen Agria Agricultural Co., Ltd., or Agria Agriculture, and Shenzhen Zhongyuan Agriculture Co., Ltd., or Zhongyuan, which hold the requisite licenses and permits for conducting agricultural business. Our contractual arrangements with Guanli, Agria Agriculture and Zhongyuan and their respective shareholders enable us to:

 

exercise effective control over Guanli, Agria Agriculture and Zhongyuan;

 

receive substantially all of the earnings and other economic benefits from Guanli, Agria Agriculture and Zhongyuan to the extent permissible under PRC law in consideration for the services provided by Agria Brother; and

 

have an exclusive option to purchase all or part of the equity interests in P3A, Guanli, Agria Agriculture and Zhongyuan in each case when and to the extent permitted by PRC law.

 

In addition, the shareholders of Guanli have executed a letter of undertaking to remit all of the dividends and other distributions received from Guanli to Agria Brother, subject to satisfaction of their personal income tax and other statutory obligations arising from receiving such dividends or other distributions. We will require every person who holds the equity interests in Guanli at any time to enter into agreements with us on terms substantially similar as the existing contractual agreements between us and the current shareholders of Guanli. We have the legal obligation to provide funding for all losses incurred by Guanli, Agria Agriculture and Zhongyuan.

 

D. Property, Plant and Equipment

 

We invested in Ganxin in September 2010 to make it the primary production base for our field corn seed products. In the year ended June 30, 2012, Ganxin had access to approximately 5,410 acres of farmland in Gansu Province for the production of corn seeds of which approximately 1,200 acres was used for production of our field corn seed and approximately 400 acres was used for production of our edible corn seed with the remainder used to produce corn seed for third parties.

 

P3A, which we divested in July 2010, entered into long-term lease agreements with local government and village collectives for approximately 13,500 acres of land with remaining durations of approximately 8 to 26 years and all rental payments was prepaid in full. P3A had previously used this land for sheep breeding. As part of the divestiture of P3A, we retained our interest in this land. We are not currently using this land, although we are assessing appropriate revenue generating opportunities for this land.

 

Production of our edible corn seed and vegetable seed products is primarily outsourced to third parties. In addition, we lease approximately 120 acres of land, which are generally used for seed testing and production. These leases typically have terms of 18 years.

 

ITEM 4A.    UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.      OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.

 

A. Operating Results

 

Results of Operations

 

The following table sets forth a summary of our consolidated result of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not indicative of the results that may be expected for any future period.

 

42
 

 

    For the Year Ended December 31,     For the Year Ended June 30,     For the Six Months Ended June 30,  
    2009     2010     2012     2010     2011  
    RMB    

% of

Revenues

    RMB    

% of

Revenues

    RMB     $    

% of

Revenues

    RMB    

% of

Revenues

    RMB    

% of

Revenues

 
                                              (unaudited)                    
    (In millions, except percentage)  
Revenue     3.0       100       29.0       100       6,918.8       1,089.1       100.0       21.5       100       1,026.2       100  
Cost of revenue     (5.3 )     (175.4 )     (17.3 )     (59.8 )     (5,383.1 )     (847.3 )     (77.8 )     (12.7 )     (58.9 )     (779.1 )     (75.9 )
Gross profit     (2.3 )     (75.4 )     11.7       40.2       1,535.7       241.7       22.2       8.8       41.1       247.1       24.1  
Operating expenses:                                                                                        
Selling, general and administrative expenses     (89.6 )     (2,974.4 )     (98.7 )     (340.0 )     (1,361.2 )     (214.3 )     (19.7 )     (49.2 )     (228.7 )     (271.1 )     (26.4 )
Research and development expenses     (1.2 )     (38.4 )     (0.1 )     (0.4 )     (32.0 )     (5.0 )     (0.5 )     (0.0 )     (0.1 )     (7.0 )     (0.7 )
Total operating expenses     (90.8 )     (3,012.8 )     (98.8 )     (340.4 )     (1,393.2 )     (219.3 )     (20.2 )     (49.2 )     (228.8 )     (278.1 )     (27.1 )
Operating profit/(loss)     (93.0 )     (3,088.2 )     (87.1 )     (300.1 )     142.5       22.4       2.1       (40.4 )     (187.7 )     (31.1 )     (3.0 )
Other income (expenses):                                                                                        
Interest income     8.5       281.7       22.4       77.3       57.5       9.1       0.8       6.5       30.1       14.1       1.4  
Interest expense     (0.0 )     (1.3 )     (2.3 )     (7.8 )     (118.5 )     (18.7 )     (1.7 )     (1.7 )     (7.8 )     (22.3 )     (2.2 )
Exchange gain/(loss)     (16.6 )     (551.0 )     (2.8 )     (9.8 )     9.2       1.4       0.1       (4.9 )     (22.7 )     (12.8 )     (1.2 )
Unrealized (loss) gain in investment     (0.6 )     (18.2 )     1.9       6.7                         (65.1 )     (302.6 )     55.5       5.4  
Other expense     (0.0 )     (1.1 )     (1.3 )     (4.6 )     (35.4 )     (5.6 )     (0.5 )     (0.1 )     (0.7 )     (3.2 )     (0.3 )
Other income     2.8       92.9       20.6       71.1       29.1       4.6       0.4       1.9       9.0       2.3       0.2  
Income/(loss) from equity investments                 (2.2 )     (7.7 )     (1.9 )     (0.3 )     (0.0 )     (0.0 )     (0.0 )     10.2       1.0  
Income/(loss) before income tax     (99.0 )     (3,285.2 )     (50.8 )     (174.9 )     82.3       13.0       1.2       (103.8 )     (482.4 )     12.7       1.2  
Income tax     (10.9 )     (362.3 )     (7.1 )     (24.5 )     (13.6 )     (2.1 )     (0.2 )     (0.1 )     (0.6 )     1.1       0.1  
Income/(loss) from continuing operations     (109.9 )     (3,647.5 )     (57.9 )     (199.4 )     68.7       10.8       1.0       (103.9 )     (483.3 )     13.8       1.3  
Income (loss) from discontinued operations     (25.4 )     (842.3 )     (1.3 )     (4.5 )                       (1.3 )     (6.1 )     (2.9 )     (0.3 )
Net income /(loss)     (135.3 )     (4,489.8 )     (59.2 )     (203.9 )     68.7       10.8       1.0       (105.2 )     (489.2 )     11.0       1.1  
Less net income, or addition of net loss, attributable to the non controlling interest                             (84.6 )     (13.3 )     (1.2 )%                 7.4       (0.7 )
Net income (loss) attributable to the Company     (135.3 )     (4,489.8 )     (59.2 )     (203.9 )     (16.0 )     (2.5 )     (0.2 )%     (105.2 )     (489.2 )     18.4       1.8  

 

Revenues

 

Our revenues increased by 23,757.9% from RMB29.0 million in the year ended December 31, 2010 to RMB6,918.8 million ($1,089.1 million) in the year ended June 30, 2012 primarily due to this fiscal year being the first full year that we have consolidated PGW’s operating results since the completion of the partial takeover offer by Agria Singapore for PGW in April 2011. Additionally, the increase in our revenues during this period was attributable to the growth of our China seeds business compared with the year ended December 31, 2010.

 

43
 

 

Our revenues increased by 4,673.0% from RMB21.5 million in the six months ended June 30, 2010 to RMB1,026.2 million in the six months ended June 30, 2011, primarily due to our consolidation of PGW’s operating results upon the completion of the partial takeover offer by Agria Singapore for PGW in April 2011. Although we only consolidated revenues for the two month period from April 30, 2011, the date of closing of the investment, to June 30, 2011, our consolidation of PGW’s operating results led to a significant increase in our reported revenue. Additionally, the increase in our revenues during this period was attributable to the growth of our existing edible corn seed business and the commencement of sales of field corn seeds.

 

Our revenues increased by 863.2% from RMB3.0 million in the year ended December 31, 2009 to RMB29.0 million in the year ended December 31, 2010, primarily due to (i) the full year revenue contribution in 2010 from our acquisition of Nong Ke Yu, which was completed in September 2009, (ii) the revenue derived from our exclusive sales agency arrangement with our 49% owned associate Ganxin, and (iii) the part year contribution in 2010 from our acquisition of BeOK, a company engaged in research, production and marketing of vegetable seeds.

 

Our historical operating business P3A was disposed of in July 2010 and is classified as a discontinued operation. As a result, our revenue has been recast to remove costs of P3A revenue in the years ended December 31, 2009 and 2010 and in the six months ended June 30, 2010.

 

The following table sets forth revenues in absolute terms and as a percentage of our total revenues for each of our segments for each of the periods indicated:

 

   For the Year Ended December 31,   For the Year Ended June 30,   For the Six Months Ended June 30, 
   2009   2010   2012   2010   2011 
   Revenue
(RMB
millions)
   % of
Total
Revenue
   Revenue
(RMB
millions)
   % of
Total
Revenue
   Revenue
(RMB
millions)
   Revenue
($
millions)
   % of
Total
Revenue
   Revenue
(RMB
millions)
   % of
Total
Revenue
   Revenue
(RMB
millions)
   % of
Total
Revenue
 
China seeds   3.0    100.0    29.0    100.0    52.8    8.3    0.8    21.5    100.0    60.8    5.9 
International seeds                   2,235.6    351.9    32.3            353.1    34.4 
AgriServices                   4,630.4    728.9    66.9            612.3    59.7 
Total   3.0    100.0    29.0    100.0    6,918.8    1,089.1    100.0    21.5    100.0    1,026.2    100.0 

 

China Seeds Revenues

 

We have generated revenues from the sale of edible corn seed products since we acquired Nong Ke Yu in September 2009. We have generated revenues from the sale of vegetable seed products since we acquired BeOK in January 2010. We have also generated revenues from the sale of field corn seed products since we invested in, and entered into an exclusive sales agency agreement with Ganxin in September 2010. In January 2012, Nong Ke Yu commenced production and sales of field corn sales produced by Xinjiang Ruide Ltd., at which time we suspended our exclusive sales agency agreement with Ganxin.

 

The following table sets forth our seed sales volume and revenues, in absolute amounts and as percentages of our total revenues, for each of the seed product categories as well as our royalty income for the periods indicated:

 

   For the Year Ended December 31,   For the Year Ended June 30, 
   2009   2010   2012 
   Revenue
(RMB
millions)
   % of Total
Revenues
   Revenue
(RMB
millions)
   % of Total
Revenues
   Revenue
(RMB
millions)
   Revenue
($ millions)
   % of Total
Revenues
 
                             
Edible corn seeds   0.0    0.4    28.7    99.0    27.0    4.2    0.4 
Field corn seeds           0.0    0.0    25.3    4.0    0.4 
Vegetable seeds           0.3    1.0    0.5    0.1    0.0 
Royalty income   3.0    99.6                     
Total   3.0    100.0    29.0    100.0    52.8    8.3    0.8 

 

44
 

 

   For the Six Months Ended June 30, 
   2010   2011 
   Revenue
(RMB
thousands)
   % of Total
Revenues
   Revenue
(RMB
thousands)
   % of Total
Revenues
 
                 
Edible corn seeds   21.3    99.1    26.7    2.6 
Field corn seeds           34.1    3.3 
Vegetable seeds   0.2    0.9    0.0    0.0 
Royalty income                
Total   21.5    100.0    60.8    5.9 

 

Revenues from our China seed segment increased by 82.1% from RMB29.0 million in the year ended December 31, 2010 to RMB52.8 million ($8.3 million) in the year ended June 30, 2012, primarily due to the commencement of production and sales of field corn seeds by Nong Ke Yu in November 2011. Revenues from our China seed segment increased by 182.8% from RMB21.5 million in the six months ended June 30, 2010 to RMB60.8 million in the six months ended June 30, 2011, primarily due to increases in sales volume and average selling prices of our categories of seed products. Revenues from our China seed segment increased by 863.2% from RMB3.0 million in the year ended December 31, 2009 to RMB29.0 million in the year ended December 31, 2010, primarily due to our acquisitions of Nong Ke Yu and BeOK and our investment in Ganxin.

 

Revenues from our edible corn seeds business decreased by 5.9% from RMB28.7 million in the year ended December 31, 2010 to RMB27.0 million ($4.2 million) in the year ended June 30, 2012, primarily due to certain of our food manufacturing customers holding higher inventory levels at the beginning of the sales season than in previous years and therefore reducing the quantity of seeds purchased during that year. Additionally, stronger market prices in the prior year encouraged our competitor seed companies to increase their production in the year ended June 30, 2012, resulting in increased competition and reduced revenues in this business.

 

Revenue from our edible corn seeds business increased 25.3% from RMB21.3 million in the six months ended June 30, 2010 to RMB26.7 million in the six months ended June 30, 2011, primarily due to increases in sales volume and average selling prices of our categories of seed product. The increases in average selling prices were in line with increases in prevailing market prices which in turn led to our customers purchasing more seeds than they typically required to hedge against increasing prices in the future.

 

Revenue from our edible corn seeds business increased from RMB0.01 million in the year ended December 31, 2009 to RMB28.7 million in the year ended December 31, 2010. This was driven by an increase in our sales volume, caused by the acquisition in September 2009 of Nong Ke Yu, an edible corn seeds business engaged in research and development, production, distribution and sales of seeds for edible corn for human consumption. Due to the seasonal nature of this business and the timing of the acquisition, revenue derived from Nong Ke Yu in 2009 was very low. However, in 2010, we benefited fully from Nong Ke Yu’s business and operations. Additionally, the average selling price of our edible corn seeds increased in line with a general increase in market prices for corn seeds in 2010.

 

Revenues from our field corn seeds business started when we entered our exclusive sales agreement with Ganxin, our 49% owned investment, in October 2010. In November 2011, Nong Ke Yu, our 100% owned subsidiary, commenced sales of its own produced field corn seeds and we suspended our exclusive sales agreement with Ganxin.

 

Revenues from our field corn seeds business totaled RMB25.3 million ($4.0 million) in the year ended June 30, 2012. Revenues from our field corn seeds business totaled RMB34.1 million in the six months ended June 30, 2011. The above analysis excludes sales made by Ganxin, our 49% owned investment, which predominantly produces and sells field corn seed and is accounted for as an equity investment.

 

Our vegetable seeds business remained immaterial to our revenues and results of operations in the year ended June 30, 2012, as our sales and production efforts in the China seeds market were focused on edible and field corn seeds, where we see greatest opportunity for growth of our business.

 

45
 

 

Revenue generated from our China seed business in 2009 included a royalty income of RMB3.0 million from Nong Ke Yu, relating to the purchase and subsequent rental of production and sales rights to two corn seeds JKN2000 and JKN120 for the period prior to the acquisition of Nong Ke Yu.

 

International Seeds Revenues

 

We have generated revenues from our international seeds business segment since April 30, 2011, the date we completed our partial takeover offer by Agria Singapore for PGW. International seeds revenues comprise sales generated by the following categories: (i) seed and grain revenue generated by our sales of forage seeds, turf and grain; (ii) agrifeeds revenue generated by our sales of liquid animal feeds and other nutritional animal products, including molasses; and (iii) South America agritech revenue, comprising sales of the above products to developing seed markets in South America.

 

The following table sets forth our international seeds revenue, in absolute amounts and as percentages of our total revenue, for each of the above operating units for the six months ended June 30, 2011. We generated no revenue from our international seeds business in the six months ended June 30, 2010 or in each of the two years ended December 31, 2010, as these periods were before the completion of our partial takeover offer for PGW.

 

   For the Six Months Ended June 30,
2011
   For the Year Ended June 30, 2012 
   Revenue
(RMB millions)
   % of Total
Revenue
   Revenue
(RMB
millions)
   Revenue
($ millions)
   % of Total
Revenue
 
                     
Seed and grain   245.4    23.9    1,464.6    230.5    21.2 
Agrifeeds   25.3    2.5    276.1    43.5    4.0 
South America Agritech   82.3    8.0    494.9    77.9    7.2 
Total   353.0    34.4    2,235.6    351.9    32.3 

 

AgriServices Revenues

 

We have generated revenues from our AgriServices segment since April 30, 2011, the date we completed our partial takeover offer by Agria Singapore for PGW. AgriServices revenues comprise sales generated by the following categories: (i) merchandising revenue generated by our rural supplies and fruitfed retail activities via our chain of retail stores in New Zealand; (ii) livestock revenue generated by our rural livestock trading and livestock export activities; and (iii) other AgriServices revenue generated by our activities in insurance, real estate, irrigation and pumping, wool, training and consulting, as well as our activities supplying products and services to the Uruguayan rural services industry.

 

The following table sets forth our AgriServices revenue, in absolute amounts and as percentages of our total revenue, for each of the above categories of sales for the six months ended June 30, 2011. We generated no revenue from AgriServices in the six months ended June 30, 2010 or in each of the two years ended December 31, 2010, as these periods were before the completion of our partial takeover offer for PGW.

 

    For the Six Months Ended June 30,
2011
    For the Year Ended June 30, 2012  
    Revenue
(RMB millions)
    % of Total
Revenues
    Revenue
(RMB millions)
    Revenue
($ millions)
    % of Total
Revenues
 
                               
Merchandising     314.8       30.7       3,069.8       483.2       44.4  
Livestock     132.6       12.9       685.1       107.9       9.9  
Other AgriServices     164.9       16.1       875.5       137.8       12.7  
Total     612.3       59.7       4,630.4       728.9       66.9  

 

46
 

 

Cost of Revenues and Gross Margins

 

Our cost of revenues increased by 31,016.2% from RMB17.3 million in the year ended December 31, 2010 to RMB5,383.1 million ($847.3 million) in the year ended June 30, 2012. Gross profit increased by 13,025.6% from RMB11.7 million in the year ended December 31, 2010 to RMB1,535.7 million ($241.7 million) in the year ended June 30, 2012. The increase in cost of revenues and gross profit was primarily due to this being the first full year that we have consolidated PGW’s operating results upon completion of the partial takeover offer by Agria Singapore for PGW in April 2011. Additionally, the increase in our costs of revenues and gross profit during this period was attributable to the growth of our China seeds business compared with the year ended December 31, 2010.

 

Our cost of revenues increased by 6,034.6% from RMB12.7 million in the six months ended June 30, 2010 to RMB779.1 million in the six months ended June 30, 2011.  Gross profit increased by 2,708.0% from RMB8.8 million in the six months ended June 30, 2010 to RMB247.1 million in the six months ended June 30, 2011.  The increases in cost of revenues and gross profit were primarily due to our consolidation of the operating results of PGW, following the completion of the partial takeover offer by Agria Singapore for PGW in April 2011. Although we only consolidated PGW’s operating results for the two month period from April 30, 2011, the date of closing of the investment, to June 30, 2011, our consolidation of PGW’s operating results led to a significant increase in our reported cost of revenues and gross profit.

 

Our cost of revenues increased by 228.2% from RMB5.3 million in the year ended December 31, 2009 to RMB17.3 million in the year ended December 31, 2010. We had a gross loss of RMB2.3 million in the year ended December 31, 2009, compared to a gross profit of RMB11.7 million in the year ended December 31, 2010.

 

Our historical operating business P3A was disposed of in July 2010 and is classified as a discontinued operation. Therefore our cost of revenues has been recast to remove P3A revenues in each of the two years ended December 31, 2010 and in the six months ended June 30, 2010.

 

China Seeds Cost of Revenues and Gross Margins

 

Our cost of revenues for our China seeds segment primarily consists of the costs that we pay to companies to whom we outsource production of our seed products, depreciation of buildings and equipment and direct labor costs. At the beginning of each growing season, we provide parent seeds to production companies to grow for us under contractual arrangements, which detail the area of land, standard yield and quality requirements. We also provide advances to the production companies for their rental of land, payments to farmers, purchase of fertilizer and other production materials. At the end of the growing season, we take delivery of the seeds and undertake various sorting, selecting, coating and packaging processes to produce our finished goods.

 

In the year ended December 31, 2009, our cost of revenues for our China seeds segment primarily comprised the amortization of purchased technology know-how relating to two varieties of corn seeds, JKN 2000 and JKN 120. In the year ended December 31, 2010, since we no longer received royalty income from these corn seed varieties, the amortization of purchased technology know-how was charged to general and administrative expenses rather than cost of revenues.

 

The following table sets forth the cost of revenues, the gross profit and the gross margin for each of the seed product categories and of other costs of revenues (amortization of our purchased technology know-how) for the years indicated.

 

47
 

 

   For the Year Ended December 31,   For the Year Ended June 30, 
   2009   2010   2012 
   Cost of
Revenue
(RMB
millions)
   Gross
Profit
(RMB
millions)
   Gross
Margin
(%)
   Cost of
Revenue
(RMB
millions)
   Gross
Profit
(RMB
millions)
   Gross
Margin
(%)
   Cost of
Revenue
(RMB
millions)
   Cost of
Revenue
($ millions)
   Gross
Profit
(RMB
millions)
   Gross
Profit
($ millions)
   Gross
Margin
(%)
 
Edible corn seeds   0.0    0.0    38.5    17.1    11.6    40.4    14.1    2.2    12.9    2.0    47.8 
Field corn seeds               0.0    0.0    4.3    18.6    2.9    6.7    1.1    26.5 
Vegetable seeds               0.2    0.1    22.1    0.4    0.1    0.1    0.0    20.0 
Other cost of revenues   5.3    (2.3)   (75.9)                                
Total   5.3    (2.3)   (75.4)   17.3    11.7    40.2    33.1    5.2    19.7    3.1    37.3 

 

    For the six months ended June 30,                                
    2010     2011                                
    Cost of
Revenue
    Gross
Profit
    Gross     Cost of
Revenue
    Gross
Profit
    Gross                                
    (RMB millions)     (RMB millions)     Margin
(%)
    (RMB millions)     (RMB millions)     Margin
(%)
                               
                                                                   
Edible Corn Seeds     12.6       8.7       40.8       12.1       14.6       54.7                                                          
Field Corn Seeds                       21.6       12.5       36.7                                          
Vegetable Seeds     0.1       0.1       50.0       0.0       0.0       26.8                                          
Total     12.7       8.8       40.9       33.7       27.1       44.6                                          

 

Cost of revenues for our China seeds segment increased by 91.0% from RMB17.3 million in the year ended December 31, 2010 to RMB33.1 million ($5.2 million) in the year ended June 30, 2012. Gross profit for our China seeds segment increased from RMB11.7 million in the year ended December 31, 2010 to RMB19.6 million ($3.1 million) in the year ended June 30, 2012. Cost of revenues for our China seeds segment increased by 165.4% from RMB12.7 million in the six months ended June 30, 2010 to RMB33.7 million in the six months ended June 30, 2011. Gross profit for our China seeds segment increased by 208.0% from RMB8.8 million in the six months ended June 30, 2010 to RMB27.1 million in the six months ended June 30, 2011. The cost of revenues and gross profit of our China seeds segment during these periods were influenced by the cost of revenues and gross profits of each of the categories of seed products in this segment.

 

Cost of revenues for our edible corn seeds business decreased by 17.6% from RMB17.1 million in the year ended December 31, 2010 to RMB14.1 million ($2.2 million) in the year ended June 30, 2012. This was primarily due to improved production techniques reducing the proportion of sub-standard seeds produced. Cost of revenues for our edible corn seeds business decreased by 4.0% from RMB12.6 million in the six months ended June 30, 2010 to RMB12.1 million in the six months ended June 30, 2011. This was primarily due to our negotiation of preferential terms with the companies to whom we outsource seed production leveraged from higher order volume and occurred in spite of higher revenues for this business.

 

We began incurring costs of revenues for our field corn seeds business when we entered into our exclusive sales agreement with Ganxin, our 49% owned investment, in October 2010. In November 2011, Nong Ke Yu, our 100% owned subsidiary, commenced sales of its own-produced field corn seeds and we suspended the exclusive sales agreement with Ganxin. Cost of revenue was RMB21.6 million in the six months ended June 30, 2011 and RMB18.6 million ($2.9 million) in the year ended June 30, 2012. Gross margin was 36.7% in the six months ended June 30, 2011 and 26.5% in the year ended June 30, 2012.

 

48
 

 

Our vegetable seeds business remained immaterial to our cost of revenues and gross profit in the year ended June 30, 2012, as our sales and production efforts in the China seeds market were focused on edible and field corn seeds, where we see greatest opportunity for growth of our business.

 

Our cost of revenues for our China seeds business increased from RMB5.3 million in 2009 to RMB17.3 million in 2010. This increase was primarily due to (i) our acquisition of Nong Ke Yu in September 2009, (ii) our exclusive sales agency arrangement with our 49% owned associate Ganxin, and (iii) our acquisition of BeOK in January 2010. The increase was partially offset by the amortization of purchased technology know-how that was charged to our general and administrative expenses in 2010 rather that cost of revenues in 2009. Our gross margin for seed sales improved from a loss of 75.4% in 2009 to a profit of 40.2% in 2010, because the increase in our revenue due to our acquisitions was at a greater rate than the increase in our cost of sales.

 

International Seeds Cost of Revenues

 

International seeds cost of revenues includes: (i) payments made to companies to whom we outsource production of our seed products; (ii) direct costs associated with the treatment, dressing and other value added activities we perform on our seed products prior to them being ready for sale; and (iii) the importation of molasses from Australia which are sold into the New Zealand dairy sector.

 

Cost of revenues for our international seeds segment in the year ended June 30, 2012 was RMB1,691.1 million ($266.2 million). Gross profit for the segment was RMB544.5 million ($85.7 million) and the gross margin was 24.4%.

 

Cost of revenues for our international seeds segment was RMB263.8 million in the six months ended June 30, 2011. Gross profit for the segment was RMB89.2 million and gross margin was 25.3%.

 

We incurred no cost of revenue and earned no gross profit in our international seeds segment in the six months ended June 30, 2010 or the two years ended December 31, 2010, as this was before the completion of our partial takeover offer for PGW.

 

AgriServices Cost of Revenues

 

AgriServices cost of revenues primarily consist of: (i) payments to suppliers of agrichemicals, fertilizers and other farm inputs which are sold into the New Zealand agriculture sector through our merchandising store network; (ii) payments for livestock acquired for stock fattening programs and payments for livestock purchased for the purposes of live export; (iii) payments to suppliers of capital farm equipment, including irrigation systems which are sold through our various other business units.

 

Cost of revenues for our AgriServices segment in the year ended June 30, 2012 was RMB3,654.4 million ($575.2 million). Gross profit for the segment was RMB967.4 million ($152.3 million) and the gross margin was 20.9%.

 

Cost of revenue of our AgriServices segment was RMB463.9 million in the six months ended June 30, 2011. Gross profit for the segment was RMB148.4 million and gross margin was 24.2%.

 

We incurred no cost of revenue and earned no gross profit in our international seeds segment in the six months ended June 30, 2010 or the two years ended December 31, 2010, as this was before the completion of our partial takeover offer for PGW.

 

Operating Expenses and Income

 

Our historical operating business P3A was disposed of in July 2010 and is classified as a discontinued operation. Therefore our operating expenses and income has been recast to remove P3A operating expenses and income in each of the two years ended December 31, 2010 and in the six months ended June 30, 2010.

 

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Selling, General and Administrative Expenses. Our selling, general and administrative expenses primarily consist of our expenses of compensation and benefits for administrative, sales finance and human resources personnel, depreciation, provisions for bad debts, travel and other expenses associated with our corporate and administrative activities as well as advertising in magazines, promotion expenses and other marketing related expenses.

 

Selling, general and administrative expenses increased from RMB98.7 million in the year ended December 31, 2010 to RMB1,361.2 million ($214.3 million) in the year ended June 30, 2012. This increase was primarily due to this fiscal year being the first full year that we have consolidated PGW’s operating results upon completion of the partial takeover offer by Agria Singapore for PGW in April 2011.

 

Selling, general and administrative expenses increased from RMB49.2 million for the six months ended June 30, 2010 to RMB271.1 million for the six months ended June 30, 2011. This increase was primarily due to our consolidation of the results of PGW, following the completion of the partial offer by Agria Singapore for PGW in April 2011. Although we only consolidated the PGW for the period from closing of the investment to the reporting period end of June 30, 2011, our consolidation of PGW’s results led to a significant increase in our reported selling, general and administrative expenses.

 

Selling, general and administrative expenses increased from RMB89.7 million in the year ended December 31, 2009 to RMB98.7 million in the year ended December 31, 2010. This increase was primarily due to (i) the amortization of corn seed rights in 2010 of RMB5.0 million which were classified as costs of goods sold in 2009, (ii) the amortization of land use rights of the land that was retained by us as part of the P3A divestiture of RMB7.6 million for the period from the date of divestiture until December 31, 2010 and (iii) the full year impact of our Nong Ke Yu acquisition, partially offset by a reduction in the costs of amortization of share options from RMB14.6 million in 2009 to RMB9.8 million.

 

The following table sets forth the selling, general and administrative costs in absolute terms and as percentages of our total revenues for each of our segments for each of periods indicated. The regional corporate category represents costs incurred by the head office of PGW, while the central corporate category represents costs incurred elsewhere in our group.

 

   For the Year Ended December 31,   For the Year Ended June 30, 
   2009   2010   2012 
   SG&A
(RMB
millions)
   % of Total
Revenues
   SG&A
(RMB
millions)
   % of Total
Revenues
   SG&A
(RMB
millions)
   SG&A
($ millions)
   % of Total
Revenues
 
                             
China seeds   0.8    26.7    6.4    22.1    15.6    2.5    0.2 
International seeds                   386.9    60.9    5.6 
AgriServices                   743.3    117.0    10.7 
Regional corporate                   143.9    22.7    2.1 
Central corporate   88.9    2,960.0    92.3    318.3    71.5    11.2    1.1 
Total   89.7    2,986.7    98.7    340.0    1,361.2    214.3    19.7 

 

   For the Six Months Ended June 30,             
   2010   2011             
   SG&A
(RMB
millions)
   % of Total
Revenues
   SG&A
(RMB
millions)
   % of Total
Revenues
             
                             
China seeds   3.7    17.2    7.0    0.7                                            
International seeds           57.0    5.6                
AgriServices           127.1    12.4                
Regional corporate           29.1    2.8                
Central corporate   45.5    211.6    50.9    4.9                
Total   49.2    228.8    271.1    26.4                

 

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Research and Development Expenses. Research and development expenses primarily consist of expenses related to development of our proprietary products, salaries and benefits of our research and development personnel, fees paid to our research partners, costs of raw materials used in our research and development activities, as well as other overhead incurred by our research and development personnel.

 

Research and development expenses increased from RMB0.1 million in the year ended December 31, 2010 to RMB32.0 million ($5.0 million) in the year ended June 30, 2012. This increase was primarily due to this being the first full fiscal year that we have consolidated PGW’s operating results upon completion of the partial takeover offer by Agria Singapore for PGW in April 2011.

 

Research and development expenses increased from less than RMB100,000 for the six months ended June 30, 2010 to RMB7.0 million for the six months ended June 30, 2011. This increase was due to our consolidation of the results of PGW, following the completion of the partial offer by Agria Singapore for PGW in April 2011. Although we only consolidated the results of PGW for the period from closing of the investment to June 30, 2011, the fiscal year end of PGW, our consolidation of PGW’s results led to a significant increase in our reported selling, general and administrative expenses.

 

Research and development expenses fell from RMB1.2 million in the year ended December 31, 2009 to RMB0.1 million in the year ended December 31, 2010 due to the departure of several members of our research and development staff in 2009 and the partial release in 2010 of a provision from the time of the acquisition of Nong Ke Yu. NongKeyYu, prior to our acquisition in September 2009, had been undertaking trials in Leizhou to examine the viability of certain varieties of edible corn seeds for the Southern China market. At the time of our acquisition, we had an expectation of liabilities and committed expenditure in relation to these trials and made a provision in the acquired balance sheet of RMB2.0 million. The actual costs incurred in terminating the tests was RMB1.5 million with the balance being released to offset research and development expenses in 2010.

 

Share-based Compensation Expenses. Since we adopted the 2007 share incentive plan in July 2007, options to purchase a total of 9,767,333 ordinary shares were granted to our officers, directors and employees and remained outstanding as of June 30, 2012. We had not granted any options or other or equity incentives to any employee, director or consultant before July 2007.

 

We determine share-based compensation expenses based on the fair value of the options as of the date of grant and amortize such expenses over the vesting period of the options. A change in the amount of share-based compensation expenses will primarily affect our operating expenses, net income and earnings per share.

 

For the options to purchase 9,767,333 ordinary shares that were granted to our officers, directors and employees on July 4, 2007, July 19, 2007, December 7, 2007, February 1, 2008, May 27, 2008, June 5 2008, June 12, 2008, September 5, 2008, December 5, 2008, October 13, 2009, May 21,2010, June 1, 2010 and August 19, 2011 and remained outstanding, total unrecognized compensation costs are estimated to be approximately RMB1.9 million ($0.3 million) as of June 30, 2012 based on an assessment of the fair value of the awarded options. The compensation expenses are to be recognized as a charge to expense over the vesting period of two to four years from the respective grant dates.

 

Operating Profit (Loss)

 

As a result of the foregoing factors, our operating profit from operations improved from a loss of RMB87.1 million in the year ended December 31, 2010 to a profit of RMB142.5 million ($22.4 million) in the year ended June 30, 2012. Our operating loss from operations decreased from RMB40.4 million for the six months ended June 30, 2010 to RMB31.1 million for the six months ended June 30, 2011. Our operating loss from operations decreased from RMB93.0 million in the year ended December 31, 2009 to RMB87.1 million in the year ended December 31, 2010.

 

The following table sets forth the operating profits and losses in absolute terms and as percentages of our total revenues for each of our segments for the periods indicated:

 

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   For the Year Ended December 31,   For the Year Ended June 30, 
   2009   2010   2012 
   Operating
profit/(loss)
(RMB
millions)
   % of Total
Revenues
   Operating
profit/(loss)
(RMB
millions)
   % of Total
Revenues
   Operating
profit/(loss)
(RMB
millions)
   Operating
profit/(loss)
($ millions)
   % of Total
Revenues
 
                             
China seeds   (4.0)   (132.8)   5.2    17.9    1.7    0.3    0.0 
International seeds                   127.9    20.1    1.8 
AgriServices                   228.3    35.9    3.3 
Regional corporate                   (143.9)   (22.7)   (2.0)
Central corporate   (89.0)   (2,955.4)   (92.3)   (318.0)   (71.5)   (11.2)   (1.0)
Total   (93.0)   (3,088.2)   (87.1)   (300.1)   142.5    22.4    2.1 

 

    For the Six Months Ended June 30,                    
    2010     2011                    
    Operating
profit/(loss)
(RMB
millions)
    % of Total
Revenues
    Operating
profit/(loss)
(RMB
millions)
    % of Total
Revenues
                   
                                           
China seeds     5.1       23.7       19.7       1.9                                    
International seeds                 7.8       0.7                          
AgriServices                 21.3       2.1                          
Regional corporate                 (29.1 )     (2.8 )                        
Central corporate     (45.5 )     (211.4 )     (50.8 )     (4.9 )                        
Total     (40.4 )     (187.7 )     (31.1 )     (3.0 )                        

 

Interest Income

 

Interest income primarily consists of interest earned on our cash and restricted cash deposits, interest charged by us on overdue accounts owed to us and interest from convertible redeemable notes held by us and issued by PGW from January 2010 until we started consolidating PGW’s results in April 2011. The convertible redeemable notes were redeemed in December 2011.

 

Interest income increased from RMB22.4 million in the year ended December 31, 2010 to RMB57.5 million ($9.1 million) in the year ended June 30, 2012, primarily due to our consolidation of interest income received by PGW upon completion of the partial takeover offer by Agria Singapore for PGW in April 2011.

 

Interest income increased to RMB14.1 million in the six months ended June 30, 2011 from RMB6.5 million for the six months ended June 30, 2010, and increased to RMB22.4 million in the year ended December 31, 2010 from RMB8.5 million in the year ended December 31, 2009, as a greater proportion of our cash and restricted cash balances were placed in higher interest fixed term deposit accounts.

 

Interest Expense

 

Our interest expense for the six months ended June 30, 2011 and for the year ended June 30, 2012 comprised: (i) interest and facility fees paid on our bank loans in China; (ii) interest and facility fees paid by PGW from April 30, 2011, the date of closing of our partial takeover offer; and (iii) interest paid on our acquisition debt facilities used to fund our partial takeover offer for PGW since the debt’s commitment in January 2011 and draw down in April 2011.

 

Primarily due to our consolidation of PGW’s results and the costs of the acquisition debt, our interest and financing expenses increased from RMB2.3 million in the year ended December 31, 2010 to RMB118.5 million ($18.7 million) in the year ended June 30, 2012 and from RMB1.7 million for the six months ended June 30, 2010 to RMB22.3 million for the six months ended June 30, 2011.

 

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Our interest and financing expenses for the year ended December 31, 2010 comprised interest paid on bank loans and was RMB2.3 million, compared to immaterial amounts in 2009.

 

Unrealized Gain (Loss) on Investment

 

We had no unrealized gain or loss on investments in the year ended June 30, 2012,

 

The unrealized gain on investments of RMB55.5 million for the six months ended June 30, 2011 represented the difference between the fair value of our then 19% holding in the equity of PGW between January 1, 2011 and April 29, 2011, when we completed our partial offer for PGW. The unrealized loss on investments of RMB65.1 million for the six months ended June 30, 2010 represented the difference between the fair value of our then 19% holding in the equity of PGW between January 1, 2010 and June 30, 2010.

 

The unrealized gain on investments of RMB1.9 million in the year ended December 31, 2010 compared to the unrealized loss on investment of RMB0.6 million in the year ended December 31, 2009 represented the difference between the fair value of PGW based on the share price of PGW as of December 31, 2010 and the fair value of the investment based on the share price as of December 31, 2009.

 

Other Income and Other Expenses

 

We recorded RMB29.1 million ($4.6 million) of other income for the year ended June 30, 2012, primarily due to the release of RMB25.5 million ($4.0 million) of a provision made in April 2011 with respect to a supply contract entered into by PGW prior to our acquisition of a controlling interest in PGW. The supply contract required payments to be made to the purchaser in the event that PGW was not able to meet its supply obligations under the contract. We reduced the provision based on the results of initiatives implemented during the year ended June 30, 2012 to assist in achieving supply targets.

 

We recorded RMB35.4 million ($5.6 million) of other expenses for the year ended June 30, 2012, primarily due to losses on assets and investments of RMB14.0 million ($2.2.million), fair value adjustments of RMB12.2 million ($1.9 million) and restructuring costs of RMB8.2 million (US$1.3 million).

 

We recorded RMB2.3 million of other income for the six months ended June 30, 2011, compared to other losses of less than RMB100,000 for the six months ended June 30, 2010.

 

We recorded RMB20.6 million of other income in the year ended December 31, 2010, which was primarily attributable to payments of $0.5 million from our insurers for our legal costs incurred in defending our class action lawsuit and $2.2 million of income from our ADS depositary as reimbursement for legal fees and administrative expenses.

 

We recorded RMB2.8 million of other income in the year ended December 31, 2009, which was primarily attributable to an underwriting fee received as part of our participation in the rights issue undertaken by PGW.

 

Income (Loss) from Equity Investments

 

We recorded RMB10.2 million of income from equity investments in the six months ended June 30, 2011, primarily reflecting our share of income from Ganxin, our 49% owned associate. In the year ended June 30, 2012, we made a provision of RMB1.9 million ($0.3 million) equal to our share of income from Ganxin in the period, reflecting an option that the 51% owner of Ganxin has to acquire our stake under certain circumstances.

 

We recorded less than RMB3 million of income or loss from equity investments in each of the two years ended December 31, 2010 and 2009, the year ended June 30, 2012 and the six months ended June 30, 2010.

 

Income (Loss) Before Income Tax

 

As a result of the foregoing factors, our pre-tax income improved from a loss of RMB50.8 million in the year ended December 31, 2010 to a profit of RMB82.3 million ($13.0 million) in the year ended June 30, 2012. Our pre-tax income improved from a loss of RMB103.8 million for the six months ended June 30, 2010 to a profit of RMB12.7 million for the six months ended June 30, 2011. Our pre-tax income improved from a loss of RMB99.0 million in the year ended December 31, 2009 to a loss of RMB50.8 million in the year ended December 31, 2010.

 

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Income Tax

 

Our income tax expenses increased from RMB7.1 million in the year ended December 31, 2010 to RMB 13.6 million ($2.1 million) in the year ended June 30, 2012, primarily due to this fiscal year being the first full year that we have consolidated PGW’s operating results upon completion of the partial takeover offer by Agria Singapore for PGW in April 2011.

 

We had an income tax expense of RMB0.1 million for the six months ended June 30, 2010, compared to a tax credit of RMB1.1 million for the six months ended June 30, 2011.

 

Our income tax decreased from RMB10.9 million in the year ended December 31, 2009 to RMB7.1 million in the year ended December 31, 2010 as a result of our reduced taxable profits, offset in part by an increase to RMB4.4 million in tax on income from our ADS depositary.

 

Net Income (Loss) From Continuing Operations

 

As a result of the foregoing factors, our net income from continuing operations improved from a loss of RMB57.9 million in the year ended December 31, 2010 to a profit of RMB68.7 million ($10.8 million) in the year ended June 30, 2012. Our net income from continuing operations improved from a loss of RMB103.9 million for the six months ended June 30, 2010 to a profit of RMB13.8 million for the six months ended June 30, 2011. Our net income from continuing operations improved from a loss of RMB109.9 million in the year ended December 31, 2009 to a loss of RMB57.9 million in the year ended December 31, 2010.

 

Income (Loss) From Discontinued Operations

 

We had no profits or losses from discontinued operations in the year ended June 30, 2012.

 

We recorded an RMB2.9 million loss from discontinued operations for the six months ended June 30, 2011. This is attributed to the loss incurred by PGW Finance, which was classified as a discontinued operation in the six months ended June 30, 2011 and was divested in August 2011.

 

On July 13, 2010, we completed the divestiture of P3A to Mr. Zhixin Xue, the president and a director of P3A. As a result of the transaction, we acquired from Mr. Xue and cancelled shares representing 11.5% of our issued and outstanding share capital immediately prior to the transaction.

 

We recorded an RMB1.3 million loss from discontinued operations in both the year ended December 31, 2010 and the six months ended June 30, 2010. In each case, this was attributed to P3A and comprises:

 

RMB20.3 million in net income from discontinued operations for the period through the date of disposal;

 

an RMB212.8 million loss on disposal of discontinued operations; and

 

an RMB191.2 million reversal of deferred tax liabilities released due to the divestiture of our discontinued operations.

 

We recorded an RMB25.4 million loss from discontinued operations in the year ended December 31, 2009 attributable to P3A’s net loss in the year ended December 31, 2009.

 

Net Income (Loss)

 

As a result of the foregoing factors, our net income improved from a loss of RMB59.2 million in the year ended December 31, 2010 to a profit of RMB68.7 million ($10.8 million) in the year ended June 30, 2012. Our net income improved from a loss of RMB105.2 million for the six months ended June 30, 2010 to a profit of RMB11.0 million for the six months ended June 30, 2011. Our net income improved from a loss of RMB135.3 million in the year ended December 31, 2009 to a loss of RMB59.2 million in the year ended December 31, 2010.

 

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Net Income Attributable to Noncontrolling Interests

 

Of the RMB68.7 million ($10.8 million) net income earned in the year ended June 30, 2012, RMB84.6 million ($13.3 million) was attributable to noncontrolling interests. The noncontrolling interests primarily represent (i) non-PGW shareholders of subsidiaries of PGW; (ii) the 49.78% of PGW not owned by Agria Singapore; and (iii) the 19.19% of Agria Asia Investments not owned by Agria Group.

 

Of the RMB11.0 million net income earned in the six months ended June 30, 2011, a loss of RMB7.4 million was attributable to noncontrolling interests. The noncontrolling interests primarily represent (i) non-PGW shareholders of subsidiaries of PGW; (ii) the 49.99% of PGW not owned by Agria Singapore; and (iii) the 19.19% of Agria Asia Investments not owned by Agria Group.

 

None of the losses incurred in the six months ended June 30, 2010 or the years ended December 31, 2009 and 2010 were attributable to noncontrolling interests.

 

Net Income (Loss) Attributable to the Company

 

As a result of the foregoing factors, net loss attributable to the Company was RMB16.0 million ($2.5 million) for the year ended June 30, 2012 and net profit attributable to the Company was RMB18.4 million for the six months ended June 30, 2011. Net loss attributable to the Company was RMB105.2 million in the six months ended June 30, 2010, RMB59.2 million in the year ended December 31, 2010 and RMB135.3 million in the year ended December 31, 2009.

 

Taxation

 

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

 

PRC Enterprise Income Tax

 

On March 16, 2007, the National People’s Congress of China enacted a new tax law, the 2008 EIT Law, which became effective on January 1, 2008. Under the new tax law, foreign invested enterprises and domestic companies are subject to EIT at a uniform rate of 25% and any tax exemption, reduction and preferential treatments which are applicable only to foreign invested enterprises will be revoked. P3A, our consolidated affiliated entity up until July 2010, qualified as a “key technology enterprise” under the Shanxi province 1311 Agricultural High Technology Project implemented by Shanxi province in 2002, and therefore P3A had been exempted from EIT since 2002 based on the approval of the local tax authority in Shanxi. Upon effectiveness of the 2008 EIT Law on January 1, 2008 and based on Jin Di Shui Gao Xing Fa (2009)2 issued by Local Tax Bureau of Taiyuan, P3A was approved to be exempted from PRC income tax since January 1, 2008 unless the scope of its operation had been changed. The tax exemption status was subject to annual inspection by end of each May. Agria China, our wholly-owned subsidiary established in March 2007 in China, was initially granted a “tax holiday” for a full exemption from EIT for the fiscal years 2007 to 2009. As a result of the new EIT law passed in March 2007 and its related implementation rules, our “tax holiday” exemption ceased on December 31, 2007, and Agria China has been subject to EIT at a rate of 25% since January 1, 2008. Agria Brother, our wholly-owned subsidiary established in April 2008 in Shenzhen, China is subject to EIT at a rate of 25%. Guanli, our consolidated affiliated entity established in November 2008, is subject to EIT at a rate of 25%.

 

Under the new tax law, enterprises organized under the laws of jurisdictions outside China with their de facto management bodies located within China may be considered PRC resident enterprises and therefore subject to PRC EIT at the rate of 25% on their worldwide income. According to the Implementing Rules, “de facto management bodies” refer to “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” We may be considered a resident enterprise and may therefore be subject to a 25% PRC income tax on our global income. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Any limitation of PRC law and regulations on the ability of our subsidiaries and affiliated entity to distribute dividends or make other payments to us could materially adversely affect our ability to conduct our business.”

 

55
 

 

PRC Value-Added Tax (VAT)

 

In accordance with the relevant tax laws in the PRC, VAT is levied on the invoiced value of sales and is payable by purchasers. A PRC company is required to remit the VAT it collects to the tax authorities but may deduct the VAT it has paid on eligible purchases. Up until July 2010 when we divested P3A, it had been exempt from VAT since 2002 pursuant to the relevant PRC regulations and policies regarding the VAT applicable to producers of certain agricultural products.

 

New Zealand Tax

 

New Zealand resident companies are subject to tax on their taxable income at the rate of 28%.  There is no capital gains tax in New Zealand.  However, certain gains arising from the disposal of personal property purchased with the intention of resale are taxable and certain gains on the sale or transfer of land may be taxable.

 

Australia Tax

 

Australian resident companies are taxable on their taxable income at the rate of 30%.  Net capital gains derived by Australian resident companies are taxed at the 30% corporate rate.

 

Uruguayan Tax

 

Uruguayan businesses are taxed on taxable income sourced in Uruguay.  Capital gains derived by Uruguayan companies are taxed at the standard rate of corporate tax.  The corporate tax rate in Uruguay is 25%.  A capital duty at the rate of 1.5% is levied on the net worth of the entity.

 

Critical Accounting Policies

 

We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (iii) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Significant estimates reflected in our financial statements include, but are not limited to, allowance for doubtful accounts, useful lives of fixed assets, intangible assets, and imputed interest on related party loans. Some of our accounting policies require a higher degree of judgment than others in their application.

 

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

 

Principles of Consolidation

 

The consolidated financial statements include the financial statements of the Company, its subsidiaries and variable interest entities for which the Company is the primary beneficiary. All significant intercompany transactions and balances between the Company, its subsidiaries and its variable interest entities are eliminated upon consolidation.

 

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Foreign Currency

 

The functional currency of the Company, Aero-Biotech, China Victory, Agria Hong Kong, Agria Asia, Agria Overseas, Agria Asia Investment and Agria Singapore is the United States dollar. The functional currency of Agria New Zealand and PGW is the New Zealand dollar. The functional currency of Agria China, Agria Brother and our consolidated variable interest entities is the RMB. The reporting currency of the Company is RMB. Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are remeasured at the balance sheet date exchange rate. Exchange gains and losses are included in foreign exchange gains and losses in the consolidated statements of operations.

 

On consolidation, the financial statements of the Company that use the United States dollar and New Zealand dollar as their functional currency are translated into RMB at the exchange rate in effect at the balance sheet date for assets and liabilities, and at the average exchange rate during the year for income and expense items except for individually significant transactions whereby the exchange rates on the date the transactions are recognized are used. Translation differences are recorded in accumulated other comprehensive loss, a component of shareholders' equity.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Significant estimates and assumptions reflected in the Company's consolidated financial statements include, but are not limited to revenue recognition, allowance for doubtful accounts, inventory write downs, impairment assessment and useful lives determination of property plant and equipment, valuation of intangible assets, goodwill and other long-lived assets, recognition of deferred income taxes, impairment assessments of investments and consolidation of VIEs.

 

Accounts Receivable

 

An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable based on an assessment of specific evidence indicating troubled collection, historical experience, account balance aging and prevailing economic conditions. An accounts receivable balance is written off after collection efforts have ceased.

 

Inventories

 

Inventories are stated at the lower of cost or market value. Cost is determined by the weighted average method. Raw materials and supplies consist of feed ingredients, packaging materials and operating supplies, while work-in-progress and finished goods include direct materials, direct labor and the allocation of manufacturing overhead costs.

 

Raw materials and finished goods are stated at the lower of cost or net realizable value. Cost is determined on a first in, first out basis, and, in the case of manufactured goods, includes direct materials, labor and production overhead. Work in Progress is stated at cost plus the profit recognized to date, less amounts invoiced to customers. Costs include all expenses directly related to specific contracts. Livestock inventory includes live animals acquired for stock fattening programs and for live export.

 

Intangible Assets

 

Land Use Rights

 

Prepaid land use rights are recorded at the amount paid less accumulated amortization. Amortization is provided on a straight-line basis over the term of the agreement ranging from 10 to 46 years.

 

Acquired Technologies

 

Acquired technologies, which consist primarily of purchased technology know-how related to the production of corn seeds and breeder sheep, are stated at cost less accumulated amortization. Amortization is calculated on a straight-line basis over the estimated useful lives of 3 to 15 years.

 

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Software

 

Software consists of computer software purchased from third-party developers for internal use with an estimated useful life of 3 to 10 years.

 

Investments

 

Investments in privately held entities, which are not readily marketable or do not have quoted market prices, are recorded at cost. Distributions received, other than for return of capital, are recorded as other income in the consolidated statements of operations. The Company assesses its investments for other than temporary impairments when indicators of impairment arise, including adverse changes to financial condition and the market environment of the investees.

 

Through April 2011, in accordance with ASC 825-10 "Financial Instruments — overall", the Company elected to account for its PGW equity investee in which the Company exercised significant influence using fair value as determined by the investee's quoted market price. Accordingly, the investment was reflected on the balance sheet at its fair value, with changes in fair value between reporting periods reflected in the consolidated statements of operations. As described in Note 4, in April 2011, the Company acquired a controlling interest in PGW. The Company accounts for its other equity investees under the equity method of accounting. Accordingly, the investments are reflected at original cost and adjusted for the Company's share of earnings or losses of the investees. There are no significant differences between the carrying amounts and the underlying equity in the net assets of the investees.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired. In April 2011, the Company acquired a controlling interest in PGW, resulting in additional goodwill. In accordance with the provisions of ASC 350-20, “Intangibles - goodwill and other”, goodwill amounts are not amortized, but rather are tested for impairment at least annually, or more frequently if there are indicators of impairment present. If the carrying value of the reporting unit to which goodwill is allocated is less than the reporting unit's fair value, goodwill is considered to be impaired. A reporting unit's fair value is determined based on its expected cash flows. The amount of goodwill impairment loss is measured as the excess of the carrying value of goodwill over its implied fair value. Subsequent reversal of goodwill impairment loss is prohibited. Goodwill has been assigned to Beijing NKY Seeding Development Co., Ltd., a component of the Company's corn seeds operating segment, Beiao, a component of the Company's vegetable seeds operating segment, and PGW, a company engaged in rural services in New Zealand, for purposes of impairment testing. No impairment charges have been recognized for the years ended December 31, 2009 and 2010, the six months ended June 30, 2011, and the year ended June 30, 2012.

 

Revenue Recognition

 

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery of the products and/or services has occurred and risks and rewards of ownership have passed to the customer; (iii) the selling price is fixed or determinable; and (iv) collection of the resulting receivable is reasonably assured.

 

More specifically, the Company's sales arrangements are evidenced by individual sales agreements for each transaction. The customer takes title and assumes the risks and rewards of ownership of the products upon delivery of products, which generally occurs at shipping point. Other than warranty obligations, the Company does not have any substantive performance obligations to deliver additional products or services to the customers. The product sales price stated in the sales contract is final and not subject to adjustment. The Company generally does not accept sales returns and does not provide customers with price protection. The Company assesses a customer's creditworthiness before accepting sales orders. Based on the above, the Company records revenue related to product sales upon delivery of the product to the customers.

 

The Company is subject to significant seasonal fluctuations. In particular, Livestock and Seeds activity are significantly weighted to the second half of the financial year. Seeds revenues reflect the fact the Company operates in geographical zones that suit Autumn harvesting and sowing. New Zealand generally has spring calving and lambing, so Livestock trading is weighted towards the second half of the financial year in order for farmers to maximize their incomes. Other business units have similar but less material cycles. The Company recognizes this is the nature of the industry and plans and manages its business accordingly.

 

Revenue is recognized net of any taxes collected from customers and subsequently permitted to government authorities. The Company generally records shipping and handling fees billed to customers as revenue, and shipping and handling costs incurred with the delivery of its products as cost of revenue .

 

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Income Taxes

 

Deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company has elected to classify interest due on any underpayment of income taxes and penalties in interest expense and penalties, if and when required, within general and administrative expenses.

 

Share-based Compensation

 

All grants of equity awards to employees are recognized in the financial statements based on their grant date fair values. The Company elected to recognize compensation cost for equity awards with only service conditions on a straight-line basis over the requisite service period for the entire award with the limitation that the amount of compensation cost recognized at any date must at least equal the portion of the grant-date value of the award that is vested at that date.

 

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those share-based awards that are expected to vest.

 

Where the terms of an equity-settled award are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

 

Where an equity-settled award is cancelled and is not accompanied by a concurrent grant of a replacement award or other valuable consideration, it shall be accounted for as a repurchase for no consideration. Accordingly, any previously unrecognized compensation cost shall be charged to expense at the cancellation date.

 

Share-based compensation and other benefit plans for PGW were not significant to the June 30, 2012 operating results and financial position.

 

Earnings (loss) Per Share

 

Basic earnings (loss) per ordinary share is computed by dividing income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted earnings (loss) per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares. Ordinary shares issuable upon the conversion of the redeemable, convertible preferred shares are included in the computation of diluted income per ordinary share on an "if-converted" basis, when the impact is dilutive. The dilutive effect of outstanding share options is reflected in the diluted earnings per share by application of the treasury stock method.

 

Fair Value of Financial Instruments

 

The carrying amounts of accounts receivable, accounts and notes payable, other liabilities and short-term bank borrowings approximate their fair value due to the short-term maturity of these instruments.

 

The long-term bank borrowings approximate their fair value, as their interest rates approximate market interest rates.

 

The fair values of related party receivables and payables are not practicable to estimate due to the related party nature of the underlying transactions.

 

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Derivative Financial Instruments

 

The Company uses derivative financial instruments to manage its exposure to interest rate and foreign currency risks arising from operational, financing and investment activities. The Company does not hold or issue derivative instruments for trading purposes. Generally, the derivatives do not qualify for hedge accounting. Such derivatives consist of forward exchange contracts, spot forward exchange contracts and foreign exchange options to manage exposure to foreign currency operations. Derivative financial instruments are recognized initially at fair value and transaction costs are expensed immediately. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on re-measurement to fair value is recognized immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the hedging relationship.

 

Cash flow hedges generally consist of interest rate swaps that were used by PWF to hedge exposures to changes in the market rates of variable and fixed interest rates. Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognized directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognized in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognized in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognized in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss. Subsequent to the sales of PWF, the Company does not have any cash flow hedges.

 

During all periods presented, total derivative transactions, gains and losses, and period end fair values and notional amounts were not significant to the Company’s operations or financial position.

 

Segment Reporting

 

From 2009 through June 2010, the Company operated in corn seed, sheep products and seedlings segments. In July 2010, the Company disposed of its sheep products and seedlings business segments. From August, 2010 to April 30, 2011, the Company operated and managed its business only in the China seeds business segment. Beginning with the acquisition of PGW at end of April 2011, the Company now operates in China seeds, International seeds and AgriServices segments. The China seeds segment engages in production and sale of corn seed in China, the International seeds segment engages in seed, nutrition and grain businesses and the AgriServices segment engages in merchandising, livestock, insurance, real estate and irrigation and pumping businesses. The accounting policies used in its segment reporting are the same as those used in the preparation of its consolidated financial statements. The 2009 and 2010 segment data has been restated to reflect the 2010 disposition. In 2009 and 2010, the Company generated substantially all of its revenues from customers in the PRC. Beginning in May 2011, with the acquisition of PGW, the Company generated revenues from customers in the PRC, New Zealand, Australia, South America and the United Kingdom. Geographical information is presented in note 22.

 

B. Liquidity and Capital Resources

 

Our principal sources of liquidity have been cash generated from operating activities and from financing activities, consisting of proceeds from our initial public offering in November 2007, bank borrowings and loans from related parties and other entities. As of June 30, 2012, we had RMB164.9 million ($26.0 million) in cash and cash equivalents, which consisted of cash on hand and bank deposits which are unrestricted as to withdrawal or use. In addition, we had RMB398.7 million ($62.8 million) of restricted cash which is pledged to a bank as guarantee for bank loans.

 

As of June 30, 2012, we had accounts receivable of RMB970.8 million ($152.8 million), inventories of RMB1,317.9 million ($207.5 million) and prepayments and other current assets of RMB280.9 million ($44.2 million). This represented: (i) a reduction in accounts receivables over balances at June 30, 2011 of RMB155.0 million caused by a combination of improved collection of accounts receivable by PGW and a decrease in the RMB to New Zealand dollar exchange rate; (ii) a reduction in inventories over balances at June 30, 2011 of RMB68.7 million caused by a combination of a greater proportion of our inventory in PGW being held at cost rather than at fair value and a decrease in the RMB to New Zealand dollar exchange rate; and (iii) an increase in prepayments and other current assets over balances at June 30, 2011 of RMB148.3 million, primarily due to the receivables with respect to certain loans that were transferred from PGW Finance to PGW concurrent with the sale of PGW Finance in August 2011.

 

As of June 30, 2011 we had accounts receivable of RMB1,122.8 million, inventories of RMB1,386.6 million and prepayments and other current assets of RMB132.6 million. This represented increases over balances at June 30, 2010 of RMB1,122.6 million, RMB1,312.2 million and RMB113.5 million, respectively, and in each case were caused by our consolidation of PGW’s results since completing  our partial takeover offer in April 2011. In addition, we recorded current assets held for sale relating to PGW Finance, which was sold in August 2011 for RMB2,710 million.

 

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We can only receive cash payments from Guanli pursuant to our contractual arrangements with Guanli and its shareholders.

 

As of June 30, 2012, we had RMB592.7 million ($93.3 million) in outstanding short-term bank loans and borrowings and current portions of long term bank loans and borrowings and RMB683.5 million ($107.6 million) in outstanding long term portions of long-term bank loans and borrowings.

 

As of June 30, 2011, we had RMB485.9 million in outstanding short-term bank loans and borrowings and current portions of long term bank loans and borrowings and RMB1,229.0 million in outstanding long term portions of long-term bank loans and borrowings.

 

As of June 30, 2012, short-term and long-term bank borrowing facilities included:

 

Debt owed by our subsidiary, PGW:

 

· a term debt facility denominated in New Zealand dollars of NZ$130.0 million ($102.5 million) that matures on July 31, 2014 provided by a syndicate of two banks. As of June 30, 2012, this facility had an outstanding balance of NZ$100.0 million ($78.8 million) and available balance of NZ$30.0 million ($23.6 million) ;

 

· a working capital facility denominated in New Zealand dollars of NZ$60.0 million ($47.3 million) that matures on July 31, 2014 provided by a syndicate of two banks. As of June 30, 2012, this facility had no outstanding balance;
   
· an amortizing facility denominated in New Zealand dollars of NZ$39.0 million ($30.7 million) that matures on July 31, 2013 provided by a syndicate of two banks. As of June 30, 2012, this facility had an outstanding balance of NZ$11.5 million ($9.1 million) and available balance of NZ$27.5 million ($21.7 million);

 

· bank overdraft, guarantee and trade facilities provided by a syndicate of two banks totaling NZ$46.5 million ($36.6 million);

 

· facilities in South America, denominated in US dollars provided by six banks that were fully drawn, mature before June 30, 2013 and total $18.7 million (RMB118.5 million);

 

Debt owed by our subsidiary, Agria Asia Investments :

 

· acquisition debt denominated in New Zealand dollars of NZ$25.0 million ($19.7 million) that matures on October 31, 2012 provided by a bank. In September 2012, we received a credit approved term sheet from the bank to extend this loan to February 27, 2014.;

 

·acquisition debt denominated in New Zealand dollars of NZ$10.0 million ($7.9 million) that matures on October 31, 2012 provided by Livestock Improvement Company. If the bank which provided the acquisition debt referred to above extends the NZ$25.0 million acquisition debt facility, Livestock Improvement Company is restricted in its ability to enforce security in the event of them not being repaid on October 31, 2012;

  

Debt owed by the Company and our wholly-owned subsidiaries :

 

· loan facilities denominated in RMB of RMB62.0 million ($9.8 million) that matures on April 6, 2013 provided by one bank. These facilities were guaranteed by US$10 million pledged deposit, which was included in Restricted Cash as of June 30, 2012;

 

· loan facilities denominated in US dollars of $48.4 million that mature between January 11, 2013 and April 19, 2013 provided by two banks. These facilities were guaranteed by RMB355.5 million ($52.8 million) pledged deposit, which was included in Restricted Cash as of June 30, 2012.

 

The short and long term facilities are generally collateralized by receivables, inventories, property and equipment. The interest rates on the loans are set by reference to the base rates in each of China, the United States and New Zealand for RMB, US dollar and New Zealand dollar denominated loans, respectively, with a margin payable in the year ended June 30, 2012 of up to 4.50%. These loans have been provided by various banks in China, the United States and New Zealand.

 

We incurred capital expenditures of RMB8.9 million, RMB0.6 million and RMB79.5 million ($12.5 million) in the years ended December 31, 2009 and 2010 and June 30, 2012, respectively, and RMB18.3 million in the six months ended June 30, 2011. Our capital expenditures have primarily been used to acquire property, plant and equipment, other assets and technologies. Our capital expenditures are funded by cash provided from operating activities, debt and the proceeds from our initial public offering.

 

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We have not encountered any difficulties in meeting our cash obligations to date. We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for operations for the foreseeable future. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions that we may pursue, or any amounts we may pay in the class action lawsuits against us. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities, issue debt securities or borrow from lending institutions. If we are unable to extend or refinance acquisition debt secured on our shares of PGW or are required by New Hope to acquire part or all of their shareholding in Agria Asia Investments, and we are required to sell some of the shares that we own in PGW, this may lead to our inability to continue consolidating PGW’s results of operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. Any sale of additional equity securities, including convertible debt securities, would dilute our shareholders. The incurrence of debt would divert cash from working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

 

The following table sets forth a summary of our cash flows for the periods indicated:

 

    For the Year Ended
December 31,
    For the Year Ended June 30,     For the Six Months Ended
June 30,
 
    2009     2010     2012     2010     2011  
    RMB     RMB     RMB     $     RMB     RMB  
                            (unaudited)        
    (In thousands)  
Net cash provided by/(used in) operating activities     (6,281 )     (9,210 )     182,702       28,758       2,439       65,201  
Net cash used in investing activities     (429,981 )     (277,153 )     175,542     27,631     (255,110 )     (687,475 )
Net cash (used in)/provided by financing activities     (2,026 )     (76,396 )     (274,248 )     (43,167 )     122,236       348,855  
Effect of exchange rate changes on cash     (654 )     (16,838 )     (12,877     (2,027     (2,498 )     8,962  
Net increase (decrease) in cash and cash equivalents     (438,942 )     (379,597 )     71,119       11,195       (132,933 )     (264,457 )
Cash and cash equivalents at the beginning of the year     1,176,767       737,825       93,771       14,760       737,825       358,228  
Cash and cash equivalents at the end of the year     737,825       358,228       164,890       25,955       604,892       93,771  

 

Operating Activities

 

Net cash provided by operating activities in the year ended June 30, 2012 was RMB182.7 million ($28.8 million), primarily as a result of cash received from the sales of our products more than offsetting our cash operating expenses. The increase in our inventories caused cash outflows of RMB36.2 million ($5.7 million), the decrease in our accounts receivable caused cash inflows of RMB103.2 million ($16.3 million) and the increase in accounts payable caused cash inflows of RMB15.9 million ($2.5 million).

 

Net cash provided by operating activities in the six months ended June 30, 2011 was RMB65.2 million, primarily as a result cash of changes in operating assets and liabilities caused by our consolidation of PGW. The increase in our inventories caused cash outflows of RMB31.5 million and the movements in our accounts receivable caused cash inflows of RMB305.0 million.

 

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Net cash used in operating activities in the year ended December 31, 2010 was RMB9.2 million, primarily as a result cash received from the sales of our products being more than offset by our cash operating expenses. Additionally, both our inventories and accounts payable have increased as we grow our seeds business. The increase in our inventories caused cash outflow of RMB54.5 million and the increase in our accounts payable caused cash inflow of RMB41.3 million.

 

Net cash used in operating activities in the year ended December 31, 2009 was RMB6.3 million, primarily as a result of the decrease in our revenue. The decrease in accounts receivable caused cash inflow of RMB47.4 million. The increase in our inventories caused cash outflow of RMB34.9 million

 

Investing Activities

 

Net cash provided by in investing activities in the year ended June 30, 2012 was RMB175.5 million ($27.6 million), primarily due to payment for other investments of RMB463.8 million ($73.0 million) and proceeds from sale of other assets and net decrease of finance receivables, together RMB716.0 million ($112.7 million) related to the sale of PGW Finance and retention of certain loans in August 2011. Additionally acquisition of property, plants and equipment and other assets totaled RMB74.0 million ($11.6 million).

 

Net cash used in investing activities in the six months ended June 30, 2011 was RMB687.5 million primarily as a result cash outflows (net of cash received) for our acquisitions of RMB695.5 million.

 

Net cash used in investing activities for the year ended December 31, 2010 was RMB277.2 million due primarily to the following factors: (i) we incurred investment expenditures of RMB165.4 million in connection with our subscription for convertible redeemable notes issued by PGW, (ii) we incurred investment expenditure of RMB40.0 million in connection with our acquisition of a 49% interest in Ganxin, and (iii) P3A held cash balances of RMB87.5 million at the date of divestiture.

 

Net cash used in investing activities for the year ended December 31, 2009 was RMB430.0 million due primarily to the following factors: (i) we incurred capital expenditure of RMB8.9 million in 2009 primarily to acquire property, plant and equipment, other assets and intangible assets, and (ii) we incurred acquisition expenditures of RMB414.6 in connection with our acquisition of a 19.01% interest in PGW. Our acquisition of Nong Ke Yu for RMB5.0 million resulted in net cash inflow of RMB0.5 million as a result of acquired cash balances of RMB5.5 million.

 

Financing Activities

 

Net cash used in financing activities in the year ended June 30, 2012 was RMB274.2 million ($43.2 million), primarily due to repayment of short term borrowings exceeding proceed from short term borrowing by RMB380.1 million ($59.9 million) of the same amount during the year.

 

Net cash raised from financing activities in the six months ended June 30, 2011 was RMB348.8 million, primarily as a result raising finance for the acquisition of a controlling interest in PGW.

 

Net cash used by financing activities was RMB76.4 million in 2010, resulting primarily from a pledge over cash balances of RMB136.0 million granted as security over short term bank loans during the year offset in part by the net effect of the drawdown of two loans for RMB59.6 million each and the repayment of one of these loans during the year.

 

Net cash used in financing activities was RMB2.0 million in 2009, resulting primarily from loan proceeds and repayment of existing loans and the repurchase of shares.

 

Recently Issued Accounting Pronouncements

 

In September 2011, the Financial Accounting Standard Board, or FASB, issued updated guidance that simplifies the goodwill impairment test. For its annual and interim goodwill impairment test, an entity first assesses qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described above. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. Our Company adopted the updated guidance for our annual goodwill impairment test in 2011.

 

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In June 2011, the FASB issued guidance to improve the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income, or OCI, by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity. The amendments in this standard require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently in December 2011, the FASB issued an update which indefinitely defers certain requirements to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. The amendments in these standards do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The guidance is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. The adoption of this guidance is expected to have an impact on the presentation of the Company's consolidated statements of operations and comprehensive loss, but will not impact the reported amounts.

 

In December 2010, the FASB issued updated guidance that modifies the goodwill impairment test. Goodwill is tested for impairment using a two-step process. The first step is to identify potential impairments by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step is performed to measure the amount of impairment, if any. The second step is to determine the implied fair value of the reporting unit’s goodwill, measured in the same manner as goodwill is recognized in a business combination, and compare the implied fair value with the carrying amount of the goodwill. If the carrying amount exceeds the implied fair value of the reporting unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.

 

Updated guidance requires that, if the carrying amount of a reporting unit becomes zero or negative, the second step of the impairment test must be performed when it is more likely than not that a goodwill impairment loss exists. In considering whether it is more likely than not that an impairment loss exists, a company is required to evaluate qualitative factors, including the factors presented in existing guidance that trigger an interim impairment test of goodwill (e.g., a significant adverse change in business climate or an anticipated sale of a reporting unit). The provisions of the guidance became effective for our Company on January 1, 2011. The adoption did not have a material impact on our Consolidated Financial Statements.

 

In January 2010, the FASB issued additional disclosure requirements for fair value measurements. The new guidance requires more detailed disclosures of the changes in Level 3 instruments and was effective for our Company on January 1, 2011. The adoption did not have a material impact on our Consolidated Financial Statements, as it only required additional disclosures.

 

In October 2009, the FASB issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor-specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE) is unavailable. The changes became effective for our Company on January 1, 2011. The amendment did not have a material impact on our Consolidated Financial Statements.

 

In October 2009, the FASB issued guidance which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality will be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. This guidance must be adopted in the same period that our Company adopts the amended accounting for arrangements with multiple deliverables described in the preceding paragraph. The changes became effective for our Company on January 1, 2011. The amendment did not have a material impact on our Consolidated Financial Statements.

 

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C. Research and Development, Patents and Licenses, etc.

 

We conduct research and development primarily in cooperation with our associate Zhongnong and with various universities and research institutions. We have also acquired a number of technologies and varieties of corn from third parties. In New Zealand, Australia and Uruguay, much of our research is undertaken by our international seeds business segment, including its turf division, which is supported by a strong research base and commercializes new products through internal R&D, breeding and evaluation programs and joint venture research partnerships.

 

Our expenses incurred in connection with these activities were RMB32.0 million ($5.0 million) for the twelve months ended June 30, 2012, RMB7.0 million for the six months ended June 30, 2011 and RMB 0.1 million and RMB 1.2 million for the years ended December 31, 2010 and 2009 respectively.  Research and development expenses primarily consist of expenses related to development of our proprietary products, salaries and benefits of our research and development personnel, fees paid to our research partners, costs of raw materials used in our research and development activities, as well as other overhead incurred by our research and development personnel.

 

D. Trend Information

 

See “Item 3. Key Information,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations” for information on material trends affecting our business and results of operations.

 

E. Off-Balance Sheet Commitments and Arrangements

 

We have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or