XOTC:SIAF Sino Agro Food Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_______

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

OR

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

 

For the transition period from ___________________________ to ___________________________

 

Commission file number: 000-54191

 

SINO AGRO FOOD, INC.

 

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   33-1219070

(State of Other Jurisdiction of Incorporation or

Organization)

  (I.R.S. Employer Identification Number)
     

Room 3711, China Shine Plaza

No. 9 Lin He Xi Road

Tianhe County, Guangzhou City, P.R.C.

  510610
(Address of Principal Executive Offices)   (Zip Code)

 

(860) 20 22057860

(Registrant’s Telephone Number, Including Area Code)

 

Copies to:

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Floor

New York, NY10006

Attn: Mr. Marc Ross, Esq.

 

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 x 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of June 30, 2012, there were 77,769,893 shares of our common stock issued and outstanding.

 

 
 

 

TABLE OF CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION  
Item 1. Financial Statements F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Plan of Operations 1
Item 3.  Quantitative and Qualitative Disclosures About Market Risk  23
Item 4. Controls and Procedures 23
     
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 24
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 25
SIGNATURES   26

 

 
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

INDEX TO QUARTERLY FINANCIAL REPORT

 

FOR THE SIX MONTHS ENDED JUNE 30, 2012

 

  PAGE
   
CONSOLIDATED BALANCE SHEETS F - 2
   
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME F - 3
   
CONSOLIDATED STATEMENTS OF CASH FLOWS F -4
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F- 5 - F - 39

 

 
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF BALANCE SHEETS

 

   June 30, 2012   December 31,  2011 
   (Unaudited)   (Audited) 
   $   $ 
         
ASSETS          
Current assets          
Cash and cash equivalents  $2,692,365   $1,387,908 
Inventories   11,024,263    4,435,445 
Cost and estimated earnings in excess of billings on uncompleted contracts   2,422,815    456,104 
Deposits and prepaid expenses   23,623,347    14,868,838 
Accounts receivable, net of allowance for doubtful accounts   36,773,165    27,531,915 
Due from related parties   12,820,752    15,820,752 
Other receivables   10,528,554    9,688,871 
Total current assets   99,885,261    74,189,833 
Property and equipment          
Property and equipment, net of accumulated depreciation   7,856,217    2,667,765 
Construction in progress   6,857,296    3,577,869 
Land use rights, net of accumulated amortization   55,421,316    56,507,470 
Total property and equipment   70,134,829    62,753,104 
Other assets          
Goodwill   724,940    724,940 
Proprietary technologies, net of accumulated amortization   8,301,667    6,977,675 
Long term accounts receivable   3,206,513    5,936,718 
License rights   1    1 
Unconsolidated equity investee   1,076,489    1,258,607 
Total other assets   13,309,610    14,897,941 
           
Total assets  $183,329,700   $151,840,878 
           
LIABILITIES  AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Accounts payable and accrued expenses  $1,922,201   $1,202,104 
Billings in excess of costs and estimated earnings on uncompleted contracts   2,541,008    1,962,119 
Due to a director   635,840    289,764 
Dividends payable   21,326    155,957 
Other payables   15,569,342    11,968,148 
Due to related parties   815,092    867,413 
Total liabilities   21,504,809    16,445,505 
           
Commitments and contingencies   -    - 
           
Stockholders' equity          
Preferred stock: $0.001 par value   -    - 
(10,000,000 shares authorized, 7,000,100  shares issued and outstanding as of  June 30, 2012 and December 31, 2011, respectively)          
Series A preferred stock:  $0.001 par value   -    - 
(100 shares issued and outstanding as of  June 30, 2012 and December 31, 2011, respectively)          
Series B convertible preferred stock:  $0.001 par value)   7,000    7,000 
(7,000,000 shares issued  and outstanding) as of  June 30, 2012 and December 31, 2011, respectively)          
Common stock:  $0.001 par value   77,770    67,034 
(100,000,000 shares authorized, 77,769,893 and 67,034,262 shares issued and oustanding as of  June 30, 2012 and December 31, 2011, respectively)          
Additional paid - in capital   78,912,904    72,794,902 
Retained earnings   66,356,928    50,395,444 
Accumulated other comprehensive income   3,862,339    3,446,838 
Treasury stock   (1,250,000)   (1,250,000)
Total Sino Agro Food, Inc. and subsidiaries stockholders' equity   147,966,941    125,461,218 
Non - controlling interest   13,857,950    9,934,155 
Total stockholders' equity   161,824,891    135,395,373 
Total liabilities and stockholders' equity  $183,329,700   $151,840,878 

 

F - 2
 

  

SINO AGRO FOOD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

   Three months   Three months   Six months   Six months 
   ended   ended   ended   ended 
   June 30, 2012   June 30, 2011   June 30, 2012   June 30, 2011 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
   $   $   $   $ 
Continuing operations                    
Revenue   25,348,287    6,705,370    41,328,303    9,826,901 
                     
Cost of goods sold   11,790,039    2,881,648    19,756,463    4,072,263 
                     
Gross profit   13,558,248    3,823,722    21,571,840    5,754,638 
                     
General and administrative expenses   (2,735,677)   (548,394)   (4,957,999)   (1,241,712)
Net income from operations   10,822,571    3,275,328    16,613,841    4,512,926 
                     
Other income (expenses)                    
                     
Government grant   -    -    79,401    - 
                     
Other income   20,797    9,314    436,649    18,616 
                     
Gain (loss) of extinguishment of debts   562,361    489,500    817,513    582,426 
                     
Net income  (expenses)   583,158    498,814    1,333,563    601,042 
                     
Net income  before income taxes   11,405,729    3,774,142    17,947,404    5,113,968 
                     
Provision for income taxes   -    -    -    - 
                     
Net income (loss)  from continuing operations   11,405,729    3,774,142    17,947,404    5,113,968 
Less: Net (income) loss attributable to the non - controlling interest   (1,115,707)   (762,664)   (1,985,920)   (1,191,577)
Net income (loss) from continuing operations attributable to the Sino Agro Food, Inc. and subsidiaries   10,290,022    3,011,478    15,961,484    3,922,391 
Discontinued operations                    
Net income from discontinued operations   -    -    -    10,203,951 
Less: Net income attributable to the non - controlling interest   -    -    -    - 
Net income  from discontinued operations attributable to the Sino Agro Food, Inc. and subsidiaries   -    -    -    10,203,951 
Net income (loss) attributable to the Sino Agro Food, Inc. and subsidiaries   10,290,022    3,011,478    15,961,484    14,126,342 
Other comprehensive income (loss)                    
Foreign currency translation gain (loss)   (73,645)   1,676,536    546,712    2,852,210 
Comprehensive income (loss)   10,216,377    4,688,014    16,508,196    16,978,552 
Less: other comprehensive (income)  loss attributable to the non - controlling interest   23,878    (101,798)   (131,211)   (395,716)
Comprehensive income (loss) attributable to the Sino Agro Food, Inc. and subsidiaries   10,240,255    4,586,216    16,376,985    16,582,836 
                     
Earnings (loss) per share attributable to Sino Agro Food, Inc. and subsidiaries common stockholders:                    
From continuing and discontinued operations                    
Basic  $0.14   $0.05   $0.22   $0.25 
Diluted  $0.13   $0.05   $0.20   $0.22 
Earnings (loss) per share attributable to Sino Agro Food, Inc. and subsidiaries common stockholders:                    
From continuing operations                    
Basic  $0.14   $0.05   $0.22   $0.07 
Diluted  $0.13   $0.05   $0.20   $0.06 
Weighted average number of shares outstanding:                    
Basic   73,836,392    57,420,993    71,312,129    57,272,885 
Diluted   80,836,392    64,620,993    78,312,129    64,272,885 

 

F - 3
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

   Six months ended   Six months ended 
   June 30, 2012   June 30, 2011 
   (Unaudited)   (Unaudited) 
           
Cash flows from operating activities          
Net income (loss) from continuing operations  $17,947,404   $5,113,968 
Adjustments to reconcile net income (loss) from continuing operations to net cash from operations:          
Depreciation   183,154    85,756 
Amortization   1,138,176    306,738 
Common stock issued for services   2,139,057    - 
Gain on extinguishment of debts   (817,513)   (582,426)
Changes in operating assets and liabilities:          
Increase in inventories   (4,618,431)   (448,127)
Increase in cost and estimated earnings in excess of billings on uncompleted contacts   (1,966,711)   - 
Increase in deposits and prepaid expenses   (10,893,566)   (2,318,847)
Increase (decrease) in due to a director   346,076    (584,594)
(Decrease) increase in  accounts payable and accrued expenses   (509,997)   42,908 
Increase in  other payables   9,426,533    13,059,501 
Decrease in accounts  receivable   (5,173,526)   (5,122,059)
Increase in billings in excess of costs and estimated earnings on uncompleted contracts   578,889    1,684,804 
Decrease in amount due to related parties   (52,321)   - 
Decrease in amount due from related parties   3,000,000    - 
Increase in other receivables   (839,683)   (3,269,215)
Net cash provided by operating activities   9,887,541    7,968,407 
Cash flows from investing activities          
Purchases of property and equipment   (20,423)   (6,828)
Acquisition of land use rights   -    (4,102,453)
Acquisition of proprietary technologies   (1,500,000)   - 
Investment in unconsolidated corporate joint venture   (1,076,489)   (1,256,555)
Business combination of a subsidiary   (2,499,184)   - 
Payment for construction in progress   (6,626,688)   (493,223)
Net cash used in investing activities   (11,722,784)   (5,859,059)
Cash flows from financing activities          
Non - controlling interest contribution   1,806,664    - 
Dividends paid   (134,631)   (3,905)
Net cash provided by (used in) financing activities   1,672,033    (3,905)
Net cash (used in) provided by continuing operations   (163,210)   2,105,443 
Cash flows from discontinued operations          
Net cash provided by operating activities   -    - 
Net cash used in investing activities   -    (3,137,885)
Net cash provided by financing activities   -    - 
Net cash used in discontinued operations   -    (3,137,885)
Effects on exchange rate changes on cash   1,467,667    (2,001,189)
Increase (decrease) in cash and cash equivalents   1,304,457    (3,033,631)
Cash and cash equivalents, beginning of period   1,387,908    3,890,026 
Cash and cash equivalents, end of period   2,692,365    856,395 
Less: cash and cash equivalents at the end of the period - discontinued operation   -    - 
Cash and cash equivalents at the end of the period - continuing operations  $2,692,365   $856,395 
Supplementary disclosures of cash flow information:          
Cash paid for interest   -    - 
Cash paid for income taxes   -    - 
Non - cash transactions          
Common stock issued for settlement of debts  $6,946,250   $3,910,500 
Disposal proceeds receivable of sale of subsidiaries, HYT and ZX  $2,386,233   $34,473,905 
Land use rights payable due to related parties  $-   $22,411 
Transfer construction in progress to property, plant and equipment  $5,317,648   $- 
Acquisition of treasury stock  $-   $1,250,000 

  

F - 4
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.CORPORATE INFORMATION

 

Sino Agro Food, Inc. (the “Company” or “SIAF”) (formerly known as Volcanic Gold, Inc. and A Power Agro Agriculture Development, Inc.) was incorporated on October 1, 1974 in the State of Nevada.

 

The Company was engaged in the mining and exploration business but ceased its mining and exploring business on October 14, 2005. On August 24, 2007, the Company entered into a Merger and Acquisition Agreement with Capital Award Inc., a Belize corporation (“CA”) and its subsidiaries Capital Stage Inc. (“CS”) and Capital Hero Inc. (“CH”). Effective the same date, CA completed a reverse merger transaction with SIAF. SIAF acquired all the outstanding common stock of CA from Capital Adventure, a shareholder of CA, for 32,000,000 shares of the Company’s common stock.

 

On August 24, 2007 the Company changed its name from Volcanic Gold, Inc. to A Power Agro Agriculture Development, Inc. On December 8, 2007, the Company changed its name to Sino Agro Food, Inc.

 

On September 5, 2007, the Company acquired three existing businesses in the People’s Republic of China (the “PRC”):

 

a)Hang Yu Tai Investment Limited (“HYT”), a company incorporated in Macau, the owner of a 78% equity interest in ZhongXingNongMu Ltd. (“ZX”), a company incorporated in the PRC;

 

b)Tri-way Industries Limited (“TRW”), a company incorporated in Hong Kong;

 

c)Macau Eiji Company Limited (“MEIJI”), a company incorporated in Macau, the owner of 75% equity interest in Enping City Juntang Town Hang Sing Tai Agriculture Co. Ltd. (“HST”), a PRC corporate Sino-Foreign joint venture. HST was dissolved in 2010.

 

On November 27, 2007, MEIJI and HST established a corporate Sino - Foreign joint venture, Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd. (“JHST”), a company incorporated in the PRC with MEIJI owning a 75% interest and HST owning a 25% interest.

 

On November 26, 2008, SIAF established Pretty Mountain Holdings Limited. (“PMH”), a company incorporated in Hong Kong with an 80% equity interest. On May 25, 2009, PMH formed a corporate Sino-Foreign joint venture, Qinghai Sanjiang A Power Agriculture Co. Ltd. (“SJAP”), incorporated in the PRC, of which PMH owns a 45% equity interest . The remaining 55% equity interest in SJAP is owned by the following entities:

 

Qinghai Province Sanjiang Group Company Limited (English translation) (“Qinghai Sanjiang”), a company owned by the PRC with major business activities in the agriculture industry; and

 

Guangzhou City Garwor Company Limited (English translation) (“Garwor”), a private limited company incorporated in the PRC, specializing in sales and marketing.

 

SJAP is engaged in the business of manufacturing bio-organic fertilizer, livestock feed and development of other agriculture projects in the County of Huangyuan, in the vicinity of the Xining City, Qinghai Province, PRC.

 

In September 2009, the Company carried out an internal reorganization of its corporate structure and business, and formed a 100% owned subsidiary, A Power Agro Agriculture Development (Macau) Limited (“APWAM”), which was formed in Macau. APWAM then acquired PMH’s 45 % equity interest in SJAP. By virtue of the acquisition, APWAM assumed all obligations and liabilities of PMH under the Sino Foreign Joint Venture Agreement. On September 9, 2010, an application was submitted by the Company to the Companies Registry of Hong Kong for deregistration of PMH under Section 291AA of the Hong Kong Companies Ordinance. On January 28, 2011, PMH was dissolved.

 

On May 7, 2010, Qinghai Sanjiang sold and transferred its equity interest in SJAP to Garwor. The State Administration for Industry and Commerce of Xining City Government of the People’s Republic of China approved the sale and transfer. As a result, APWAM owned 45% of SJAP and Garwor owned the remaining 55%.

 

On February 15, 2011, the Company entered into an agreement to sell its 78% equity interest in ZX for $31,000,000. In accordance with the memorandum of understanding dated March 28, 2011, the original agreement regarding the sale of ZX was cancelled, and replaced by the new agreement to sell its 100% equity interest in HYT group (including HYT and ZX) for $45,000,000 with the effective date of sale being January 1, 2011.

 

F - 5
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.CORPORATE INFORMATION (CONTINUED)

 

The Company applied to form Enping City Bi Tao A Power Fishery Development Co. Limited (“EBAPFD”), Enping City Bi Tao A Power Prawn Culture Development Co. Limited (“EBAPCD”), and Enping City A Power Cattle Farm Co. ,Limited (“ECF”), all of which the Company would indirectly own a 25% equity interest in. The approvals of the formation of EBAPFD, EBAPCD and DCF by the relevant authorities of the PRC Government are pending. As of June 30, 2012, the Company has invested $1,076,489 in ECF and had not commenced its operations. The official name of Jiangmen Hang Meiji Cattle Farm Development Co, Limited (“JHMC”) was officially granted on June 3, 2012.

 

On February 28, 2011, TRW applied to form a corporate joint venture, Enping City Bi Tao A Power Fishery Development Co., Limited (“EBAPFD”), incorporated in the PRC. TRW owned a 25% equity interest in EBAPFD. On November 17, 2011, TRW formed Jiang Men City A Power Fishery Development Co., Limited (“JFD”) in which it acquired a 25% equity interest, while withdrawing its 25% equity interest in EBAPFD. As of December 31, 2011, the Company had invested $1,258,607 in JFD. JFD operates an indoor fish farm. On January 1, 2012, the Company acquired an additional 25% equity interest in JFD for total cash consideration of $1,662,365. On April 1, 2012, the Company acquired an additional 25% equity interest in JFD for the amount of $1,702,580.The Company presently owns a 75% equity interest in JFD and controls its board of directors. As of June 30, 2012, the Company had consolidated the assets and operations of JFD.

 

On July 18, 2011, the Company formed Hunan Shenghua A Power Agriculture Co., Limited (“HSA”) in which the Company owns a 26% equity interest, and SJAP owns a 50% equity interest with the Chinese partner owning the remaining 24%.

 

The Company’s principal executive office is located at Room 3711, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, Guangdong Province, PRC, 510610.

 

The nature of the operations and principal activities of the Company and its subsidiaries are described in Note 2.2.

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

2.1FISCAL YEAR

 

The Company has adopted December 31 as its fiscal year end.

 

F - 6
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.2REPORTING ENTITY

 

The accompanying consolidated financial statements include the following entities:

 

F - 7
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Name of subsidiaries   Place of incorporation   Percentage of interest   Principal activities
             
Capital Award Inc. ("CA")   Belize   100% (12.31.2011: 100%) directly   Fishery development and holder of A-Power Technology master license.
             
Capital Stage Inc. ("CS")   Belize   100% (12.31.2011: 100%) indirectly   Dormant
             
Capital Hero Inc. ("CH")   Belize   100% (12.31.2011: 100%) indirectly   Dormant
             
Tri-way Industries Limited ("TRW")   Hong Kong, PRC   100% (12.31.2011: 100%) directly   Investment holding, holder of enzyme technology master license for manufacturing of livestock feed and bio-organic fertilizer  and has not commenced its planned business of fish farm operations.
             
Macau Eiji Company Limited ("MEIJI")   Macau, PRC   100% (12.31.2011: 100%) directly   Investment holding and holder of aromatic cattle know how
             
Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd ("JHST")   PRC   75% (12.31.2011: 75%) directly   Hylocereus Undatus  Plantation ("HU Plantation"). The Company has not commenced beef business.
         
         
           
             
             
A Power Agro Agriculture Development (Macau) Limited ("APWAM")   Macau, PRC   100% (12.31.2011: 100%) directly   Investment holding
           
Jiang Men City A Power Fishery Development Co., Limited ("JFD")   PRC   75% indirectly  treated as subsidiary (12.31.2011 25% indirectly and treated as unconsolidated equity interest)   Fish cultivation

 

Name of variable interest entity   Place of incorporation   Percentage of interest   Principal activities
Qinghai Sanjiang A Power Agriculture Co., Ltd ("SJAP")   PRC   45% (12.31.2011: 45%) indirectly   Manufacturing of organic fertilizer, livestock feed, and beef cattle and plantation of crops and pastures

 

Name of unconsolidated equity investee   Place of incorporation   Percentage of interest   Principal activities
             
Jiangmen Hang Meiji Cattle Farm Development Co., Limited ("JHMC")(previously known as Enping City A Power Cattle Farm Co., Limited) ("ECF")   PRC   25% (12.31.2011 25% indirectly)   Beef cattle cultivation
             
Hunan Shenghua A Power Agriculture Co., Limited ("HSA")   PRC   26% directly and 50% indirectly (12.312011: 26% directly and 50% indirectly)   Manufacturing of organic fertilizer, livestock feed, and beef cattle and sheep cultivation, and plantation of crops and pastures
             
Enping City Bi Tao A Power Prawn Culture Development Co., Limited ("EBAPCD") (pending approval)   PRC   25% (12.31.2011 25% indirectly)   Prawn cultivation

 

F - 8
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.3BASIS OF PRESENTATION

 

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").

 

Interim results are not necessarily indicative of results for a full year. The information included in this interim report should be read in conjunction with the information included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011.

 

2.4BASIS OF CONSOLIDATION

 

The consolidated financial statements include the financial statements of SIAF, its subsidiaries CA, CS, CH, TRW, MEIJI, HJST, ZX,, HYT, PMH, JFD, HSA and APWAM and its variable interest entity SJAP. All material inter-company transactions and balances have been eliminated in consolidation. HYT and ZX were no longer recognized as subsidiaries as of January 1, 2011 and PMH were dissolved on January 28, 2011.

 

2.5BUSINESS COMBINATION

 

The Company adopted the accounting pronouncements relating to business combination (primarily contained in ASC Topic 805 “Business Combinations”), including assets acquired and liabilities assumed arising from contingencies. These pronouncements established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquisition as well as provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, these pronouncements eliminate the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria and require an acquirer to develop a systematic and rational basis for subsequently measuring and accounting for acquired contingencies depending on their nature. The Company’s adoption of these pronouncements will have an impact on the manner in which it accounts for any future acquisitions.

 

2.6NON - CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS

 

The Company adopted the accounting pronouncement on non-controlling interests in consolidated financial statements, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance is primarily contained in ASC Topic “Consolidation.” It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated financial statements. The adoption of this standard has not had material impact on the Company’s consolidated financial statements.

 

2.7USE OF ESTIMATES

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods covered thereby. Actual results could differ from these estimates. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. The following are some of the areas requiring significant judgments and estimates: determinations of the useful lives of assets, estimates of allowances for doubtful accounts, cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, estimates of the realization of deferred tax assets and inventory reserves.

 

F - 9
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.8REVENUE RECOGNITION

 

The Company’s revenue recognition policies are in compliance with ASC 605. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.

 

License fee income is recognized on the accrual basis in accordance with the agreements.

 

Government grants are recognized when (i) the Company has substantially accomplished what must be done pursuant to the terms of the grant that are established by the local government; and (ii) the Company receives notification from the local government that the Company has satisfied all of the requirements to receive the government grants; and (iii) the amounts are received.

 

Revenues from the Company's fishery development services contract are performed under fixed-price contracts. Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition ("ASC 605"). Under the percentage-of-completion method, the Company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognizes that profit over the contract term. The percentage of costs incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the installation contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as either costs or estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines a customer’s credit worthiness at the time an order is accepted. Sudden and unexpected changes in a customer’s financial condition could put recoverability at risk.

 

The percentage of completion method requires the ability to estimate several factors, including the ability of the customer to meet its obligations under the contract, including the payment of amounts when due. If the Company determines that collectability is not assured, the Company will defer revenue recognition and use methods of accounting for the contract such as the completed contract method until such time as the Company determines that collectability is reasonably assured or through the completion of the project.

 

For fixed-price contracts, the Company uses the ratio of costs incurred to date on the contract (excluding un installed direct materials) to management's estimate of the contract's total costs, to determine the percentage of completion on each contract. This method is used as management considers expended costs to be the best available measure of progression of these contracts. Contract costs include all direct material, subcontract and labor costs and those indirect costs related to contract performance, such as supplies, tool repairs and depreciation. The Company accounts for maintenance and repair services under the guidance of ASC 605 as the services provided relate to construction work. Contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract. Changes in job performance, job conditions, and estimated profitability arising from contract penalty, change orders and final contract settlements may result in revisions to the estimated profit ability during the contract. These changes, which include contracts with estimated costs in excess of estimated revenues, are recognized as contract costs in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. At the point the Company anticipates a loss on a contract, the Company estimates the ultimate loss through completion and recognizes that loss in the period in which the loss was identified.

 

The Company’s fishery development consultancy services revenues are recognized when the relevant services are rendered to a buyer by reference to the stage of reference, and are subject to a Chinese business tax at a rate of 0% of the gross fishery development contract service income approved by the Chinese local government.

 

The Company does not provide warranties to customers on a basis customary to the industry; however, customers can claim warranty directly from product manufacturers for defects in equipment or products. Historically, the Company has experienced no warranty claims.

 

F - 10
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.9COST OF GOODS SOLD

 

Cost of goods sold consists primarily of direct purchase cost of merchandise goods, and related levies.

 

2.10SHIPPING AND HANDLING

 

Shipping and handling costs related to cost of goods sold are included in general and administrative expenses which totaled $2,151, $0, $2,151 and $0 for the three months and the six months ended June 30, 2012 and 2011, respectively.

 

2.11ADVERTISING

 

Advertising costs are included in general and administrative expenses, which totaled $2,849, $0, $3,167 and $0 for the three months and the six months ended June 30, 2012 and 2011, respectively.

 

2.12FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME

 

The reporting currency of the Company is the U.S. dollars. The functional currency of the Company is the Chinese Renminbi (RMB).

 

For those entities whose functional currency is other than the U.S. dollar, all assets and liabilities are translated into U.S. dollars at the exchange rate on the balance sheet date; shareholders’ equity is translated at historical rates and items in the statements of income and of cash flows are translated at the average rate for the period. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported in the statements of cash flows will not necessarily agree with changes in the corresponding balances in the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of income and comprehensive income, as incurred.

 

Accumulated other comprehensive income in the consolidated statement of shareholders’ equity amounted to $3,862,339 as of June 30, 2012 and $3,446,838 as of December 31, 2011. The balance sheet amounts with the exception of equity at June 30, 2012 and December 31, 2011 were translated using an exchange rate of RMB 6.32 to $1.00 and RMB 6.30 to $1.00, respectively. The average translation rates applied to the statements of income and comprehensive income and of cash flows for the six months ended June 30, 2012 and June 30, 2011 were RMB 6.31 to $1.00 and RMB 6.51 to $1.00, respectively.

 

2.13CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents kept with financial institutions in the PRC are not insured or otherwise protected. Should any of those institutions holding the Company’s cash become insolvent, or the Company become unable to withdraw funds for any reason, the Company could lose the cash on deposit with that institution.

 

2.14ACCOUNTS RECEIVABLE

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

 

The standard credit period for most of the Company’s clients is three months. The collection period over 1 year is classified as long-term accounts receivable. Management evaluates the collectability of the receivables at least quarterly. Provision for doubtful accounts as of June 30, 2012 and December 31, 2011 are $0.

 

F - 11
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.15INVENTORIES

Inventories are valued at the lower of cost (determined on a weighted average basis) and net realizable value.

 

Costs incurred in bringing each product to its location and conditions are accounted for as follows:

-raw materials – purchase cost on a weighted average basis;
-manufactured finished goods and work-in-progress – cost of direct materials and labor and a proportion of manufacturing overhead based on normal operation capacity but excluding borrowing costs; and
-retail and wholesale merchandise finished goods – purchase cost on a weighted average basis.

 

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

 

2.16PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Such costs include the cost of replacing parts that are eligible for capitalization when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognized in the carrying amount of the property and equipment as a replacement only if it is eligible for capitalization. The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each financial year-end.

 

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.

 

Plant and machinery   5 - 10 years
Structure and leasehold improvements   10 - 20 years
Mature seeds   20 years
Furniture and equipment   2.5 - 10 years
Motor vehicles   5 -10  years

 

An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statements of income in the period the item is disposed.

 

2.17GOODWILL

 

Goodwill is an asset representing the fair economic benefits arising from other assets acquired in a business combination that are not individually identified or separately recognized. Goodwill is tested for impairment on an annual basis at the end of the Company’s fiscal year, or when impairment indicators arise. The Company uses a fair-value-based approach to test for impairment at the level of each reporting unit. The Company directly acquired MEIJI, which is the holding company of JHST that operates the Hu Plantation. As a result of this acquisition, the Company recorded goodwill in the amount of $724,940. This goodwill represents the fair value of the assets acquired in these acquisitions over the cost of the assets acquired.

 

F - 12
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.18PROPRIETARY TECHNOLOGIES

 

A master license of stock feed manufacturing technology was acquired and the costs of acquisition are capitalized as proprietary technologies when technological feasibility has been established. Stock feed manufacturing technology is amortized using the straight-line method over its estimated life of 20 years.

 

An aromatic cattle-feeding formula was acquired and the costs of acquisition are capitalized as proprietary technologies when technological feasibility has been established. Stock feed manufacturing technology is amortized using the straight-line method over its estimated life of 25 years.

 

The Company has determined that technological feasibility is established at the time a working model of products is completed. Proprietary technologies are intangible assets of finite lives. Management evaluates the recoverability of proprietary technologies on an annual basis at the end of the Company’s fiscal year, or when impairment indicators arise. As required by ASC Topic 350 “Intangible – Goodwill and Other”, the Company uses a fair-value-based approach to test for impairment.

 

2.19CONSTRUCTION IN PROGRESS

 

Construction in progress represents direct costs of construction as well as acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use.

 

2.20 LAND USE RIGHTS

 

Land use rights represent acquisition of rights to agricultural land from farmers and are amortized on the straight-line basis over their respective lease periods. The lease period of agricultural land is in the range from 30 to 60 years. Land use rights purchase prices were determined in accordance with the 2007 PRC Government’s minimum lease payments on agricultural land and mutually agreed to terms between the Company and the vendors.

 

2.21CORPORATE JOINT VENTURE

 

A corporation formed, owned, and operated by two or more businesses as a separate and discrete business or project (venture) for their mutual benefit is considered to be a corporate joint venture. Investee entities, in which the Company can exercise significant influence, but not control, are accounted for under the equity method of accounting. Under the equity method of accounting, the Company’s share of the earnings or losses of these companies is included in net income.

 

A loss in value of an investment that is other than a temporary decline is recognized as a charge to operations. Evidence of a loss in value might include, but would not necessarily be limited to, the absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.

 

2.22VARIABLE INTEREST ENTITY

 

A variable interest entity (“VIE”) is an entity (investee) in which the investor has obtained less than a majority interest, according to the Financial Accounting Standards Board (FASB). A VIE is subject to consolidation if a VIE meets one of the following three criteria as elaborated in ASC Topic 810-10, Consolidation:

 

(a)equity-at-risk is not sufficient to support the entity's activities
(b)as a group, the equity-at-risk holders cannot control the entity; or
(c)the economics do not coincide with the voting interest

 

If a firm is the primary beneficiary of a VIE, the holdings must be disclosed on the balance sheet. The primary beneficiary is defined as the person or company with the majority of variable interests. A corporation formed, owned, and operated by two or more businesses (ventures) as a separate and discrete business or project (venture) for their mutual benefit is defined as a joint venture.

 

F - 13
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.23TREASURY STOCK

 

Treasury stock means shares of a corporation’s own stock that have been issued and subsequently reacquired by the corporation. Converting outstanding shares to treasury shares does not reduce the number of shares issued but does reduce the number of shares outstanding. These shares are not eligible to receive cash dividends. Accounting for excesses and deficiencies on treasury stock transactions is governed by ASC 505-30-30.

 

State laws and federal agencies closely regulate transactions involving a company’s own capital stock, so the purchase of outstanding shares must have a legitimate purpose. Some of the most common reasons for purchasing outstanding shares are as follows:

 

(i)to meet additional stock needs for various reasons, including newly implemented stock option plans, stock for convertible bonds or convertible preferred stock, or a stock dividend.

 

(ii)to make more shares available for acquisitions of other entities.

 

The cost method of accounting for treasury shares has been adopted by the Company. The purchase of outstanding shares and thus converting them into treasury shares is treated as a temporary reduction in shareholders’ equity in view of the expectation to reissue the shares instead of retiring them. When the Company reissues the treasury shares, the temporary account is eliminated. The cost of acquiring outstanding shares for conversion into treasury shares reacquired is charged to a contra account, in this case a contra equity account that reduces the stockholder equity balance.

 

2.24INCOME TAXES

 

The Company accounts for income taxes under the provisions of ASC Topic 740 "Accounting for Income Taxes". Under ASC Topic 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

 

The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

 

Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

 

ASC Topic 740 also prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or for one expected to be taken, in a tax return. ASC Topic 740 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded as tax expense.

 

2.25POLITICAL AND BUSINESS RISK

 

The Company's operations are carried out in the PRC. Accordingly, the political, economic and legal environment in the PRC may influence the Company’s business, financial condition and results of operations by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

F - 14
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.26CONCENTRATION OF CREDIT RISK

 

Cash includes cash at banks and demand deposits in accounts maintained with banks within the People’s Republic of China. Total cash in these banks on June 30, 2012 and December 31, 2011 amounted to $ 2,008,049 and $1,379,837, respectively, none of which is covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks to its cash in bank accounts.

 

Accounts receivable are derived from revenue earned from customers located primarily in the PRC. The Company performs ongoing credit evaluations of customers and has not experienced any material losses to date.

 

The Company had 5 major customers whose revenue individually represented the following percentages of the Company’s total revenue:

 

   Three months   Three months   Six months   Six months 
   ended   ended   ended   ended 
   June 30,   June 30,   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Customer A   25.65%   -    21.85%   - 
Customer B   14.44%   -    12.21%   - 
Customer C   18.99%   48.63%   20.63%   45.57%
Customer D   12.76%   -    7.82%   - 
Customer E   8.21%   -    -    - 
Customer F   -    11.50%   -    13.26%
Customer G   -    9.93%   -    6.78%
Customer H   -    8.50%   -    10.26%
Customer I   -    8.50%   11.87%   8.93%
    80.05%   87.06%   74.38%   84.80%

 

The Company had 5 major customers whose accounts receivable balance individually represented the following percentages of the Company’s total accounts receivable:

 

F - 15
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.26CONCENTRATION OF CREDIT RISK

 

   June 30, 2012   December 31,  2011 
         
Customer A   16.66%   15.31%
Customer B   15.18%   8.39%
Customer C   11.63%   - 
Customer D   9.39%   8.22%
Customer E   6.11%   - 
Customer F   -    9.14%
Customer G   -    8.60%
    58.97%   49.66%

 

2.27IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS

 

In accordance with ASC Topic 360, “Property, Plant and Equipment,” long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of June 30, 2012 and December 31, 2011, the Company determined no impairment charges were necessary.

 

2.28EARNINGS PER SHARE

 

As prescribed in ASC Topic 260 “Earnings per Share,” Basic Earnings per Share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common stock shares outstanding during the year plus potential dilutive instruments such as stock options and warrants. The effect of stock options on diluted EPS is determined through the application of the treasury stock method, whereby proceeds received by the Company based on assumed exercises are hypothetically used to repurchase the Company’s common stock at the average market price during the period.

 

For the three months ended June 30, 2012 and 2011, basic earnings per share from continuing and discontinued operations attributable to the Company’s common stockholders amounted to $0.14 and $0.05, respectively. For the three months ended June 30, 2012 and 2011, diluted earnings per share from continuing and discontinued operations attributable to the Company’s common stockholders amounted to $0.13 and $0.05, respectively.

 

For the three months ended June 30, 2012 and 2011, basic earnings per share from continuing operations attributable to the Company’s common stockholders amounted to $0.14 and $0.05, respectively. For the three months ended June 30, 2012 and 2011, diluted earnings per share from continuing operations attributable to the Company’s common stockholders amounted to $0.13 and $0.05, respectively.

 

For the six months ended June 30, 2012 and 2011, basic earnings per share from continuing and discontinued operations attributable to Sino Agro Food, Inc. and subsidiaries common stockholders amount to $0.22 and $0.25, respectively. For the six months ended June 30, 2012 and 2011, diluted earnings per share from continuing and discontinued operations attributable to the Company’s common stockholders amounted to $0.20 and $0.22, respectively.

 

F - 16
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.28EARNINGS PER SHARE

 

For the six months ended June 30, 2012 and 2011, basic earnings per share from continuing operations attributable to Sino Agro Food, Inc. and subsidiaries common stockholders amount to $0.22 and $0.07, respectively. For the six months ended June 30, 2012 and 2011, diluted earnings per share from continuing operations attributable to the Company’s common stockholders amounted to $0.20 and $0.06, respectively.

 

2.29ACCUMULATED OTHER COMPREHENSIVE INCOME

 

ASC Topic 220 “Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments.

 

2.30RETIREMENT BENEFIT COSTS

 

PRC state managed retirement benefit programs are defined contribution plans and the payments to the plans are charged as expenses when employees have rendered service entitling them to the contribution.

 

2.31STOCK-BASED COMPENSATION

 

The Company has adopted both ASC Topic 718, “Compensation - Stock Compensation” and ASC Topic 505-50, “Equity-Based Payments to Non- Employees” using the fair value method in which an entity issues its equity instruments to acquire goods and services from employees and non-employees. Stock compensation for stock granted to non-employees has been determined in accordance with this accounting standard and the accounting standard regarding accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling goods or services, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured. This accounting standard allows the “simplified” method to determine the term of employee options when other information is not available. Under ASC Topic 718 and ASC Topic 505-50, stock compensation expenses is measured at the grant date on the value of the option or restricted stock and is recognized as expenses, less expected forfeitures, over the requisite service period, which is generally the vesting period.

 

2.32FAIR value of financial INSTRUMENTS

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

F - 17
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.32FAIR value of financial INSTRUMENTS

 

Level 1Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

 

Level 2Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

 

Level 3Pricing inputs that are generally observable inputs and not corroborated by market data.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash and accrued expenses, approximate their fair values because of the short maturity of these instruments.

 

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at June 30, 2012 or December 31, 2011, nor gains or losses are reported in the statements of income and comprehensive income that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the fiscal period ended June 30, 2012 or June 30, 2011.

 

2.33NEW ACCOUNTING PRONOUNCEMENTS

 

The Company does not expect any recent accounting pronouncements to have a material effect on the Company’s financial position, results of operations, or cash flows.

 

In January 2011, the FASB issued an Accounting Standard Update (ASU”) No, 2011-01, Receivables Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, as presented in proposed Accounting Standards Update, Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors. The amendments in this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in Update 2010-20. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this Update temporarily defer that effective date, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring, the Board proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted. The Company does not expect the adoption of ASU 2011-01 to have a significant impact on its consolidated financial statements.

 

F - 18
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.33NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

 

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03), intended to improve financial reporting of repurchase agreements and refocus the assessment of effective control on a transferor’s contractual rights and obligations rather than practical ability to perform those rights and obligations. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011.The Company does not expect the adoption of ASU 2011-03to have a significant impact on its consolidated financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 represents the converged (IASB) on fair value measurement. A variety of measures are included in the update intended to either clarify existing fair value measurement requirements, change particular principles requirements for measuring fair value or for disclosing information about fair value measurements. Form any of these requirements, the FASB does not intend to change the application of existing requirements under Accounting Standards Codification(ASC) Topic 820, Fair Value Measurements. ASU2011-04 is effective for interim and annual periods beginning after December 15, 2011 and early application is not permitted. The Company does not expect the adoption of ASU 2011-04 to have a significant impact on its consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05), intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB. The amendments require that all non-owner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. Amendments under ASU 2011-05 for public entities should be applied retrospectively for fiscal years, and interim periods within those years, beginning December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a significant impact on its consolidated financial statements.

 

In July 2011, the FASB issued accounting guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The guidance expands disclosures for the allowance for credit losses and financing receivables by requiring entities to disclose information at disaggregated levels. It also requires disclosure of credit quality indicators, past due information and modifications of financing receivables. The Company does not expect the adoption of this guidance to have a significant impact on its consolidated financial statements.

 

In September 2011, the FASB issued Intangibles – Goodwill and Other (Topic 350)– Testing Goodwill for Impairment (ASU No. 2011-08), which amends ASC 350 to first assess qualitative factors before performing the quantitative goodwill impairment testing. The ASU provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative analysis indicate it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test, which is required under current U.S. GAAP, would not be necessary. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-08 to have a significant impact on its consolidated financial statements.

 

In December 2011, the FASB issued ASU No. 2011-11, Topic 210 - Balance Sheet: Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”).ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 will be effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.

 

F - 19
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

2.33NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In July 2012, the FASB issued Accounting Standards Update ASU 2012-02, the amendments to ASC 350, Intangibles—Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). The amendments apply to all entities, both public and nonpublic, that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. In accordance with the amendments an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The Company will apply these amendments for reporting periods beginning after December 31, 2012. The Company does not expect the adoption of the amendments to have a material impact on the Company's financial statements.

 

F - 20
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3.SEGMENT INFORMATION

 

The Company establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as business segments and major customers in financial statements. The Company operates in five principal reportable segments: (i) the Fishery Development Division, (ii) the HU Plantation Division, (iii) the Organic Fertilizer, Beef and Bread Grass Division, (iv) the Cattle Development Division and (v) the Corporate Division. The Company discontinued Dairy Production Division on January 1, 2011.

  

For the three months ended June 30, 2012

 

   Continuing operations   Discontinued
operations
     
   Fishery
Development
Division
   HU Plantation
Division
   Organic
Fertilizer, Beef
and Bread Grass
Division
   Cattle Farm
Development
Division
   Corporate and
others
   Dairy
Production
Division
   Total 
                             
Revenue  $15,799,765   $2,081,863   $5,684,693   $1,781,966   $-   $-   $25,348,287 
                                    
Net income (loss)  $8,321,886   $1,117,450   $469,629   $461,438   $(80,381)  $-   $10,290,022 
                                    
Total assets  $59,793,491   $27,151,644   $71,872,466   $9,791,026   $14,721,073   $-   $183,329,700 

 

For the three months ended June 30, 2011

 

   Continuing operations   Discontinued
operations
     
   Fishery
Development
Division
   HU Plantation
Division
   Organic
Fertilizer, Beeef
and Bread Grass
Division
   Cattle Farm
Development
Division
   Corporate and
others
   Dairy
Production
Division
   Total 
                             
Revenue  $2,555,474   $1,222,241   $1,973,078   $954,577   $-   $-   $6,705,370 
                                    
Net income (loss)  $1,544,892    573,224   $467,664   $273,391   $152,307   $-   $3,011,478 
                                    
Total assets  $22,301,691   $23,546,271   $9,011,260   $13,631,721   $45,329,296   $-   $113,820,239 

 

F - 21
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3.SEGMENT INFORMATION (CONTINUED)

 

For the six months ended June 30, 2012
 
   Continuing operations   Discontinued
operations
     
   Fishery
Development
Division
   HU Plantation
Division
   Organic
Fertilizer, Beef
and Bread Grass
Division
   Cattle Farm
Development
Division
   Corporate and
others
   Dairy
Production
Division
   Total 
                             
Revenue  $26,894,373   $2,081,863   $9,628,641   $2,723,426   $-   $-   $41,328,303 
                                    
Net income (loss)  $13,592,472   $1,090,577   $1,035,018   $1,186,596   $(943,178)  $-   $15,961,484 
                                    
Total assets  $59,793,491   $27,151,644   $71,872,466   $9,791,026   $14,721,073   $-   $183,329,700 

 

For the six months ended June 30, 2011
 
   Continuing operations   Discontinued operations     
   Fishery
Development
Division
   HU Plantation
Division
   Organic
Fertilizer, Beef
and Bread Grass
Division
   Cattle Farm
Development
Division
   Corporate and
others
   Dairy
Production
Division
   Total 
                             
Revenue  $4,115,219   $1,222,241   $3,534,864   $954,577   $-   $-   $9,826,901 
                                    
Net income (loss)  $2,465,690    553,425   $823,345   $273,358   $(193,427)  $10,203,951   $14,126,342 
                                    
Total assets  $22,301,691   $23,546,271   $9,011,260   $13,631,721   $45,329,296   $-   $113,820,239 

 

4.INCOME TAXES

 

United States of America

 

The Company was incorporated in the State of Nevada, in the United States of America. The Company has no trading operations in United States of America and no US corporate tax has been provided for in the financial statements of the Company.

 

F - 22
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.INCOME TAXES (CONTINUED)

 

China

 

Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic Enterprises (“DE’s”) and Foreign Invested Enterprises (“FIE’s”). The new standard EIT rate of 25% replaced the 33% rate currently applicable to both DE’s and FIE’s. The Company is currently evaluating the impact that the new EIT will have on its financial condition. Beginning January 1, 2008, China unified the corporate income tax rule on foreign invested enterprises and domestic enterprises. The unified corporate income tax rate is 25%.

 

Under new tax legislation in China beginning in January 2008, the agriculture, dairy and fishery sectors are exempt from enterprise income taxes.

 

No EIT has been provided in the financial statements of CA, ZX, JHST and SJAP since they are exempt from EIT for the six months ended June 30, 2012 and 2011 as they are within the agriculture, dairy and fishery sectors.

 

No EIT has been provided in the financial statements of HSA at 25% for the income the six months ended June 30, 2012 and 2011 as HSA incurred tax loss for the period.

 

JFD is imposed with an EIT of 25%. The Company is appealing to the local tax authority to determine the taxation method and tax rate. The result of the appeal is pending. No EIT has been provided for in the financial statements of JFD for the six months ended June 30, 2012 and 2011.

 

Belize and Malaysia

 

CA, CS and CH are international business companies incorporated in Belize, and are exempt from corporate tax in Belize.

 

All sales invoices of CA were issued by its representative office in Malaysia and its trading and service activities are conducted in China. As the Malaysia tax law is imposed on a territorial basis and not on a worldwide basis, CA’s income is not subject to Malaysian corporate tax.

 

As a result, neither Belize nor Malaysia corporate tax is provided in the financial statements of CA for the six months ended June 30, 2012 and 2011.

 

Hong Kong

 

No Hong Kong profits tax has been provided in the financial statements of PMH and TRW, since these entities did not earn any assessable profits for the six months ended June 30, 2012 and 2011.

 

Macau

 

No Macau Corporation tax has been provided in the financial statements of HYT, APWAM and MEIJI since these entities did not earn any assessable profits for the six months ended June 30, 2012 and 2011.

 

5.NET INCOME FROM DISCONTINUED OPERATIONS

 

On February 15, 2011 and on March 29, 2011, the Company entered into an agreement and memorandum of understanding, respectively, to sell 100% equity interest in HYT group (including HYT and ZX) to Mr. Xin Ming Sun, a director of ZhongXingNong Nu Co., Ltd for $45,000,000, with an effective date of January 1, 2011.HYT group contributed revenue and net income for the Dairy Production Division. Prior to sale of HYT group, the Dairy Production Division represented a separate business segment; the disposal group has been treated as a discontinued operation in this quarterly financial report. The post-tax result of the Dairy Production Division has been disclosed as a discontinued operation in the consolidated statement of income and comprehensive income.

 

F - 23
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5.NET INCOME FROM DISCONTINUED OPERATIONS (CONTINUED)

 

(a)Net income from discontinued operations

 

       Six months ended   Six months ended 
   Note   June 30, 2012   June, 2011 
       (Unaudited)   (Unaudited) 
             
Revenue      $-   $- 
                
Cost of goods sold        -    - 
                
Gross profit        -    - 
                
General and administrative expenses        -    - 
Net income from operations        -    - 
                
Interest expense        -    - 
Net income  before income taxes        -    - 
                
Net income from sale of  subsidiaries        -    10,203,951 
Net income  before income taxes        -    10,203,951 
Provision for income taxes        -    - 
Net income from discontinued operations        -    10,203,951 
Less: Net income attributable to the non - controlling interest        -    - 
Net income from discontinued operations attributable to the Sino Agro Food, Inc. and subsidiaries       $-   $10,203,951 

 

(b)Consideration received

 

   Six months ended 
   June 30, 2012 
     
Consideration received in cash and cash equivalents  $704,388 
Disposal proceeds receivable of sale of subsidiaries   44,295,612 
Total consideration proceeds  $45,000,000 

 

F - 24
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6.NET INCOME FROM DISCONTINUED OPERATIONS (CONTINUED)

 

(c)Analysis of consolidated assets and liabilities of subsidiaries, HYT and ZX as of December 31, 2010

 

   December 31, 2010 
     
ASSETS     
Current assets     
Cash and cash equivalents  $3,137,885 
Inventories   7,495,794 
Deposits and prepaid expenses   8,874,285 
Accounts receivable, net of allowance for doubtful accounts   6,044,666 
Other receivables   2,069,514 
Total current assets   27,622,144 
Property and equipment     
      
Property and equipment, net of accumulated depreciation   14,612,953 
Goodwill   11,275,060 
Land use rights, net of accumulated amortization   9,441,158 
Total property and equipment   35,329,171 
Total assets  $62,951,315 
      
Less: LIABILITIES     
      
Current liabilities     
Accounts payable and accrued expenses  $22,409 
Other payables   11,167,319 
Total current liabilities   11,189,728 
      
Other liabilities     
Long term debt   3,776,435 
      
Total liabilities   14,966,163 
Net assets of subsidiaries, HYT and ZX as of December 31, 2010 disposed of  $47,985,152 

 

(d)Net cash outflow on sale of subsidiaries, HYT and ZX

 

   Six months ended 
   June 30, 2011 
     
Cash and cash equivalents balance disposed of  $(3,137,885)
Net cash outflow on sale of subsidiaries, HYT and ZX  $(3,137,885)

 

F - 25
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6.NET INCOME FROM DISCONTINUED OPERATIONS (CONTINUED)

 

(e)Detailed cash flow from discontinued operations

 

       Six months ended   Six months ended 
   Note   June 30, 2012   June 30 , 2011 
       (Unaudited)   (Unaudited) 
             
Cash flows from operating activities               
Net income for the period       $-   $10,203,951 
Adjustments to reconcile net income to net cash from operations:               
Depreciation        -    - 
Amortization        -    - 
Net gain of sale of subsidiaries, HYT and ZX        -    (10,203,951)
Changes in operating assets and liabilities:               
Increase in inventories        -    - 
Increase in deposits and prepaid expenses        -    - 
Increase in other payables        -    - 
Decrease in accounts receivable        -    - 
Decrease in other receivables        -    - 
Net cash provided by operating activities        -    - 
Cash flows from investing activities               
Net cash outflow on sale of subsidiaries, HYT and ZX   6(d)   -    (3,137,885)
Payment for acquisition of land use rights        -    - 
Payment for construction in progress        -    - 
Net cash used in investing activities        -    (3,137,885)
Cash flows from financing activities               
Net cash provided by financing activities        -    - 
Effects on exchange rate changes on cash        -    - 
(Decrease) increase in cash and cash equivalents        -    (3,137,885)
                
Cash and cash equivalents, beginning of period        -    3,137,885 
                
Cash and cash equivalents, end of period       $-   $- 
                
Supplementary disclosures of cash flow information:               
Cash paid for interest       $-   $- 
Cash paid for income taxes       $-   $- 
Non - cash transactions               
Disposal proceeds receivable of sale of subsidiaries, HYT and ZX       $-   $44,295,612 

 

7.CASH AND CASH EQUIVALENTS

 

   June 30, 2012   December 31, 2011 
         
Cash and bank balances  $2,692,365   $1,387,908 

 

F - 26
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8.INVENTORIES

 

As of June 30, 2012, inventories are as follows:

 

   June 30, 2012   December 31, 2011 
         
Atlantc cods and sejs  $127,914   $- 
Bread grass   88,276    449,984 
Beef cattle   4,274,464    825,853 
Beef meat   282,234    - 
Fish fry   1,632,223    - 
Live sleepy cods   1,541,170    - 
Organic fertilizer   244,238    807,689 
Raw materials for bread grass and organic fertilizer   2,537,029    1,398,965 
Raw materials for HU plantation   296,715    11,111 
Immature seeds   -    842,313 
Unharvested HU plantation   -    99,530 
   $11,024,263   $4,435,445 

 

9.DEPOSITS AND PREPAID EXPENSES

 

   June 30, 2012   December 31, 2011 
   $   $ 
         
Deposits for          
acquisition of land use rights   4,453,665    4,453,665 
inventory purchases   10,308,788    5,190,952 
Shares issued for employee compensation and oversea professional fee   -    2,139,057 
Aquaculture contract with Gao Riqiang   3,178,214    3,085,164 
Temporary payment for acquiring equity investments   5,682,680    - 
    23,623,347    14,868,838 

 

The Company made temporary deposit payments for equity investments in the future development of a prawn farm hatchery and a prawn farm nursery.

 

F - 27
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10.ACCOUNTS RECEIVABLE

 

The Company has performed an analysis on all of its accounts receivable and determined that all amounts are collectible by the Company. As such, all trade receivables are reflected as a current asset and no allowance for bad debt has been recorded as of June 30, 2012 and December 31, 2011. Bad debts written off for the six months ended June 30, 2012 and 2011 are $0.

 

Aging analysis of accounts receivable is as follows:

 

   June 30, 2012   December 31,  2011 
         
0 - 30 days  $15,651,024   $20,061,598 
31 - 90 days   10,356,100    1,828,058 
91 - 120 days   199,026    2,457,259 
over 120 days and less than 1 year   10,567,015    3,185,000 
over 1 year   3,206,513    5,936,718 
    39,979,678    33,468,633 
Less: amounts reclassified as long term accounts receivable   (3,206,513)   (5,936,718)
   $36,773,165   $27,531,915 

 

11.OTHER RECEIVABLES

 

   June 30, 2012   December 31, 2011 
         
Temporary payments  $656,092   $656,092 
Due from employees   978,434    130,191 
Due from third parties   8,894,028    8,902,588 
   $10,528,554   $9,688,871 

 

Payments due from employees and third parties are unsecured, interest free and without fixed term of repayment. Payments due from employees are the amounts advanced for handling business transactions on behalf of the Company, and are reconciled once the business transactions have been completed.

 

12.DUE FROM RELATED PARTIES

 

   June 30, 2012   December 31,2011 
         
Due from proceeds receivable  $2,386,233   $5,386,233 
Due from HYT   10,434,519    10,434,519 
   $12,820,752   $15,820,752 

 

The Company sold the HYT group (including HYT and ZX) effective January 1, 2011. Due from HYT is an unsettled balance, which is unsecured, interest free and to be repaid within one year from December 31, 2011.

 

F - 28
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12.DUE FROM RELATED PARTIES (CONTINUED)

 

Disposal proceeds receivable from the sale of subsidiaries is due from Mr. Xi Ming Sun, a director of ZhongXingNong Nu Co., Ltd., (i) of which $3,796,215 was settled by way of equal installments of $759,243 each on April 30, June 30, August 31, October 31 and December 31 of 2011; and (ii) the remaining $40,499,397 shall be settled by way of cash contribution toward land use rights payable as stated in the agreement.

 

As of June 30, 2012, the outstanding amount due from Mr. Xi Ming Sun is $2,386,233.

 

Due from proceeds receivable is unsecured, interest free and has no fixed term of repayment.

 

13.PLANT AND EQUIPMENT

 

   June 30, 2012   December 31, 2011 
         
Plant and machinery  $1,867,921   $1,855,068 
Structure and leasehold improvements   3,973,019    27,211 
Mature seeds   1,342,659    503,663 
Furniture and equipment   1,347,134    773,185 
Motor vehicles   106,298    106,298 
    8,637,031    3,265,425 
           
Less: Accumulated depreciation   (780,814)   (597,660)
Net book value   7,856,217    2,667,765 

 

Depreciation expense was $ 125,530 and $ 47,463 for the three months ended June 30, 2012 and 2011, respectively.

 

Depreciation expense was $ 183,154 and $ 85,756 for the six months ended June 30, 2012 and 2011, respectively.

 

14.CONSTRUCTION IN PROGRESS

 

   June 30, 2012   December 31, 2011 
         
Construction in progress          
- Oven room for production of dried flowers  $827,746   $826,359 
- Office and warehouse   251,332    26,646 
- Organic fertilizer and bread grass production plant   5,778,218    2,724,864 
   $6,857,296   $3,577,869 

 

15.LAND USE RIGHTS

 

Private ownership of land is not permitted in the PRC. Instead, the Company has leased five lots of land. The cost of the first lot of land use rights acquired in 2007 was $6,194,505, which consisted of 1,985.06 acres in the Hebei Province with leaseholds expiring in 2036, 2051, 2067 and 2077. The cost of the second lot of land use rights acquired in 2007 in the Guangdong Province, PRC was $6,408,289 and consists of 174.94 acres with the lease expiring in 2067. The cost of the third lot of land use rights acquired in 2008 in the Guangdong Province, PRC was $764,128, which consists of33.68 acres with the lease expiring in 2068. The cost of the fourth lot of land use rights acquired in 2010 in the Hebei Province, PRC was $3,223,411, which consists of 825.00 acres with the lease expiring in 2066.The first lot of land use rights original cost of $6,194,505 and the fourth lot of land use rights with the original cost of $3,223,411 were disposed with the sale of a subsidiary of ZX. The cost of the fifth lot of land use rights acquired in 2011 was $7,042,831, which consists of 57.58 acres in the Guangdong Province, PRC with the lease expiring in 2037.

 

F - 29
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.LAND USE RIGHTS (CONTINUED)

 

   June 30, 2012   December 31,2011 
         
Cost  $57,845,574   $57,845,574 
           
Less: Accumulated amortization   (2,424,258)   (1,338,104)
           
Net carrying amount  $55,421,316   $56,507,470 

 

Land use rights are amortized on the straight-line basis over their respective lease periods. The lease period of agriculture land is 30 to60 years.

 

Amortization of land use rights was $642,905 and $ 60,680 for the three months ended June 31, 2012 and 2011, respectively. Amortization of land use rights was $ 944,176 and $ 128,644 for the six months ended June 31, 2012 and 2011, respectively.

 

16.PROPRIETARY TECHNOLOGIES

 

By an agreement dated November 12, 2008, TRW acquired an enzyme technology master license, registered under a Chinese patent, for the manufacturing of livestock feed and bioorganic fertilizer and its related labels for $8,000,000.

 

On March 6, 2012 MEIJI acquired an aromatic-feed formula technology for the production of aromatic cattle for $1,500,000.

 

   June 30, 2012   December 31,  2011 
         
Proprietary technologies  $9,500,000   $8,000,000 
Less: Accumulated amortization   (1,198,333)   (1,022,325)
Net carrying amount  $8,301,667   $6,977,675 

 

Amortization of proprietary technologies was $ 145,500 and $79,794 for the three months ended June 30, 2012 and 2011, respectively. Amortization of proprietary technologies was $ 194,000 and $ 178,094 for the six months ended June 30, 2012 and 2011, respectively.

 

17.GOODWILL

 

Goodwill represents the fair value of the assets acquired over the cost of the assets acquired. It is stated at cost less accumulated impairment losses. Management tests goodwill for impairment on an annual basis or when impairment indicators arise. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the assets. To date, no such impairment loss has been recorded.

 

   June 30, 2012   December 31, 2011 
         
Goodwill from acquisition  $724,940   $724,940 
Less: Accumulated impairment losses   -    - 
Net carrying amount  $724,940   $724,940 
           

 

F - 30
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

18.UNCONSOLIDATED EQUITY INVESTEE

 

On February 11, 2011, CA applied to form a corporate joint venture, Enping City Bi Tao A Power Prawn Culture Development Co. Limited (“EBAPCD”), incorporated in the People’s Republic of China. CA has the right to acquire up to a 75% equity interest in EBTPCD. EBTPCD has not commenced its business of prawn cultivation.

 

On February 28, 2011, TRW applied to form a corporate joint venture, Enping City Bi Tao A Power Fishery Development Co., Limited (“EBAPFD”), incorporated in the People’s Republic of China. TRW owned a 25% equity interest in EBAPFD. On November 17, 2011, TRW formed Jiang Men City A Power Fishery Development Co., Limited (“JFD”)in which it acquired a 25% equity interest, while it withdrew its 25% equity interest in EBAPFD. As of December 31, 2011, the Company invested $1,258,607 in JFD. On January 1, 2012, the Company acquired an additional 25% equity interest in JFD for the amount of $1,662,365. On April 1, 2012, the Company acquired an additional 25% equity interest in JFD for the amount of $1,702,580. The Company presently owns a 75% equity interest in JFD and controls its board of directors. As result, the Company consolidated SJAP as a VIE, and the investment of $4,623,552 was eliminated in the consolidated financial statements.

 

The Company has consolidated the assets and operations of JFD.

 

On April 15, 2011, MEIJI applied to form a corporate joint venture, Enping City A Power Cattle Farm Co., Limited (“ECF”), incorporated in the People’s Republic of China. MEIJI had 25% equity interest in ECF. As of June 30, 2012, the Company has invested $1,076,489 in ECF, which has not commenced operations.

 

   June 30, 2012   December 31,2011 
         
Investment in unconsolidated joint venture  $1,076,489   $1,258,607 

 

19.VARIABLE INTEREST ENTITY

 

On September 28, 2009, APWAM acquired the PMH’s 45% equity interest in the Sino-Foreign joint venture company, Qinghai Sanjiang A Power Agriculture Co. Limited (“SJAP”), which was incorporated in the People’s Republic of China. As of June 30, 2012, the Company has invested$2,251,359 in this joint venture. SJAP is engaged in its business of the manufacturing of organic fertilizer, livestock feed, and beef cattle and plantation of crops and pastures. On June 30, 2012, the Company evaluated VIE testing results and concluded that the Company is the primary beneficiary of SJAP’s expected losses or residual returns and SJAP qualifies as a VIE of the Company. As result, the Company consolidated SJAP as a VIE, and the investment of $2,251,359 was eliminated in the consolidated financial statements.

 

Continuous assessment of its VIE relationship with SJAP

 

The Company may also have a controlling financial interest in an entity through an arrangement that does not involve voting interests, such as a VIE. The Company evaluates entities deemed to be VIE’s using a risk and reward model to determine whether to consolidate. A VIE is an entity (1) that has total equity at risk that is not sufficient to finance its activities without additional subordinated financial support from other entities, (2) where the group of equity holders does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual returns, or both, or (3) where the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.

 

The Company also quantitatively and qualitatively examined if SJAP is considered a VIE. Qualitative analyses considered the extent to which the nature of its variable interest exposed the Company to losses. For quantitative analyses, the Company also used internal cash flow models to determine if SJAP was a VIE and, if so, whether the Company was the primary beneficiary. The projection of these cash flows and probabilities thereof requires significant managerial judgment because of the inherent limitations that relate to the use of historical data for the projection of future events. On June 30, 2012, the Company evaluated the above VIE testing results and concluded that the Company is the primary beneficiary of SJAP’s expected losses or residual returns and that SJAP qualifies as a VIE of the Company.

 

F - 31
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

19.VARIABLE INTEREST ENTITY (CONTINUED)

 

The reasons for the changes are as follows:

 

Originally, the board of directors of Sanjiang A Power (SJAP) consisted of 7 members; 3 appointees from Qinghai Sanjiang (one stockholder), 1 from Garwor (one stockholder), and 3 from the Company, such that the Company did not have majority interest represented on the board of directors of SJAP.

 

On May 7, 2010, Qinghai Sanjiang sold and transferred its equity interest in SJAP to Garwor. The State Administration for Industry and Commerce of Xining City Government of the People’s Republic of China approved the sale and transfer.

 

Consequently Garwor and the Company agreed that the new board of directors of SJAP would consist of 3 members; 1 appointee from Garwor and 2 appointees from the Company, such that the Company now had a majority interest in the board of directors of SJAP. Also, and in accordance with the Company’s Sino Joint Venture Agreement, the Company’s management appointed the financial officer of SJAP.

 

As result, the Company had consolidated the assets and operations of SJAP.

 

20.LICENSE RIGHTS

 

Pursuant to an agreement dated August 1, 2006 between Infinity Environmental Group Limited (“Infinity”) and the Company, the Company was granted an A Power Technology License with the condition that the Company was required to pay the license fee covering 500 units of APM as performance payment to Infinity on or before July 31, 2008. This license allows the Company to develop, service, manage and supply A Power Technology Farms in the PRC using the A Power Technology, but subject to a condition that the Company is required to pay a license fee to Infinity once the Company has sold the license to its customer. Under the said license, the Company has the right to authorize developers and/or joint venture partners to develop A Power Technology Farms in the PRC. Infinity is a company incorporated in Australia.

 

21.OTHER PAYABLES

 

   June 30, 2012   December 31, 2011 
         
Due to third parties  $14,710,480   $10,794,449 
Due to employees and others   858,862    1,114,848 
Land use rights payable   -    58,851 
   $15,569,342   $11,968,148 

 

Due to third parties, related parties, employees and others are unsecured, interest free and have no fixed terms of repayment.

 

22.DUE TO RELATED PARTIES

 

   June 30, 2012   December  31, 2011 
         
Due to related parties  $815,092   $867,413 

 

Due to related parties are unsecured, interest free and have no fixed terms of repayment.

 

F - 32
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

23.COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS/ BILLINGS ON UNCOMPLETED CONTRACTS IN EXCESS OF COSTS AND ESTIMATED EARNINGS

 

(i)The net liabilities position for contracts in progress consisted of the following at June 30, 2012 and December 31, 2011

 

   June 30, 2012   December 31, 2011 
         
Billings  $17,978,900   $19,066,400 
Less:  Costs   (5,320,360)   (8,249,145)
Estimated earnings   (10,117,532)   (8,855,136)
Billing in excess of costs and estimated earnings on uncompleted contract  $2,541,008   $1,962,119 

 

(ii)

 

   June 30, 2012   December 31, 2011 
         
Cost   2,945,514   $887,540 
Estimated earnings   4,844,959    1,974,204 
Less:  Billings   (5,367,658)   (2,405,640.0)
Costs and estimated earnings in excess of billings on uncompleted contract   2,422,815   $456,104 

 

(iii)

 

   June 30, 2012   December 31, 2011 
         
Billings  $23,346,558   $21,472,040 
Less:  Costs   (8,265,874)   (9,136,685)
Estimated earnings   (14,962,491)   (10,829,340.0)
Billing in excess of costs and estimated earnings on uncompleted contract  $118,193   $1,506,015 

 

24.SHAREHOLDERS’ EQUITY

 

On March 22, 2010, the Company designated 100 shares of Series A preferred stock at a par value per share of $0.001. As of the same date, 100 shares of Series A preferred stock were issued at $1.00 per share for cash in the amount of $100.

 

On March 22, 2010, the Company designated 7,000,000 shares of Series B convertible preferred stock at a par value per share of $0.001. The Series B convertible preferred stock is redeemable, does not confer rights to a dividend or to vote, but rank senior over common stockholders on liquidation, and can convert to common stock on a one for one basis at any time. On June 26, 2010, 7,000,000 shares of common stock were surrendered for cancellation and the Company issued 7,000,000 shares of Series B convertible preferred stock at $1.00 per share. 7,000,000 shares were issued and outstanding as of June 30, 2012 and December 31, 2011, respectively.

 

F - 33
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

24.SHAREHOLDERS’ EQUITY (CONTINUED)

 

Series A preferred stock stockholders

 

(i)are not entitled to receive a dividend;

 

(ii)vote together with the shares of Common Stock of the Corporation as a single class and, regardless of the number of shares of Series A Preferred Stock outstanding and as long as at least one of such shares of Series A Preferred Stock is outstanding, shall represent eighty percent (80%) of all votes entitled to be voted at any annual or special meeting of shareholders of the Corporation or action by written consent of shareholders. Each outstanding share of the Series A Preferred Stock shall represent its proportionate share of the 80%, which is allocated to the outstanding shares of Series A Preferred Stock.

 

(iii)rank senior to common stockholders, holders of Series B convertible preferred stockholders and any other stockholders on liquidation. The Company has designated 100 shares of Series A preferred stock with 100 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively.

 

During the year ended December 31, 2011: (i) the Company reacquired 1,000,000 outstanding shares which became treasury shares for $1,250,000 at a price of $1.25 per share; (ii) the Company issued 15,619,397 shares of common stock for $12,499,902 at values ranging from$0.50 to $1.50 per share to settle debts due to third parties; (iii) the Company purchased 8,620,000 shares for $1,579,400 at prices ranging from $0.01 to $0.78 for cancellation;(iv) the Company issued employees a total of 2,760,729 shares of common stock valued at fair value of range from $0.895 per share to $1.01 per share for $$2,667,114; and (v) the Company issued 1,800,000 shares of common stock to certain company that provided consulting services for the benefit of the Company at $0.895 per share for $1,620,000.

 

During the three months ended June 30, 2012, the Company issued 7,037,347 shares of common stock at approximately $0.64 per share to settle debts due to third parties in the amount of $4,572,258.

 

During the six months ended June 30, 2012, the Company issued 10,735,631 shares of common stock for $6,946,250 at values ranging from $0.49 to $0.64 per share to settle debts due to third parties.

 

25.OBLIGATION UNDER OPERATING LEASES

 

The Company leases (i) 2,178 square feet of agriculture space used for offices for a monthly rent of $479 in Enping City, Guangdong Province, PRC, its lease expiring on March 31, 2014; and (ii) 2,300square feet of office space in Guangzhou City, Guangdong Province, PRC for a monthly rent of $4,238, its lease expiring on October 15, 2012.

 

Lease expense was $ 14,150 and $ 14,150 for the three months ended June 30, 2012 and 2011, respectively. Lease expense was $ 28,300 and $ 28,300 for the six months ended June 30, 2012 and 2011, respectively.

 

The future minimum lease payments as of June 30, 2012, are as follows:

 

   June 30, 2012 
   $ 
     
Year ended December 31, 2012   28,300 
Year ended December 31, 2013   5,160 
Year ended December 31, 2014   5,160 
Thereafter   - 
    38,620 

 

 

F - 34
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

26. BUSINESS COMBINATION

 

 Business combination of JFD

 

On February 28, 2011, TRW applied to form a corporate joint venture, Enping City Bi Tao A Power Fishery Development Co., Limited (“EBAPFD”), incorporated in the PRC. TRW owned a 25% equity interest in EBAPFD. On November 17, 2011, TRW formed Jiang Men City A Power Fishery Development Co., Limited (“JFD”) in which it acquired a 25% equity interest, while withdrawing its 25% equity interest in EBAPFD. As of December 31, 2011, the Company had invested $1,258,607 in JFD. JFD is engaged as an operator of an indoor fish farm. On January 1, 2012, the Company acquired an additional 25% equity interest in JFD for total cash consideration of $1,662,365. On April 1, 2012, the Company acquired an additional 25% equity interest in JFD for the amount of $1,702,580.The Company presently owns a 75% equity interest in JFD and controls its board of directors. As of June 30, 2012, the Company had consolidated the assets and operations of JFD.

 

First acquisition on January 1, 2012 – 25% equity interest in JFD

 

The Company allocated the purchase price based on the fair value of the assets acquired as of January 1, 2012.

 

Net assets acquired:    
Property, plant and equipment  $34,919 
Construction in progress   4,495,306 
Inventories   1,838,337 
Less: Other payables   (92,603)
Non-controlling interest   (3,324,729)
25% held by the Company   (1,662,365)
   $1,288,865 
      
Satisfied by     
Purchase consideration  $1,662,365 
Less: Cash acquired   (373,500)
   $1,288,865 

 

Second acquisition on April 1, 2012 – 25% equity interest in JFD.

 

F - 35
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

The Company allocated the purchase price based on the fair value of the assets acquired as of April 1, 2012.

 

Net assets acquired:    
Property, plant and equipment  $33,535 
Construction in progress   4,499,376 
Inventories   1,970,387 
Accounts receivable   1,337,519 
Less: Other payables   (292,663)
Accounts payable   (1,230,096)
Non-controlling interest   (1,702,580)
50% held by the Company   (3,405,159)
   $1,210,319 
      
Satisfied by     
Purchase consideration  $1,702,580 
Less: Cash acquired   (492,261)
   $1,210,319 

 

27.STOCK BASED COMPENSATION

 

On July 1, 2011 and July 11, 2011, the Company issued employees a total of 2,760,729 shares of common stock valued at fair value of range from $0.895 per share to $1.00 per share for services rendered to the Company. On July 11, 2011, the Company issued 1,800,000 shares of common stock to a company to provide consulting services for the benefit of the Company. The fair value of the common stock issued was determined by using the trading price of the Company’s common stock on the date of issuance of $0.895 per share.

 

The Company calculated stock based compensation of $4,278,114 and recognized $ 2,139,057 and $0 for the six months ended June 30, 2012 and 2011, respectively.

 

28.CONTINGENCIES

 

As of June 30, 2012 and December 31, 2011, the Company did not have any pending claims, charges, or litigation that it expects would have a material adverse effect on its consolidated balance sheets, consolidated statements of incomes and comprehensive income or cash flows.

 

29.GAIN ON EXTINGUISHMENT OF DEBTS

 

The Company entered several agreements with third parties to settle debts by issuance of the Company’s common stock. The shares issued by the Company were valued at the trading price of the stock on the date the shares were issued. Any excess of the fair value of the shares over the carrying cost of the debt has been reported as a gain on the extinguishment of debts of $562,361 and $489,500 has been credited to operations for the three months ended June 30, 2012 and 2011, respectively. Any excess of the fair value of the shares over the carrying cost of the debt has been reported as a gain on the extinguishment of debts of $817,513 and $582,426 has been credited to operations for the six months ended June 30, 2012 and 2011, respectively.

 

F - 36
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

30.RELATED PARTY TRANSACTIONS

 

In addition to the transactions and balances as disclosed elsewhere in these consolidated financial statements, during the six months ended June 30, 2012 and 2011, the Company had the following significant related party transactions:

 

  Name of related party   Nature of transactions
       
  Xiang Jun Fang, director of the Company and Jiang Men City Hang Sing Tai Agriculture Development Co Ltd, subsidiary of the Company   Included in due to related parties, due to Mr. Xiang Jun Fang is $1,414 and $1,413 as of June 30, 2012 and December 31, 2011, respectively. The amounts are unsecured, interest free and have no fixed term of repayment.
       
  YueXiong He, director of the Company and Jiang Men City Hang Sing Tai Agriculture Development Co Ltd., subsidiary of the Company.   During the six months ended June 30, 2012, Mr. Rui Xiong He sold his land use rights to the Company for $7,042,831. During the six months ended June 30, 2011, Mr. Rui Xiong He sold his land use rights to the Company for $7,042,831. Included in due to related parties, due to Mr. Yue Xiong He is $813,678 and $800,000 as of June 30, 2012 and December 31, 2011, respectively. The amounts are unsecured, interest free and have no fixed term of repayment.
       
  Mr. Xi Ming Sun, director of ZhongXingNong Nu Co., Ltd.   During the six month ended June 2012, the Company sold its 100% equity interest in HYT group (including HYT and ZX) for $45,000,000.
       
      Included in due from related parties, due from Mr. Xi Ming Sun is $2,386,233 and $5,386,233 as of June 30, 2012 and December 31, 2011. The amount is unsecured, interest free and has a fixed term of repayment.

 

F - 37
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

  Enping City Bi Tao A Power Prawn Culture Development Co. Limited, equity investee.   During the six months ended June 30, 2011, the Company entered into a prawn farm contract with Enping Bi Tao A Power Prawn Culture Development Co. Ltd (under application) with a contract value of $4,051,550 and recognized income of $2,141,879
       
      Billings in excess costs and estimated earnings on uncompleted contract, due to Enping City Bi Tao A Power Prawn Culture Development Co. Limited (under application) is $0 and $225,835 as of June 30, 2012 and December 31, 2011, respectively. The amount is unsecured, interest free and has no fixed term of repayment.
       
  Dongguan City Shenghua A Power Agriculture Development Co., Limited, stockholder of Hunan Shenghua A Power Agriculture Co., Limited.   Included in due to related parties, due to Dongguan City Shenghua A Power Agriculture Development Co., Limited, is $0 and $66,000 as of June 30, 2012 and December 31, 2011. The amount is unsecured, interest free and has fixed term of repayment.

 

  Mr. Solomon Yip Kun Lee, Chairman   Included in due to a director, Mr. Solomon Yip Kun Lee is $635,840 and $289,764 as of June 30, 2012 and December 31, 2011, respectively. The amounts are unsecured, interest free and have no fixed term of repayment.
       
  Hang Yu Tai Investment Limited controlled by Mr. Xi Ming Sun   Included in due from related parties, due from Hang Yu Tai Investment Limited is $10,434,519 as June 30, 2012 and December 31, 2011, respectively. The amounts are unsecured, interest free and have no fixed term of repayment.

 

F - 38
 

 

SINO AGRO FOOD, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Jiang Men City A Power Fishery Development Co., Limited (previously known as Enping Bi Tao A Power Fishery Development Co., Ltd), equity investee   During the six months ended June 30, 2011, the Company entered into a fishery farm contract with Jiang Men City A Power Fishery Development Co., Limited with a contract value of $491,200 and recognized income of $81,543.
       
    Billings in excess costs and estimated earnings on uncompleted contract, due to Jiang Men City A Power Fishery Development Co., Limited is $0 and $1,484,320 as of June 30, 2012 and December 31, 2011, respectively. The amount is unsecured, interest free and has no fixed term of repayment.
       
  Jiangmen Hang Meiji Cattle Farm Development Co Limited (previously known as Enping City A Power Cattle Farm Co., Limited), equity investee   During the six months ended June 30, 2011, the Company entered into a fishery farm contract with Jiang Men City A Power Fishery Development Co., Limited with a contract value of $1,751,953 and recognized income of $334,102.
       
      Billings in excess costs and estimated earnings on uncompleted contract, due to Enping City Bi Tao A Power Prawn Culture Development Co. Limited (under application) is $0 and $251,964 as of June 30, 2012 and December 31, 2011, respectively. The amount is unsecured, interest free and has no fixed term of repayment.

 

F - 39
 

 

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

 

This Quarterly Report on Form 10−Q (the “Form 10-Q”) contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Forward-looking statements can be identified by the use of forward-looking terminology, such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties These statements reflect management’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause the Company’s actual results, performance or achievements in 2012 and beyond to differ materially from those expressed in, or implied by, such statements. Such statements, include, but are not limited to, statements contained in this Form 10-Q relating to the Company’s business, financial performance, business strategy, recently announced transactions and capital outlook. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: a continued decline in general economic conditions nationally and internationally; decreased demand for our products and services; market acceptance of our products; the impact of any litigation or infringement actions brought against us; competition from other providers and products; the inability to raise capital to fund continuing operations; changes in government regulation; the ability to complete customer transactions, and other factors relating to our industry, our operations and results of operations and any businesses that may be acquired by us. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Readers of this Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

 

You should read the following discussion and analysis of the financial condition and results of operations of the Company together with the financial statements and the related notes presented in Item 1 of this Form 10-Q.

 

Overview

 

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

 

Detailed below is summarized information regarding our operational and/or developing stage business activities that are or are expect to generate revenues within year 2012 carried out by our existing or newly formed subsidiaries:

 

Categories of business activities:

 

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

 

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

 

- 1 -
 

 

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

 

(a) One contract was completed for the development of a fish farm (Fish Farm 1) that has been generating revenues since August 2011;

 

(b) Phase (1)’s development work on a prawn hatchery and nursery farm (Prawn Farm 2) was partly completed such that it is generating revenues since May 2012 with its Phase (2)’s development work to develop facilities for the grow-out of prawns, brood stock developments and associated expansion activities has commenced since May 2012;

 

(c &d) two contracts for the development of a prawn grow-out farm (Prawn Farm 1) and a fish and eel farm (Fish Farm 2) are still in progress; and

 

(e) A new contract granted by Guangzhou City A Power Na Wei Trading Co. Ltd. (“APNWT”) for the development of a “Marketing, distribution, seafood processing and sales” complex (Wholesale Center 1) situated at the Guangzhou City, LiWan District, New wholesale Market; development work commenced in May 2012.

 

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

 

1.1.3. Sales offish grown by contracted fish farms. As of June 30, 2012, CA has contracted only one fish farm in China, namely Gao Aquaculture Fish Farm, to grow fish to sell locally.

 

1.1.4. Imports and Exports trading of seafood that commenced in May 2012.

 

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

 

1.2.1. Jiangman A Power Fishery Development Co. Ltd.(“JAPF”). JAPF is the owner and operator of the Fish Farm 1. On June 30, 2012, the Company, through Triway Industrial Ltd. (Triway), a company incorporated in Hong Kong, a wholly owned subsidiary of the Company, acquired a total of 75% equity interest in JAPF; as such the Company’s consolidated account is incorporating financials of JAPF.

 

1.2.2. Enping A Power Prawn Culture Co. Ltd. (“EAPPC”). Enping A Power Prawn Culture Co. Ltd. is a tentative name subject to approval granted by relevant Chinese Authorities on its application for the formation of a Sino Joint Venture Company (“SJVC 1”) to own and operate Prawn Farm 1. EAPPC expects to generate revenues within Q4 2012. However EAPPC’s financial statements will not be included in the Company’s consolidated account until such time as the SJVC1 will be formalized and one of the Company’s subsidiaries will acquire majority equity interest in SJVC1.

 

1.2.3. Zhong Shan A Power Prawn Farms Development Co. Ltd. (“ZSAPP”): Zhong Shan A Power Prawn Farms Development Co. Ltd. is also a tentative name subject to approval granted by relevant Chinese Authorities on its application for the formation of a Sino Joint Venture Company (“SJVC2”) to own and operate Prawn Farm 2. ZSAPP has been generating revenues since May 2012. However ZSAPP’s financial statements will not be included in the Company’s consolidated account until such time the SJVC will be formalized and one of the Company’s subsidiaries will acquire a majority equity interest in SJVC2.

.

- 2 -
 

 

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

 

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

 

2.1 Division (1) is operated from Huangyuan District of Xining City, Qinghai Province by QingHai Sanjiang A Power Agriculture Co. Ltd. (“SJAP”), a subsidiary of the Company incorporated in China in 2009.

 

As of June 30, 2012, SJAP has the following business activities that are generating revenues:

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

* Manufacturing and sales of livestock feed.

* Rearing and sales of beef cattle.

 

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

 

* Manufacturing and sales of Enzyme.

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

* A mesh gas station to generate electricity.

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

 

2.2 Division (2) is operated in Hunan Province, Linli District by Hunan Shanghua A Power Agriculture Co. Ltd. (“HSAPA”), a subsidiary of the Company majority owned jointly by the Company and SJAP.

 

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

 

* Manufacturing and sales of organic and mixed fertilizer (although the main components of its fertilizer manufacturing factory is still under construction, as of July 2012, HSAPA initiated small portion of sales revenues through trading arrangements with SJAP.)

 

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

 

2.3 Division (3) has two sub-divisions:

 

2.3.1 Division (3a) is a beef cattle farm (Cattle Farm 1) situated at Guangdong Province, Enping City, owned and operated by Jiangman Hang Meiji Cattle Farm Co. Ltd. (“HMCF”), a name officially approved by the Company Registrar of Guangdong Government on April 2012, but, its application to become a Sino Joint Venture Company (SJVC 3) is still pending final approvals granted by the relevant Chinese Authorities.

 

As of June 30, 2012 HMCF started to generate revenues from the sales of beef cattle.

 

- 3 -
 

 

2.3.2 Division (3b) (Categorized as “Cattle Farm” in the accounting table below)is operated in Guangdong Province, Guangzhou City by Macau MEIJI Company Limited (“MEIJI”) a wholly owned subsidiary of the Company incorporated in Macau, China.

 

As of June 30, 2012, MEIJI generates revenues through engineering and technology services obtained through Consulting and Servicing contracts and management fees. In this respect MEIJI has (i)completed the contract to develop Cattle Farm 1 in the first quarter of 2012 and (ii) begun work in another contract to build a second cattle farm (cattle Farm 2) also at a district within Enping City, Guangdong Province during the second quarter of 2012.

 

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

 

3. HU plantation operation (Categorized as “Plantation” in the accounting tables below)

 

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

 

As of June 30th, 2012, HST has two types of operations;

* Growing and sales of HU Flowers

* Drying and value added processing and sales of HU flowers’ products.

 

Three Months ended June 30, 2012 Compared to the Three Months ended June 30, 2011

 

Revenue

Revenue including continued and discontinued operations increased by $18,642,917 or 278.03% to $25,348,287 for the three months ended June 30, 2012 from $6,705,370 for the three months ended June 30, 2011. The increase was primarily due to the natural growth of revenue generated from the fishery, plantation, organic fertilizer, cattle farm, beef and the maturity of on-going divisional businesses improving their revenues. The Company earned revenue $0 for the three months ended June 30, 2012 and 2011 respectively from the discontinued segment – dairy.

 

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

 

- 4 -
 

 

   2012   2011     
Category  Q2   Q2   Difference 
   $   $   $ 
Fishery   15,799,765    2,555,474    13,244,291 
                
Plantation   2,081,863    1,222,241    859,622 
                
Organic Fertilizer   2,170,154    -    2,170,154 
                
Cattle farm   1,781,966    954,577    827,389 
                
Beef   3,514,539    1,973,078    1,541,461 
                
Total   25,348,287    6,705,370    18,642,917 

 

Fishery: Revenue from fishery increased by $13,244,291, or 518.27%, to $15,799,765 for the three months ended June 30, 2012 from $2,555,474 for the three months ended June 30, 2011. The increase was primarily due to our increased contract service income from fishery, wholesale center 1 and prawn development contracts and sale of fish for the three months ended June 30, 2012 versus consulting income and sale of fish for the three months ended June 30, 2011.

 

Plantation: Revenue from plantation of flowers increased by $859,622, or 70.33%, to $2,081,863 for the three months ended June 30, 2012 from $1,222,241 for the three months ended June 30, 2011. The increase was primarily due to the increase of wholesale prices in fresh and dried flowers in this quarter.

 

Organic fertilizer: Revenue from organic fertilizer increased by $2,170,154 to $2,170,154 for the three months ended June 30, 2012 from $0 for the three months ended June 30, 2011. The increase was primarily due to the start-up of the new business of organic fertilizer in this quarter.

 

Cattle farm : Revenue from the cattle farm increased by $827,389 or 86.77% to $1,781,966 for the three months ended June 30, 2012 from $954,577 for the three months ended June 30, 2011. The increase in cattle farm was primarily due to increased development contract service of cattle farm for the three months ended June 30, 2012.

 

Beef: Revenue from beef increased by $1,541,461 or 78.12% to $3,514,539 for the three months ended June 30, 2012 from $1,973,078 for the three months ended June 30, 2011.The increase was primarily due to the increase in sales of beef and our installment of new weather insulated facilities to maintain production.

 

Cost of Goods Sold

 

Cost of Goods Sold included in continued and discontinued operations increased by $8,908,391 or 309.14% to $11,790,039 for the three months ended June 30, 2012 from $2,881,648 for the three months ended June 30, 2011. The increase was primarily due to the Company increasing its scale of operation from continuing operations in terms of its fishery, plantation, cattle farm and beef operations for three months ended June 30, 2012 as compared for the three months ended June 30, 2011. There were no operations in the organic fertilizer division during the first quarter of 2012.

 

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

- 5 -
 

 

   2012   2011     
Category  Q2   Q2   Difference 
   $   $   $ 
Fishery   6,592,310    986,650    5,605,660 
                
Plantation   558,348    431,396    126,952 
                
Organic Fertilizer   1,063,207    -    1,063,207 
                
Cattle farm   908,434    620,474    287,960 
                
Beef   2,667,740    843,128    1,824,612 
                
Total   11,790,039    2,881,648    8,908,391 

 

Fishery: Cost of goods sold from fishery increased by $5,605,660, or 568.15%, to $6,592,310 for the three months ended June 30, 2012 from $986,650 for the three months ended June 30, 2011, to $6,592,310 for the three months ended June 30, 2012. The increase was primarily due to an increase in the sales volume relating to fish and the expansion of contracted services for the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

 

Plantation: Cost of goods sold from plantation of flowers increased by $126,952, or 29.42%, to $558,348 for the three months ended June 30, 2012 from $431,396 for the three months ended June 30, 2011. The increase was primarily due to cost increases in farm labor , logistic and associated general overhead of operation.

 

Organic fertilizer. Cost of goods sold from organic fertilizer increased by $1,063,207 to $1,063,207 for the three months ended June 30, 2012 from $0 for the three months ended June 30, 2011. The increase was primarily due to the start-up of the new business of organic fertilizer in this quarter.

 

Cattle farm. Cost of goods sold from cattle farm development decreased by $287,960, or 46.41%, to $908,434 for the three months ended June 30, 2012 from $620,474 for the three months ended June 30, 2011. The increase was primarily due to increased development contract service of cattle farm for the three months ended June 30, 2012.

 

Beef. Cost of goods sold from beef increased by $1,824,612 to $2,667,740 for the three months ended June 30, 2012.from $843,128 for the three months ended June 30, 2011. The increase was primarily due to the increased sales of beef, which led to a corresponding increase in the cost of such sales.

 

Gross Profit

Gross profit, including continued and discontinued operations, increased by $9,734,526, or 254.58%, to $13,558,248 for the three months ended June 30, 2012 from $3,823,722 for the three months ended June 30 2011.The increase was primarily due to the corresponding increases in revenues from our fishery, plantation, organic fertilizer, cattle farm and beef operations.

 

- 6 -
 

 

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

 

   2012   2011     
Category  Q2   Q2   Difference 
   $   $   $ 
Fishery   9,207,455    1,568,824    7,638,631 
                
Plantation   1,523,515    790,845    732,670 
                
Organic Fertilizer   1,106,947    -    1,106,947 
                
Cattle farm   873,532    334,103    539,429 
                
Beef   846,799    1,129,950    -283,151 
                
Total   13,558,248    3,823,722    9,734,526 

 

Fishery. Gross profit from fishery increased by $7,638,631, or 986.90%, to $9,207,455 for the three months ended June 30, 2012 from $1,568,824 for the three months ended June 30, 2011. The increase was primarily due to our increased contract service income from fishery and prawn development contracts and sale of fish for the three months ended June 30, 2012 versus consulting income and sale of fish for the three months ended June 30, 2011.

 

Plantation. Gross profit from the plantation of flowers increased by $732,670, or 92.64%, to $1,523,515 for the three months ended June 30, 2012 from $790,845 for the three months ended June 30 2011. The increase was due mainly to the increase in wholesale prices both on dried and fresh flowers in this quarter.

 

Organic fertilizer. Gross profit from organic fertilizer increased by $1,106,947 to $1,106,947 for the three months ended June 30, 2012 from $0 for the three months ended June 30, 2011. The increase was primarily due to the start-up of our new business of organic fertilizer in this quarter.

 

Cattle farm. Gross profit from cattle farm development increased by $539,429, or 161.45%, to $873,533 for the three months ended June 30, 2012 from $334,103 for the three months ended June 30, 2011. The increase was primarily due to the fact that consulting services provided to the Cattle Farm 2 were done by our in-house staff. As a result, our cost of consulting services was reduced, leading to higher gross profit margins.

 

Beef. Gross profit from beef decreased by $283,151, or 25.06%, to $846,799 for the three months ended June 30, 2012 from $1,129,950 for the three months ended June 30, 2011. The decrease was primarily due to the increase in cost of material consumed in this quarter.

 

General and Administrative Expenses and Interest Expenses

General and administrative expenses (including depreciation and amortization) in continuing operations increased by $2,187,284, or 398.85%, to $2,735,677 for the three months ended June 30, 2012 from $548,394 for the three months ended June 30, 2011. The increase was primarily due to an increase in wages and salaries, and other costs amounting to $788,034 and $879,942, respectively.

 

- 7 -
 

 

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

 

Category  2012 Q2   2011 Q2   Difference 
   $   $   $ 
Office and corporate expenses   309,684    209,116    100,568 
                
Wages and salaries   918,205    130,171    788,034 
                
Traveling and related lodging   8,119    13,160    (5,041)
                
Motor vehicles expenses and local transportation   16,750    13,211    3,539 
                
Entertainments and meals   35,519    13,707    21,812 
                
Others and miscellaneous   897,586    17,644    879,942 
                
Depreciation and amortization   549,814    151,385    398,429 
                
Total   2,735,677    548,394    2,187,283 

 

Depreciation and Amortization: Depreciation and amortization increased by $850,564, or 452.58%, to $913,935 for the three months ended June 30, 2012 from $187,937 for the three months ended June 30, 2011. The increase was primarily due to the increase of depreciation by $80,127 from depreciation of $45,403 for the three months ended June 30, 2011 to $125,530 for three months ended June 30, 2012, and the increase of amortization by $647,931, or 461.24%, to $788,405 for the three months ended June 30, 2012 from amortization of $140,474 for the three months ended June 30, 2011.

 

In this respect, total depreciation and amortization amounted to $913,935 for the three months ended June 30, 2011, of which $549,814 was booked under general and administration expenses and $364,121 was booked under cost of goods sold; whereas total depreciation and amortization was at $187,937 for the three months ended June 30, 2011, of which $151,385 was booked under general and administration expenses and $36,552 was booked under cost of goods sold.

 

Gain (loss) of extinguishment of debts

 

Any deficit (excess) of the fair value of the shares over the carrying cost of the debt has been reported as a gain (loss) on the extinguishment of debts of $562,361 and $489,500 has been credited (charged) to operations for the three months ended June 30, 2012 and 2011, respectively.

 

- 8 -
 

 

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

 

Revenues

 

Revenues including continued and discontinued operations increased by $31,501,402 or 320.56% to $41,328,303 for the six months ended June 30, 2012 from $9,826,901 for the six months ended June 30, 2011. The increase was primarily due to the increase of revenue generated from the fishery, plantation, beef and the maturity of other sectors’ businesses improving their revenues.

 

The following chart illustrates the changes by category from the six Months Ended June 30, 2012 to June 30, 2011.

 

Category  2012   2011   Difference 
   Q1 and Q2   Q1 and Q2     
Fishery  $26,894,373   $4,115,219   $22,779,154 
                
Dairy        -      
                
Plantation   2,081,863    1,222,241    859,622 
                
Organic fertilizer   2,183,216    -    2,183,216 
                
Cattle farm   2,723,426    954,577    1,768,849 
                
Beef   7,445,425    3,534,864    3,910,561 
                
Totals  $41,328,303   $9,826,901   $31,501,402 

 

Fishery. Revenues from fishery increased by $22,779,154, or 553.53 %, to $26,894,373 for the six months ended June 30, 2012 from $4,115,219 for the six months ended June 30, 2011. The increase in fishery was primarily due to our increased contract service income from fishery and prawn development contract for the three months ended June 30, 2012.

 

Plantation. Revenues from plantation of flowers increased by $859,622, or 70.33%, to $2,081,863 for the six months ended June 30, 2012.from $1,222,241 for the six months ended June 30, 2011. The increase in plantation was primarily due to the increase of wholesale prices in fresh and dried flowers in the first half year.

 

Organic fertilizer. Revenue from organic fertilizer increased by $2,183,216 to $2,183,216 for the six months ended June 30, 2012 from $0 for the six months ended June 30, 2011. The increase was due to the startup new business of organic fertilizer during the six months ended June 30, 2012.

 

Cattle farm. Revenue from cattle farm development increased by $1,768,849, or 185.3%, to $2,723,426 for the six months ended June 30, 2012 from $954,577 for the six months ended June 30, 2011. The increase was primarily due to the additional amount of work involved in the Consulting and servicing contracts for developing Cattle Farm 1 and Cattle Farm 2 provided during the six months ended June 30, 2012.

 

Beef. Revenue from beef increased by $3,910,561or 110.63% to $7,445,425 for the six months ended June 30, 2012 from $3,534,864 for the six months ended June 30, 2011. The increase in beef was primarily due to the increase in consumer demand and our installment of new weather insulated facilities to maintain production.

 

- 9 -
 

 

Cost of Goods Sold

 

Cost of goods sold increased by $15,684,200 or 385.15% to $19,756,463 for the six months ended June 30, 2012 from $4,072,263 for the six months ended June 30, 2011. The increase was primarily due to the Company increased scale of operation from fishery, plantation, organic fertilizer, cattle farm and beef for six months ended June 30, 2012 as compared for the six months ended June 30, 2011.

 

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

 

Category  2012   2011   Difference 
   Q1 and Q2   Q1 and Q2     
Fishery  $12,090,750   $1,606,581   $10,484,169 
                
Plantation   558,348    431,396-    126,952 
                
Organic fertilizer   1,075,329         1,075,329 
Cattle farm   1,061,113    620,474    440,639 
Beef   4,970,923    1,413,812    3,557,111 
                
Total  $19,756,463   $4,072,263   $15,684,200 

 

Fishery. Cost of goods sold from fishery increased by $10,484,169 from $1,606,581 for the six months ended June 30, 2011 to $12,090,750 for the six months ended June 30, 2012. The increase in fishery was primarily due to cost of sales for our increased contract service of fishery and prawn development contract.

 

Plantation. Cost of goods sold from plantation of lowers increased by $126,952, or 29.43%, to $558,348 for the six months ended June 30, 2012 from $431,396 for the six months ended June 30, 2011. The increase was primarily due to the increase in sale volume of products.

 

Organic fertilizer. Cost of goods sold from organic fertilizer increased by $1,075,329 to $1,075,329 for the six months ended June 30, 2012 from $0 for the six months ended June 30, 2011. The increase was due to the startup new business of organic fertilizer during the six months ended June 30, 2012.

 

Cattle farm. Cost of goods sold from cattle farm development increased by $440,639, or 71.02%, to $1,061,113 for the six months ended 30 June 2012 from $ 620,474 for the six months ended 30 June 2011. The increase was primarily due to the additional amount of work involved in the consulting and servicing contracts for developing Cattle Farm 1 and Cattle Farm 2 provided during the six months ended June 30, 2012.

 

Beef. Cost of goods sold from beef increased by $3,557,111, or 251.60%, to $4,970,923 for the six months ended June 30, 2012 from $1,413,812 for the six months ended June 30, 2011. The increase in beef was primarily due to the increase in sale volume of product and increase of material price during the six months ended June 30, 2012.

 

- 10 -
 

 

Gross Profit

 

Gross profit including continued and discontinued business increased by $15,817,202, or 274.86%, to $21,571,840 for the six months ended June 30, 2012 from $5,754,638 for the six months ended June 30, 2011. The increase was primarily due to the corresponding increase in operation revenues. The increase was primarily due to the corresponding increase in scale of operations of revenues from fishery, plantation, organic fertilizer, cattle farm and beef.

 

The following chart illustrates the changes by category from the six Months Ended June 30, 2012 to June 30, 2011.

 

The gross profit by category is as follows:

   Six Months Ended June 30,     
             
Category  2012   2011   Difference 
   Q1 and Q2   Q1 and Q2     
Fishery   14,803,623    2,508,638    12,294,985 
                
Dairy   -    -    - 
                
Plantation   1,523,515    790,845    732,670 
         -      
Organic fertilizer   1,107,887         1,107,887 
         -      
Cattle farm   1,662,313    334,103    1,328,210 
Beef   2,474,502    2,121,052    353,450 
                
Total   21,571,840    5,754,638    15,817,202 

 

Fishery. Gross profit from fishery increased by $12,294,985, or 490.11%, from $2,508,638 for the six months ended June 30, 2011 to $14,803,623 for the six months ended June 30, 2012. The increase in fishery was primarily due to our increased contract service from fishery and prawn development contract for the six months ended June 30, 2012

 

Plantation. Gross profit from plantation of flowers increased by $732,670, or 92.64%, from $790,845 for the six months ended June 30, 2011 to $1,523,515 for the six months ended June 30, 2012. The increase in plantation was primarily due to the increase in wholesale prices of fresh and dried flowers during the six months ended June 30, 2012.

 

Organic fertilizer. Gross profit from organic fertilizer increased by $1,107,887 to $1,107,887 for the six months ended June 30, 2012 from $0 for the six months ended June 30, 2011. The increase was due to the startup new business of organic fertilizer during the six months ended June 30, 2012.

 

Cattle farm. Gross profit from cattle farm development increased by $1,328,210, or 397.54%, from $334,103 for the six months ended June 30, 2011 to $1,662,313 for the six months ended June 30, 2012. The increase was primarily due to the additional amount of work derived from the Consulting and servicing contracts for developing Cattle Farm 1 and Cattle Farm 2 provided in the six months ended June 30, 2012.

 

- 11 -
 

 

Beef. Gross profit from beef increased by $353,450 from $2,121,052 for the six months ended June 30, 2011 to $2,474,501 for the six months ended June 30, 2012. The increase was primarily due to the increase in consumer demand of beef and our installment of new weather insulated facilities to maintain production.

 

General and Administrative Expenses and Interest Expenses

 

General and administrative expenses and interest expenses (including depreciation and amortization) increased by $3,716,287 or 299.29% to $4,957,999 for the six months ended June 30, 2012 from $1,241,712 for the six months ended June 30, 2011. The increase was primarily due to increase of $1,485,213 in the wages and salaries expense from $378,077 for the six months ended June 30, 2011 to $1,863,290 for the six months ended June 30, 2012 and the increase of 662,626 in depreciation & amortization charges from $240,872 for the six months ended June 30, 2011 to $903,498 for the six months ended June 30, 2012.

 

 

Category  2012   2011   Difference 
   Q1 and Q2   Q1 and Q2     
Office and corporate expenses  $1,151,439   $469,282   $682,157 
                
Wages and Salaries  $1,863,290   $378,077   $1,485,213 
                
Traveling and related lodging  $20,276   $37,539   $(17263)
                
Motor vehicles expenses and local transportation  $37,200   $19,756   $17,444 
                
Entertainments and meals  $52,395   $36,636   $15,759 
                
Others and miscellaneous  $929,902   $59,550   $870,352 
                
Depreciation and amortization  $903,498   $240,872   $662,626 
                
Total  $4,957,999   $1,241,712   $3,716,287 

 

Depreciation and Amortization

 Depreciation and amortization of continued and discontinued business increased by $928,836, or 236.65%, to $1,321,330 for the six months ended June 30, 2012 from $392,494 for the six months ended June 30, 2011. The increase was primarily due to the increase of depreciation by 97,398 or 24.82% to $183,154 for six months ended June 30, 2012 from depreciation of $85,756 for the six months ended June 30, 2011, and the increase of amortization by $831,438, or 271.06%, to $1,138,176 for the six months ended June 30, 2012 from amortization of $306,738 for the six months ended June 30, 2011.

 

- 12 -
 

 

In this respect, total depreciation and amortization amounted to $1,445,315 for the six months ended June 30, 2012, out of which amount, $903,498 was booked under General and administration expenses and $541,817 was booked under cost of goods sold; whereas total depreciation and amortization was at $392,494 for the six months ended June 30, 2011 and out of which amount, $240,872 was booked under General and Administration expenses and $151,622 was booked under cost of goods sold.

 

Gain (loss) of extinguishment of debts

 

Any deficit (excess) of the fair value of the shares over the carrying cost of the debt has been reported as a gain (loss) on the extinguishment of debts of $817,513 and $582,426 has been credited (charged) to operations for the six months ended June 30, 2012 and 2011, respectively.

 

CRITICAL ACCOUNTING POLICIES

 

Please refer to the Consolidated Financial Statements above.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

Please refer to the Consolidated Financial Statements above.

 

Progress Reports and Subsequent Events

 

Fishery Operation:

As of June 30, 2012, Capital Award (“CA”) had four fishery development projects in progress, and sales of fish (sleepy-cod) generated from two of the farms; their status is summarized as follows:

 

(1) The 1st Demonstration fish farm(Fish Farm 1), situated at the district of Enping City operating under “Jiangman A Power Fishery Development Co. Ltd.” (“JFD”), was built and completed for operation in February 2011 and is underway with production. During the second quarter of 2012, CA purchased from JFD and sold just under 260,000 fish of the sleepy-cod variety averaging about 532g/fish compared to Q1 with 76,000 sleepy-cod @ 575g/fish. Between external growers and the open dam farm, CA purchased 230,000 sleepy cod (350g/fish average) from JFD to expand its inventory.

 

(2) The 1st Demonstration prawn farm(Prawn Farm 1) is also situated in the district of Enping City. Its development was begun in June 2011, when operations were expected to begin no later than July 2012. However, as stated in the Form 10-Q filed for the fiscal period ended March 31, 2012 (the “Prior Form 10-Q”), development of this first demonstration prawn farm was delayed in 2011 due to problems obtaining rezoning classification from development to industrial status; as such, an alternative area of land (50 Mu or 8.25 acres) located within the same district of Enping City within close proximity to our HU Plantation was secured to replace the original landholding in February 2012. As of April 30, 2012, all basic infrastructure work has been carried out with construction work now in progress. A long-lasting rainy season that had begun in mid-April and continuing through the month of July has curtailed construction, and while progress has been made, the Company presently anticipates that the farm building, brood-stock dams, and grow-out tanks expected to be partly constructed by the end of July will not be ready for final installation work until August of 2012.

 

- 13 -
 

 

(3) 2nd Fish (and Eel Farm(Fish Farm 2) is situated at District of Jiangman City. Its development was begun in May of 2011, and is expecting its Phase 1 to be completed within year 2012, and Phase 2 development, (involving the grow-out farms, the nursery fingerling farm, the Research and Development Station and all other associated facilities),starting in January of 2013 with production operations beginning by year-end 2013.

 

As reported in the Prior 10-Q, the main work in progress in Phase 1’s development during the Company’s first quarter of 2012 was on the construction of a new road leading from the external main access road to the project site and the construction of a new bridge crossing from the new road into the site. The road and bridgework was completed by July 1, 2012 and presently provides access for heavy equipment to the project site for work on drainage construction. Management presently expects that land fill preparation to construct the Re-circulating Aquaculture System (“RAS”) farms will begin in early 2013.

 

(4) The 2ndprawn farm (Prawn Farm 2) is situated in the District of Zhong Shan City. Its development was begun in November 2011. In the Prior 10-Q, the Company stated that as of April 30, 2012, up to 75% of Phase 1’s development work was completed, and although work was still in progress, the farm was sufficiently equipped to start up production activities, having resulted in 2 million prawn flies (fingerlings) produced and sold to the regional prawn growers on May 3, 2012. Management concluded that the Company’s aquaculture prawn business using our A Power Modular (“APM”) technology and systems had essentially reached a first milestone in China. As of June 30, 2012, the following Phase 1 items remain to be completed:

 

·Boundary fencing (2.3 Km);
·Heating room; and
·3rdnursery station for nurturing high-value prawn flies.

 

All of the above are presently expected to be completed during the third quarter of 2012.

 

The Company is now applying for a permit to import the high-value brood-stock prawns and to sell their flies to local growers. The application is a rather lengthy process expected to be finalized by end of the first quarter of 2013.If granted, the Company will be one of the few receiving this authority, providing the Company with a strong competitive edge in the industry.

 

Phase 2 of the development is being carried out on an adjacent block of land measuring to 200 Mu (or 132,000 square meters). Construction began in May of 2012 on the following:

 

·8 in house APM prawn grow-out tanks (situated on 20 Mu);
·On 50 Mu,10 open dams (2 Mu/dam) connected with RAS filtration systems using the APM technology and systems;
·An additional in house (2,000 square meter) APM system hatchery that will have the capacity to produce up to 10 billion flies per year;
·All basic site infrastructures;
·Dry and Cold storage facilities;
·Heating facilities;
·Staff quarters for 25 workers; and
·A laboratory with office (2,000 square meters).

 

- 14 -
 

 

Management expects that phase 2 of the development will be completed in two stages, with Stage 1 targeted to be completed by December of 2013 at an estimated value of US$8.33 Million, and that Stage 2 will be completed by April 2014, at a value that will be ascertainable on or before December 31, 2012.

 

In the Prior 10-Q, the Company had anticipated completing Phase 2 by December 31, 2012. However, this date has been extended into two (2) stages of construction, with the first anticipated to be completed by December 31, 2013, and the second by April 30, 2014. The reason for this adjustment is due to the Company’s decision to quadruple the size and scope of the project, originally scheduled for 50 Mu (33,000 square meters) to 200 Mu (132,000 square meters), requiring a much more extensive allocation of resources and time to complete. Please refer to the Addendum to Consulting and Services Agreement attached to this Form 10-Q as Exhibit 10.1.

 

Production and sales of the Prawn Farm (2)

 

As of June 30, 2012, Prawn Farm (2) has produced more than 40 million Mexican White prawn flies with a survival rate of 94.6%, resulting in more than 37.5 million one-week old flies sold to local growers at an average of RMB158 per 10,000 flies (equivalent to about $25.00 per 10,000 flies) generating revenues of just under $100,000, and reflecting a gross profit of 36.7%.

 

Mexican White species is one of the lowest priced prawn flies sold to the local market due to its availability. On the other hand, the Company anticipates generating five (5) times the revenue of Mexican White flies through sales of its High-Value prawn flies, once approval is granted by the relevant authorities.

 

Management cautions that the application for formation of the Sino Joint Venture Company for Prawn Farm (2) has not been approved as of June 30, 2012 and therefore current revenues are not incorporated in the Company’s consolidated financial statements.

 

(5) Operation of the 600 Mu of open Dam Fish Farm

 

During the quarter ended June 30, 2012, there were over 300,000 sleepy cod taken from the open dam farm, of which 149,000 were transferred to JFD for further grow-out, and the balance of 151,000 (average size 514g/fish) were sold by CA to wholesale markets in Guangzhou City, PRC. Current inventory as of June 30, 2012 is estimated to be approximately 180,000 fish in the open dam farm.

 

(6) Potential contracts in developing new fish/prawn farms

 

CA intends to take on additional fishery consulting and servicing contracts during the third quarter of 2012 after completing a portion of its $14 Million contractual obligations associated with Fish Farm 2, and Prawn Farms 1 and 2 (Phase 2, Stage 1).

 

Significant Events that may affect Fishery Operations’ Cash Flow:

 

As stated in the Prior 10-Q, as of April 30, 2012, the income tax rate of 50% was reduced to 25% by the local authorities. However, while the rate has been reduced, it is still in CA’s management’s opinion that any tax on agriculture, amount notwithstanding, is contradictory to the Chinese Central Government’s incentive policy toward the agriculture industry. Accordingly, management has further filed its appeal on this issue. As of June 30, 2012 this appeal remains pending.

 

- 15 -
 

 

CA does not carry a builder or a developer license in China, and as a result, its contracts are structured based on it providing consulting services, and subcontracting with licensed builders and developers to handle construction and payment of capital improvement taxes.

 

The profit CA derives from these contracts is retained in China and is recorded as payable to CA by the Sino Foreign Joint Venture Company (an “SJVC”) and/or as prepayments and deposits, which CA may later elect to exchange for equity interests in the SJVC as provided within the terms and conditions of each contract. At such time, if and when CA decides to exercise its option to secure equity in the SJVC, certain tax implications might be triggered and have to be accounted for, accordingly.

 

Beef and Cattle Division:

 

Since July 7, 2012, the Company has three separate entities operating within this division plus an additional project in development of another cattle farm in the Enping district as described below:

 

1.Sanjiang A Power (“SJAP”) (Xining):The SJVC situated at HuangYuan Town, Xining City Qinghai Province, which conducts the following business activities;

 

·Manufacturing and selling of organic fertilizer;
·Manufacturing and selling of livestock feed;
·Rearing and selling of beef cattle; and
·An on-site restaurant operation.

 

During the period covered by this Form 10-Q, SJAP:

 

·Sold 2,088 MT and manufactured 0 MT of organic fertilizer with current inventory levels at 3,029 MT;
·Sold 5,939 MT and produced 285 MT of livestock feed with current inventory levels at 1,404 MT;
·Sold 915 head of over 13 month-old cattle with current inventory levels at 1,450 head; and
·Saw its restaurant operations continue to perform well.

 

SJAP is presently engaged in the following activities:

 

·Administration is now housed and operating from the four-story office building. Plans for developing a show room with laboratory will begin to be constructed within the building later this year;

 

·SJAP has constructed and fitted out a total of 14 cattle houses, with the capacity to house up to 1,750 head of cattle at any given time. Work on constructing and fitting out more cattle houses are in progress. Management expects to complete the planned capacity to house up to 2,500 head of cattle before the end of 2012;

 

·Most of the infrastructure work on the drainage channel systems are still in progress, which when completed will pipe cattle waste to a centralized collection basin where a Mash Gas station will be constructed sometime in 2013. Upon completion of the Mash Gas station, SJAP will begin processing cattle waste as its main source of raw material for manufacturing organic fertilizer;

 

- 16 -
 

 

·During the first quarter of 2012, the HuangYuan Government awarded a cash grant of RMB500,000 to SJAP toward development of its Enzyme factory targeted to be completed by the end of 2012 at a total cost of about $2 million. The Huangyuan Government is authorized to provide grant funding of up to 66% of total development cost on selected projects. Building plans for the Enzyme factory were submitted to authorities for approval on June 23, 2012;

 

·The Huangyuan Government in conjunction with SJAP is replicating SJAP’s cattle housing model for local farmers with the understanding that SJAP will purchase all mature beef (estimated to be up to 10,000 head) for processing at its new slaughterhouse, boning and cold storage facility (“ABCF”), originally scheduled to be constructed during 2012 and operating at some point during the second quarter of 2013.

 

Significant Events that may affect SJAP’s cash flow:

 

As stated in the Prior 10-Q, our ex-joint venture partner, SanJiang Group, established four organic-fertilize manufacturing plants at various districts in Qinghai Province for application on its own farms, resulting in up to 70% of the fertilizer (~10,000 Mt/year) previously bought by SJAP. SJAP will not purchase the SanJiang Group. In response, SJAP is sourcing new customers to absorb the 10,000 MT overhang. By June 30, 2012, SJAP was able to obtain new alternative customers to absorb the overhang, as follows:

 

·30% will be sold to Licensed Distributors within a radius of 150 Km from Xining City;
·20% will be sold to Fruit Farmers within district of Beijing City; and
·50% will be sold to our Hunan Fertilizer operation as part of the raw materials needed to manufacture

mixed-fertilizer.

 

As such, SJAP’s sales and manufacturing of fertilizer withstood a temporary set-back, but management expects it to function normally beginning in the third quarter of 2012.

 

As reported in the Prior 10-Q, SJAP’s application to the Agriculture Bank of China for a loan facility of RMB35 million ($5.55 million)will require an additional two to three months for processing due to the HuangYuan Government’s delay in transferring land titles on SJAP property.

 

2.The Enping demonstration Cattle Farm (Cattle Farm 1) and Macau EIJI:

 

During the first quarter of 2012, MEIJI paid a deposit of US$1.25m toward its purchase of 25% equity in the cattle farm; the SJVC is anticipating official approval of its partnership by August 2012. As of the date of this Form 10-Q, the application is still pending approval. However its official name of “Jiangman Hang Meiji Cattle Farm Development Co. Ltd.” (English translated name) (HMCF) was officially granted on June 3, 2012.

 

As stated in the Prior 10-Q, the cattle farm’s major construction has been completed and is under operation, and rearing over 200 head of cattle as of April 30, 2012, with further improvements in progress (i.e. construction of more feed storage facilities, general landscaping, and furnishing and fitting of office and staff quarters).These improvements will continue throughout 2012, creating a complex that is self-sufficient similar to our other developments throughout China.

 

- 17 -
 

 

Cattle sales of Cattle Farm 1and MEIJI Q2 2012

 

MEIJI, as the marketing agent of Cattle Farm 1, has bought 75 head of cattle from Cattle Farm 1 for beef sales to restaurants in the GuangZhou City, PRC. The following table provides a product analysis of this transaction:

 

Table (CF1)

Head of Cattle 75
Live Weight 51,700 Kg or Averaging 690 Kg / Head
Net processed meat weight 28,425 Kg
Live cattle Weight when 1st entered farm 14,625 Kg (or averaging 195 Kg / Head)
Growing and fattening period at farm (average) 278 days
Average Growth Rate / day / Head 1.78 Kg
Recovery rate of meat after de-boning processing 54.9%

 

With these results, management is confident in the commercial viability of similarly built farms like Cattle Farm 1 using our free ranging farming system, and our exclusive aromatic feed formula.

 

Regarding inventory recorded in the Company’s consolidated account, there are two types; namely, live cattle inventoried at the farm, and beef product inventoried at the MEIJI facilities. As of June 30, 2012 there were 526 head of cattle on the farm, and 25,525 Kg of beef product stocked at the MEIJI facilities.

 

A portion of the beef contract’s obligation for FY 2012as cited in the Company’s press release dated March 28, 2012 is being supplied to MEIJI by Cattle Farm 1. The remainder for this year’s contract obligation (i.e. a portion of 1000 head of cattle) will be sourced from SJAP (Xining).

 

New Consulting and Servicing Contract for MEIJI inQ2 2012 to build “Cattle Farm 2 Enping”:

 

On May 25, 2012, a Sino Joint Venture Agreement (an “SJVA”) was executed between MEIJI and another group of Chinese businessmen for the development and construction of a cattle farm at a 500 Mu site in YaneXiaoban Village, Enping District for the growth of cattle and sheep using our Aromatic Feed formula and our free ranging systems under the following terms and conditions:

 

·An SJVC will be formed with an option granted to MEIJI to acquire up to a 75% equity stake in the SJVC within a 3-year period;
·Total Capital Investment of $30 Million within 5 years;
·Initial Registered Capital of $1 million in Year 1, gradually increasing annually pursuant to prevailing conditions;
·Targeted Grow-out Capacity of 1,000 head in year 1 and up to 5,000 head by end of year 3;
·Proposed Name of the SJVC is “A Power Beef Cattle Farm Co. Ltd.” subject to approval; and
·The Project Land of 500 Mu is under lease for a period of 10 years; however the parties have agreed to acquire the land through the SJVC on or before this lease expires.

 

Please refer to the SJVC Agreement attached to this Form 10-Q as Exhibit 10.2.

 

A Consulting and Servicing Agreement has been simultaneously granted to MEIJI under the following terms:

 

- 18 -
 

 

The development will be carried out in two Phases; Phase 1 contains 2 stages of development at an estimated development cost of $10.6 Million covering the following:

 

Phase 1

 

·Land development: 250 Mu;
·Engineering and design work;
·Site clearing and leveling;
·Boundary fencing and landscaping;
·Basic infrastructure including power supply;
·Internal roads, drainage and outside access;
·Plant and equipment;
·Construction of Cattle Housing (measuring about 4,000 square meters (m2));
·Water supply and irrigation systems;
·Grassland and pasture fields;
·Supervising and training mechanical and other installation personnel; and
·All other related work

 

Phase (2) development on the balance of the 250 Mu property will be determined and detailed on or before completion of Phase 1. Please refer to the Consulting and Services Agreement attached to this Form 10-Q as Exhibit 10.3.

 

MEIJI secures young cattle supply contract

 

As the Company’s Cattle Farm 1 is beginning to show commercial viability, coupled with similar farms being built over the next few years along with the rapid rise in cost of cattle, management feels that now is the proper time to secure good sources to supply young cattle to these developing entities.

 

On May 6, 2012, a supply contract was executed with a well-established farm at Chang Chun District, Jilin Province for the supply of 4,000 head of young cattle under the following terms:

 

·Schedule of Supply:
On or before December 31, 2012 500 Head
On or before June 30, 2013 500 Head
On or before December 31, 2013 1,000 Head
On or before June 30, 2014 1,000 Head
On or before December 31, 2014 1,000 Head
Total 4,000 Head

 

·Specification: Male cattle from 5.5 months old to 8 months old (at average of no less than 160 Kg/head)consisting of 80% Simmental and 20% of various breed of beef cattle;

 

·Sale price: At RMB36/Kg Live weight (F.O.B.), +/- 10% variance subject to prevailing market prices for total purchase consideration at RMB23.04 Million +/- up to 10% variance;

 

- 19 -
 

 

·Payment terms: 20% deposit payable upon notification to deliver, remaining balance payable within 30 days from date of delivery; and

 

·Penalty Clause: Failure to deliver or failure to purchase will incur a penalty of RMB 2,305 per head of cattle.

 

Management anticipates that in securing this supply of young cattle, our two Enping cattle farms will have a consistent quality of cattle produced at stable prices.

 

Please refer to the Agreement to Purchase Young Beef attached to this Form 10-Q as Exhibit 10.4.

 

3.Hunan Shenghua A Power Agriculture Co. Ltd. (“HSAPA”)

 

As of April 30, 2012 development and construction work on the Mixed Fertilizer manufacturing facility for HSAPA was being carried out consisting of a 7,000 square meter production and storage factory, external fencing to cover the production area of about 11.55 acres of land, internal roads, landscaping, drainage, a 300 square meter office, staff quarters that will provide accommodation for up to 25 workers and all related basic infrastructure, etc. As of the date of this Form 10-Q, the production and manufacturing facility is 50% completed, and over 250 Mu of farmland within our compound is planted with grass and pasture that will be ready for harvesting by the end of the third quarter of 2012, in preparation for the rearing of cattle by the fourth quarter of 2012.

 

H U Plantation:

 

As of June 30, 2012, construction and building of half of the green houses were completed, and trials on better disease control and fertilizing programs were commenced during the first week of July, 2012. Management anticipates that improvements under green housing conditions can be evaluated by July 31, 2012.

 

Management previously believed that the heavy rain fall in April 2012 would prove beneficial compared to the dry weather experienced in April 2011,and with all other conditions remaining equal should result in a better harvest for 2012.

 

Unfortunately, the heavy rain fall has continued into the month of July resulting in the entire plantation saturated with water adversely affecting HU plant growth, and introducing pathogen induced diseases to the plants.

 

Harvest results as of June 30, 2012 were similar to June last season, where more than 3.5 million pieces of fresh flowers at an average of RMB0.85 per piece were sold (about 54.5% higher in price compared to the same period last year), and dried 175,350 Kg of dried flowers (equivalent to about 9.75 million pieces of fresh flowers) were sold at an average of RMB58/Kg, which also is higher than last season’s sale price of RMB46/Kg.

 

Management is taking action on disease mitigation and control by applying a recently developed “pure organic plant builder and soil enhancer” imported from Malaysia aimed at improving disease resistance, and enhancing plant growth rate. The Company hopes that the plants will recover within the next few weeks, limiting the overall adverse effect on production. However, the evaluation of the damage can only occur as the season progresses.

 

Management is presently awaiting the results of the greenhouse test trial before determining whether to further expend additional capital on green-housing, or to concentrate allocation of its capital toward developing additional drying facilities, and instead buy fresh HU flowers from external growers to produce dried flowers. This way the Company should be able to ensure revenue streams in the event the HU Plantation is affected by adverse seasonal factors in the future.

 

- 20 -
 

 

Marketing and Distribution Network Developments:

 

The Seafood wholesale shops and Processing Factory at Guangzhou new fish market:

 

As stated in the Prior 10-Q, on March 16, 2012, the Company entered a 5-year lease for an approximate 650 square meter (~7000 square feet) space at the newly established Wholesale Fish and Seafood Market situated within Guangzhou City that is earmarked to replace the old Guangzhou Fish Market. Renovation on this property remains in progress for our first wholesale distribution center consisting of a cold storage facility including quick freezing, freezer and chill rooms, a processing and packaging area, and a retail outlet for live and frozen seafood, which the Company refers to as its Wholesale and Seafood Processing Shop (“WSPS”).

 

Subsequently thereto, a group of Chinese businessmen and the Company entered into an SJVC Agreement, and a Consulting and Servicing Agreement with the Company and CA, respectively for the development and establishment of the WSPS. Management anticipates that preliminary operation of WSPS will start in August 2012.

 

Please refer to the WSPS SJVC and the related WSPS Consulting and Services Agreement attached to this Form 10-Q as Exhibit 10.5 and Exhibit 10.6, respectively.

 

Progress on Import and Export of Seafood:

 

As stated in the Prior 10-Q, most of China’s aquaculture imports, which originate in South Asian countries, are extremely poor in quality because of infestation with chemicals and pollutants unfit for human consumption, with the result that importation of much of the seafood from South Asian countries to China has been banned. China’s aquaculture industry is faced with the same dilemma, resulting in China’s seafood exports to other countries declining year over year. Consequently, management began investigating importing seafood from Norway, a country that is surrounded by clean waters, and currently producing abundant supplies of seafood for European countries. Norway has very stringent health standards applied to its wild and farm harvested aquaculture industries.

 

As of June 30, 2012, the Company has: (i) ordered over 80 MT of mixed variety of fish Norway, of which over 60 MT was delivered to a wholesaler/processor operating in Malaysia, and another 20 MT was imported to China to be sold by our WSPS, and (ii) ordered over 260 MT of peeled shrimp from Vietnam and Cambodia suppliers targeting delivery for resale at WSPS beginning in August 2012.The peeled shrimp are ocean captured species requiring sanitary certification by the health department of each of Vietnam and Cambodia, and are subject to clearance by the China Commercial Goods Investigation Authority before being imported to China.

 

- 21 -
 

 

Progress and development on the Restaurant Chain:

 

As stated in the Prior 10-Q, the Company was negotiating with a group of restaurant chain operators to acquire equity in their operations, including exclusivity on beef supplied to those facilities from its operations. On June 1, 2012 a Memorandum of Understanding (the “MOU”) was executed between the Company and the controlling shareholder of this restaurant group, Guangzhou City Wang XiangCheng Enterprise Management Consulting Co. Ltd. (“WXCE”).WXCE is the developer and franchisor of a restaurant chain under the Brand Name “Leonie” having restaurant operations located throughout Malaysia and Guangzhou City, PRC. Pursuant to the MOU, the Company (or its designee) will have the right to acquire up to 51% of WXCE within two years of its execution for a price equal to 125% of the net tangible assets of 51% of WXCE at the time the purchase is consummated. In the interim, the MOU provides that the Company will be the main supplier of beef, HU flowers and seafood to WXCE. Management believes this arrangement will allow the Company to begin conducting its retailing activity earlier than expected and at a lower initial cost that it would have incurred had it opted to attempt to create its own restaurant chain.

 

Please refer to the Memorandum of Understanding attached to this Form 10-Q as Exhibit 10.7.

 

Off Balance Sheet Arrangements:

 

None.

 

Other Significant Factors That May Affect Cash/Liquidity:

 

Inflation factors affecting operations:

 

On the surface the, Government’s anti-inflationary measures seemed to be working during the first quarter of 2012. However, management remains concerned since most of the building materials, cost of labor and essential consumer goods are still rising at a higher rate than GDP. Its impact on consumer spending has not seemed to materialize, though, with growth in spending maintaining an upward trajectory.

 

As of June 30, 2012, the Company had no other significant transactions that may affect our cash/liquidity other than those mentioned in this Form 10-Q.

 

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents kept with financial institutions in People’s Republic of China (“PRC”) are not insured or otherwise protected. Should any of those institutions holding the Company’s cash become insolvent, or the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit at that institution.

 

Income Taxes

 

There was no income tax for the six months ended June 30, 2012 or 2011. Under tax legislation in China, beginning January 2008, the agriculture, dairy and aquaculture sectors were exempted from enterprise income taxes. However, as mentioned earlier, as of April 30, 2012, the income tax rate of JFD of 50% was reduced to 25% by the local authorities, while the Company remains in negotiation with local tax authorities to resolve this issue. While the rate has been reduced, management of CA remains of the opinion that any tax on agriculture, amount notwithstanding, is contradictory to the China Central Government’s incentive policy toward the industry. Therefore, management has decided to continue its appeal on this issue.

 

Liquidity and Capital Resources

 

As of June 30, 2012, we had unrestricted cash and cash equivalents of $2,692,365 (see notes to the consolidated financial statements), and our working capital as of June 30, 2012 was at $78,380,452.

 

- 22 -
 

 

As of June 30, 2012, we have no long term debts.

 

Net Cash (Used in) Provided by Operating Activities. Cash provided by operating activities from continuing operations totaled $9,887,541 for the six months ended June 30, 2012. This compares with cash provided by operating activities from continuing operations of $7,968,407 for the six months ended June 30, 2011. The increase in cash flows from operations primarily resulted from net cash provided by net income for the year after adjustments of non- cash items.

 

Net Cash Used in Investing Activities. Cash used in investing activities from continuing operations totaled ($11,722,784) for the six months ended June 30, 2012.This compares with cash used in investing activities from continuing operations of ($5,859,059) for the six months ended June 30, 2011.

 

Net Cash (Used in) Provided by Financing Activities. Cash provided by financing activities from continuing operations totaled $1,672,033 for the six months ended June 30, 2012. This compares with cash used in financing activities from continuing operations of $3,905 for the six months ended June 30, 2011.

 

Net Cash (Used in) Provided by Operating Activities. Cash provided by operating activities from discontinued operations totaled $0 for the six months ended June 30, 2012. This compares with cash used in operating activities from discontinued operations of $0 for the six months ended June 30, 2011.

 

Net Cash Used in Investing Activities. Cash used in investing activities from discontinued operations totaled $0 for the six months ended June 30, 2012. This compares with cash used in investing activities of $3,137,885 for the six months ended June 30, 2011 due to withdrawal of cash and cash equivalents of discontinued dairy segment of $3,137,885 in the first quarter of 2011.

 

Net Cash (Used in) Provided by Financing Activities. Cash provided by financing activities from discontinued operations totaled $0 for the six months ended June 30, 2012. This compares with cash provided by financing activities from discontinued operations of $0 for the six months ended June 30, 2011.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls were effective as of the end of the period covered by this report.

 

- 23 -
 

 

Changes in Internal Control over Financial Reporting

 

We have also evaluated our internal controls for financial reporting, and there has been no change in our internal control over financial reporting that occurred during the three months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting

 

Limitations on the Effectiveness of Controls

 

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the period covered by this quarterly report, we issued an aggregate of 7,037,348 shares of our common stock to eight persons, three of whom are residents of the United States. The shares were issued pursuant to the exemption from registration under the Securities Act provided by its Section 4(2). The shares were issued in consideration for extinguishment of debt in the aggregate amount of $4,572,258 based on a price of the common stock of an average of approximately $0.65 per share.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

- 24 -
 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit No.   Description of Exhibits
     
10.1   Addendum to Consulting and Services Agreement*
     
10.2   SJVC Agreement*
     
10.3   Consulting and Services Agreement*
     
10.4   Agreement to Purchase Young Beef*
     
10.5   WSPS SJVC*
     
10.6   WSPS Consulting and Services Agreement*
     
10.7   Memorandum of Understanding*
     
31.1   Certification of the Chief Executive Officer pursuant to §240.13a−14 or §240.15d−14 of the Securities Exchange Act of 1934, as amended *
     
31.2   Certification of the Chief Financial Officer pursuant to §240.13a−14 or §240.15d−14 of the Securities Exchange Act of 1934, as amended *
     
32.1   Certification pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes−Oxley Act of 2002) *

 

*Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    SINO AGRO FOOD, INC.
     
 August 14, 2012 By: /s/ LEE YIP KUN SOLOMON
    Lee Yip Kun Solomon
    Chief Executive Officer
    (Principal Executive Officer
    Principal Financial Officer
    Principal Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 August 14, 2012 By: /s/ LEE YIP KUN SOLOMON
    Lee Yip Kun Solomon
    Chief Executive Officer, Director
    (Principal Executive Officer
    Principal Financial Officer
    Principal Accounting Officer)

 

 August 14, 2012 By: /s/ TAN POAY TEIK
    Tan PoayTeik
    Chief Officer, Marketing

 

 August 14, 2012 By: /s/ CHEN BORHANN
    Chen BorHann
    Corporate Secretary

 

- 26 -

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XOTC:SIAF Sino Agro Food Inc Quarterly Report 10-Q Filing - 6/30/2012
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