Introduction
Our principal shareholders holding 90.17% of our voting power have taken action by consent without a meeting approving the swap of all of the agricultural management rights of our wholly-owned subsidiary, Gansu Asia-America Trade Co., Ltd. (“GAAT”) in return for the long-term lease management rights to the agricultural properties of our
sister company, Gansu Yasheng Agro-Industrial and Commerce Group Co., Ltd. (“GY”). The swap was implemented pursuant to a Swap Agreement between GAAT and GY. Under the terms of the Swap Agreement, GAAT has transferred to GY its right to manage and operate seven companies which have the agricultural management rights, and GAAT received the agricultural long-term lease management rights held by GY referred to as the “Swap”.
The swap was implemented by our parent corporation, Gansu Yasheng Salt Chemical Industrial Group, causing the parties from whom GY received the long-term agricultural lease management rights to transfer such rights directly to GAAT and as a result GAAT has separate lease management contracts with each of the parties from whom GY, acquired those management
rights. Pursuant to this overall, integrated plan, on September 22, 2015 five Agreements for the Circulation of Land Contracted Management Right (or “Lease Management Rights”) were entered into between GAAT and:
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Linhai City Tengfei Fruit & Vegetable Professional Cooperative Tangerine Plantation (9,200 MU)
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Linhai City Sitian Fruit & Vegetable Professional Cooperative Tangerine Plantation (16,000 MU)
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Linhai City Sitian Fruit & Vegetable Professional Cooperative Broccoli Plantation (24,000 MU)
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Taizhou City Huang Yan Hou Ao Asparagus and Bamboo Professional Cooperative Moso Bamboo Plantation (18,000 MU)
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Xianju County Xiajing Golden Plum Farming and Breeding Professional Cooperative Waxberry Plantation (9,057 MU)
The swap out of GAAT’s right to manage and operate the seven companies which have the existing agricultural management rights to GY as described in our Definitive Information Statement filed with the Securities and Exchange Commission on December 4, 2015, was executed pursuant to the Swap Agreement dated December 29, 2015. Consequently, the
swap-in of GY’s Lease Management Rights was effective on December 29, 2015.
Because the Swap was not effective till December 29, 2015, we present in this 10-K Report both a description of our assets which formed the basis of our business during 2015 up to December 29, 2015 and a description of our Swap-in assets upon which our business will be based going forward.
Overview
YaSheng Group, a California corporation, is a holding company that operates and primarily conducts its business operations in People’s Republic of China (“PRC” or “China”). As one of the largest agriculture companies in China, we are a leading producer of premium specialty agriculture based products, specializing in
developing the agriculture industry by cultivating, processing, marketing and distributing a variety of food and agro-byproducts. [We also operate a small concrete plant in Baiyin City, Gansu Province, China.?]
During 2015 our food and agro-byproducts were processed primarily from premium specialty agriculture products grown in Northwest China in six agricultural product categories: fresh fruits, vegetables, field crops, specialty crops, seeds and eggs. We have been producing award winning premium specialty agriculture products for over 30 years. We harvested
our crops through our farming operations and from collective farm operators. Our primary product offerings included over 30 major agriculture products under 6 product categories with the major products including: field crops: cotton, corns, barley, wheat, flax, alfalfa; vegetables: onions, potatoes, beet, and peas; fruit: apples, pears, apricots: specialty crops: hops, wolfberries, cumin, liquorices; seeds: black melon seeds, sunflower seeds, corn seeds, flax seeds; poultry: eggs. We also produced many additional
fresh fruits and vegetables which supplied the local and provincial markets. We generated approximately 24.5% of our revenues from field crop based products, 15.1% from vegetable based products, 24.5% from fruits, 20.1% from specialty crops, 13.9% from seeds, and 1.9% from poultry products and the residual from other production until December 29, 2015.
During 2015 we sold our products through an extensive nationwide sales and distribution network covering 19 provinces and over 121 cities in China. As of December 29, 2015, we had approximately [238 distributors and 41 direct clients.] Our products were also sold directly to food processors as well as processed within our company and then resold
to supermarkets or other distributors, or further processed into retail food products. We also sold many of our fresh products within Gansu province as well as nationally to food processors and distributors, or directly to the supermarkets. Our customers are based primarily in China and include national and international leading companies. Our products were also sold as feed for livestock, ingredients for Chinese traditional medicines as well as other important ingredients in the food industry.
Quality and safety are of primary importance to us. We have established quality control and food safety management systems for all stages of our business, including raw material sourcing, producing, packaging, storage and transportation of our products. Through December 29, 2015, we operated manufacturing facilities located in Gansu province, where
an abundant supply of land, sunshine and transportation are available.
Our agriculture base is made up of both modern industrial farming and local fanning operations with many types of processing lines. The majority of the farms from which we sourced products use high tech irrigation allowing for water efficiency, reducing the presence of insects, therefore minimizing the need for heavy pesticides.
Our net sales for the year ended December 31, 2015 was $938,896315. Our gross profit for the year ended December 31, 2015 was $119,158,293. Earnings per share for the year end December 31, 2015 were $0.71 per share. Since the swap was effected between related Companies, we recognized a one time charge to earnings due to the need to value the Swap-in
assets at historical cost as compared to appraised valuation which was the valuation used by us before the Swap.
Our principal executive office is located at 805 Veterans Blvd., #228, Redwood City, CA 94063. Our telephone number at our U.S. executive office is (650) 363-8345.
Corporate History
YaSheng Group was incorporated and established in 2004 by Gansu YaSheng Salt Industrial Group, Ltd (“Gansu YaSheng”). The Company was approved by the Chinese Ministry of Commerce as “China Oversea Investment Enterprise”. Gansu YaSheng is our largest shareholder and owns approximately 83.25% of our outstanding common stock.
In 2004, GanSu YaSheng established YaSheng Group to access the U.S. public markets and international markets, to implement its expansion plans, and acquired Nicholas Investment Company, Inc., a Nevada corporation in a share exchange transaction.
In 2010, we established Yasheng American Trade Company as our subsidiary, with the intention to improve our efficiency and strengthen our internal controls. The new company will manage our products sales and investment.
In 2010, we established Yasheng Commodity Trading, LLC as our subsidiary, to help us trade futures and agricultural commodities.
In 2010, YaSheng Group is listed on the OTCQB as a U.S. registrant.
Corporate Structure until December 29, 2015
We conducted our operations in China till December 29, 2015 through the following operating subsidiaries and their numerous operating subsidiaries in China as described in further detail below.
1.
Gansu Tiaoshan Agricultural-Industrial-Commercial Group Co., Ltd.
Founded in 1997, Gansu Tiaoshan Agricultural-Industrial-Commercial Group Co., Ltd (“Gansu Tiaoshan Group”) is located in Jingtai County, Baiyin City, Gansu Province. It has over 210th mu Chinese mu is equal to 1/15 of a hectare or 1/6
of an acre) arable land. That including The national A Grade Green Food fruit base 20,000 mu, the Green Food Vegetable production base of 40,000 mu (potato, onion), the Pollution-Free Agricultural demonstration base 100,000 mu, the agricultural seed commercialization and breeding demonstration base 20,000 mu, the special medicine and herbs planting base of 30,000 mu. Its operating subsidiaries as described below primarily grow, process and sell products such as cotton, corn, barley, wheat, potatoes, beet, apple,
pear, apricot, medlar, flax seeds, black seeds, sunflower seeds, hemp seeds, corn seeds, eggs, agricultural and cement. The Tiaoshan Brand fruits have won numerous national and provincial awards as well as the Chinese Prestigious Product Award and its potato, apricot, crispy pear, and Fuji apple have been granted organic food by the China Organic Food Development Center. The Gansu Tiaoshan Group is certified as an A level national production base for organic food and fruits. The Gansu Tiaoshan Group is recognized
by the Ministry of Agriculture as a demonstration farm (a model farm) and quality-trace experimental enterprises for environment-friendly agricultural products. Tiaoshan is the China green food Development Center for the national A-class green food fruit base; this is the only National Green Food production base in Gansu province.
The Gansu Tiaoshan Group consists of the following operating entities:
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Gansu Baiyin Agriculture and Reclamation Company – Cement Factory.
The factory’s (formerly the state-owned Tiaoshan Farm Cement Plant) main products include the “Tiger-Hunting Mountain” brand class 42.5 and class 32.5 R level ordinary Portland cement, with an annual capacity of 67,000 tons. The class 32.5 R level ordinary Portland cement has
passed the ISO9001 quality system authentication and has been sold in many China places such as Lanzhou, Qinghai, Ningxia, and Inner Mongolia. Over the years, the factory has enhanced its technological expertise through continuous product development and the introduction of advanced equipment and technologies. Microcomputer technology and automation control devices have been used on all fronts. The production model has been known for the following characteristics: low in consumption, high in production, high
quality, and environment- friendly. The factory has in place a complete and thorough quality testing system, a well-designed and executed testing procedure, and is known for its stable product quality. The plant has received many honors and awards including the “Gansu Province Cement Industry Superior Quality Enterprise” title.
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Gansu Agriculture & Reclamation Seeding Co. Ltd.
was established in June 1998 and is an implementation unit for World Bank’s seeding-commercializing loan project. It is a medium-size enterprise that integrates production, processing, sales, storage, and scientific research. Gansu Agriculture engages in activities such as crops, flowers and plants, forage
grass seed, and to a lesser extent related thereto technical consultation and information service, training, production technology guidance, and agricultural chemicals. Gansu Agriculture has a quality control department, a sales department, a production field, a potato research institute, and a seed processing factory (with a processing capability of 12,250 tons per year and 5 tons per hour). In 2006 the company invested 2 million Yuan and completed a 500 ton per batch baking facility. The seed product sells
nationally to more than ten provinces and cities and exports to Japan. Gansu Agriculture pursues the “quality and credibility first” principle and puts great emphasis on technology and innovation. In 2002, Gansu Agriculture won an award as one of the Top-10 enterprises in Gansu for seed quality. In 2003, Gansu Agriculture passed the ISO9001-2000 authentication on quality control and the IS0 14001 authentication on environment governance. Gansu Agriculture’s product quality has improved continuously
while becoming more effective and more environment-friendly.
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Tiaoshan Jialv Hops Co., Ltd.,
was founded in 1982 and for the next 20 years or so mainly engaged in the production of hops. From 1989 to 2001, Tiaoshan Jialv Hops Co. revenues increased due to a rising market and product quality. From 2002 to 2004, Tiaoshan Jialv Hops Co. started to lose market share and customers to other farms in the west due to poor hops quality.
In 2006, we began to shift our production from small collective farms to large scale field industrial cultivation.
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Tiaoshan Kexing Forest & Fruit Co.
was established in June, 1998 as part of the Gansu Tiaoshan Group, one of Ministry of Agriculture’s first experimental modern enterprises. The Tiaoshan Kexing Company is primarily a fruit production enterprise. Its main products are apricots, apples, and pears. The company has passed the ISO14001 authentication.
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Tiaoshan Shuangfeng Agricultural Co. Ltd.
is located near the edge of the Tengger desert and can be easily accessed from Gansu, Qinghai, and Ningxia. It is 171 km north of Lanzhou and enjoys convenient road/railway transportation. Currently the company owns 65,500 mu in land which has adopted advanced drip irrigation technology introduced from Israel. Its main products
include seeding corn, seeding wheat, and potatoes.
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Jingtai Tiaoshan Xinglong Forest & Fruit Co., Ltd.,
was founded in 1998, and currently has 4,315 mu in fruits plantation and 332 family farm households. The company is a forest fruit production enterprise that specializes in the production of high-quality pears. Its primary products include pears, apricots and apples. In 2002, the company developed 766 mu in high-quality
pears and 775 mu in high-quality apricots. In 2004, it developed 879.9 mu in high-quality pears. Fruit production has improved from 2,000 kg per mu in the 1990s to a current level of 3,000 kg. Production rates also improved from 50% to a current level of 80%.
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Jingtai Tiaoshan Poultry Cultivation Co., Ltd
. was founded in 1985 and currently owns 8 egg hen houses and 5 nurturing houses. The company is mainly engaged in laying hens raising, feed processing and sales, domestic animal anti-epidemic service and high-tech development, and grain and oil processing and sales. There are 2 major varieties, Hailan and Haisai. Both
produce brown eggs also known as red-skin eggs.
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Jingtai Tiaoshan Yafei Forest & Fruit Co., Ltd.
The company is mainly engaged in the processing and sale of fruits. It is one of the A level national “organic fruit” production bases with approximately 23, 700 mu in land. Among other things, our orchards occupy an area of 15,000 mu, including 9,500 mu of pear orchard, 2,100 mu of apple orchard, and
1,600 mu of apricot orchard, which have a capacity of producing 37,000 tons of various fruits every year. We primarily produce “Zaosu Pear”, “Huangguan Pear”, “Huangjin Pear”, “Fuji Red Apple”, “Dajie Apricot” and candied fruits with the “Tiaoshan” brand and sell to Gansu, Interior Mongolia, Ningxia, Qinghai, Henan, Shenzhen, Hong Kong, Macau and Northeast Asian countries. Yafei has long been recognized as “National Grade A Green Food
Production Base”, “National Green Agriculture Model Enterprise”, “National Non-Environmental Damage Agricultural Product Model Base Farm”, “Gansu Province Agriculture Industrialization Leading Enterprise” and, “National Modern Reclamation Model Region” since 2004.
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Jingtai Tiaoshan Yuanfeng Agricultural Co., Ltd.
Founded in 1989, the company currently owns 21,585 mu in land, including 18, 332 mu of arable land. It is a medium-size modem agricultural enterprise that integrates production, operation, and sales. It is a demonstration (for other farms to learn agro – tech methods) farm known nationally for environment-friendly
agricultural products. The company has passed the ISO14001 environment management system authentication. Its main products include corn breeding, processing onion, and sweet corn. The national organic food development center has certified many of Jingtai Tiaoshan Yuanfeng Agricultural Co.’s products as “organic food”.
Gansu Tiaoshan Agricultural-Industrial-Commercial Group Co., Ltd.
Registration authority:
Gansu Provincial Industrial and Commercial Administration Bureau
The Business License (Provincial Level) was issued by Gansu Provincial administrative Bureau for Industry and Commerce
Legal Domicile: Taiyu Road No. 68, Tiaoshan Town, Jingtai County, Gansu Province
2.
Gansu Xiaheqing Industrial Co., Ltd.
Located in the Xiaheqing District, Jiuquan City, Gansu Corridor, it is north of the Qilian Mountain, in the middle of the Fengle River silts alleviation – the proluvial fan, east longitude 9850-9858’, north latitude 3933’-3936’, elevation 1368 meters.
With the temperate zone dry climate, it has long sunny days and big temperature difference between day and night, and as well as good light and heat conditions. Therefore, it is worldwide recognized as the “golden mile” for hops planting.
Its operating entities, as described below, include Qingsheng Rural Firm, Hongjian Rural Firm, Bianwan Rural Firm, Green Star beer raw materials Company, Lvjia hops company, Maiguan beer raw materials Company. Xiaheqing mainly grows, processes and sells products such as cotton, corn, malt, onions, potatoes, sugar beet, hops and corn seeds.
In 1998, Xiaheqing introduced the most advanced drip irrigation technology from Israel and established the 23,200 mu drip irrigation water-conservation model zone which is the largest in Gansu. In 2001, it introduced the most advanced cultivation pattern from U.K. and established a mechanized 2,000-mu net-wall hop garden. With the two great Czechoslovakian-made
hops picking machines, one large-scale clearing and selecting line, the entire net-wall hops garden became mechanized.
The company is a long-term supplier for large Chinese brewers, including Tsingtao Beer, Yanjing Beer, Huarun Beer, Yingbo Beer, and Chongqing Beer etc. We have created four “No. l s” in Chinese hops industry: planting area, unit production (also worldwide No.1), quality, and mechanization which makes us the signature of Chinese hops industry.
“Xiaheqing” hops have been recognized as “Green Food” by China Green Development Center for consecutive 15 years. In 2006, Chinese Ministry of Agriculture granted us the designation of “National Non-Environmental Damage Agricultural Product Model Base Farm”. We are listed as an exclusive or designated raw material
supplier by many of our clients.
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Jiuquan Qingsheng Agricultural Trading Co., Ltd.
was founded in 1999 as a limited liability company. Jiuquan Qingsheng Agricultural Trading Co. is located in West Gansu and mainly engages in the cultivation and sales of crops. Currently, the company owns 10,000 mu in land including 6,980 mu in cultivated land, 500 mu in forest, and 260 mu in fruits.
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Jiuquan Hongjian Agricultural Trading Co., Ltd.
Founded on August 1999, the company is located in Xiaheqing District, Jiuquan City with 18,500 mu in land including 17,500 mu of arable land. It is mainly engaged in the development and sales of agricultural and subsidiary products including poultry cultivation for the sale of eggs. Based on our good credit and excellent
services, the company has established long-term cooperation relationship with many enterprises.
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Jiuquan Bianwan Agricultural Trading Co., Ltd.,
formerly a state-operated farm, merged with Xiaheqing farm in 1971 and then further merged with Yasheng Group in 1997. It has a total land of 65,000 mu, including 2,545 mu of arable land and 1,465 mu for hops production. Jiuquan Bianwan is located at the suburb area of Jiuquan where the transportation is convenient and
the local climate is considered suitable for crops breeding and plantation. The company’s main products include hops, brewer’s barley, cotton, safflower and onions. The company’s hops enjoy great reputation and are nationally known for world-leading quality and high output. The company has become a long-term supplier for the Tsingtao Beer Group, the Yanjing Beer Group and some other beer manufacturers. The company takes pride in the implementation of advanced technology. In 1998, the company
introduced from Israel the most advanced drip irrigation equipment and technology. By introducing some of the best-selling variety of hops and having a state of the art processing facility, the company believes that it has greatly improved its prestige and competitiveness in both domestic and international market.
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Jiuquan Xiaheqing Lvxing Greenstar Hops Co., Ltd.
specializes in the cultivation and processing of hops. With an ideal local climate, the company has become the largest hops production base in Gansu with 18,857 mu in land, including 17,846 mu of cultivation field and an annual output of 550 tons. The company uses patterned cultivation and standardized procedure in
managing the hops field. Hops produced here are known for their body, color, fragrance, purity, moisture, high formic acid level, and packaging. The company has won many awards including the National Science Committee Advanced Technology Award.
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GanSu Xiaheqing-Lujia Hops Co. Ltd.
was founded in 2001 and specializes in the production of pellet hops. Pellet hops are used for beer production. The company owns and operates one of the most advanced hops pellet production line in the nation. The company takes pride in its quality hardware/software equipment and advanced testing technology. It is one of the most
high-tech enterprises nationally in the hops cultivation and processing field with an annual production capacity of 3,000 tons.
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Jiuquan Maiguan Hops Co., Ltd.
specializes in the processing and sales of malting barley. Production was first started in 1995 with an annual capacity-by-design of 10,000 tons. The company enjoys strong technological expertise and uses the Sa Latin germinating box and high-efficiency monolayer oven for production. Products are known for their fine quality as the company
diligently carries out the “Industrial Product Quality Responsibility Standards” with a comprehensive quality control process. All quality indicators have achieved the superior grade stipulated by QB-1686¬93 standard. In September 2001, the company won the Gansu Industrial Enterprise Quality Assurance Certificate; in November 2001, it was voted “Quality Confidence Brand” by the China Quality Examination Association; and the company has won many other awards and prizes from organizations
such as the China Technology Supervision Information Association and the Gansu Provincial Industrial and Commercial Administration Bureau.
Registration Authority: Jiuquan Prefectual Administrative Bureau for Industry and Commerce. The business license (Prefectual Level) was issued by Jiuquan Prefectual Administrative Bureau for Industry and Commerce, Gansu, Province. Legal Domicile: Aviation Road No. 2, XiaHequing, Jiuquan City, Gansu Province.
3.
Gansu Jinta Yongsheng Agricultural Development Company
. Gansu Jinta Yongsheng Agricultural Development Company is located in Jinta County, Jiuquan City, Gansu Province, founded in 1996. Yongsheng mainly grows, processes, and sells products such as cotton, onions, apples, pears, apricots, and sunflower seeds.
It has over 1,400 employees and approximately 19,000 mu of arable land.
Registration Authority: Jinta County-Level Administrative Bureau for Industry and Commerce, Gansu Province Legal Domicile: ShengDian, Jinta County, Gansu Province
4.
Gansu Hongtai Agricultural Technology Co., Ltd.
Gansu Hongtai Agricultural Technology Co., Ltd. is located in Gao Tai County Zhangye City, Gansu Province, founded in 1999. It has over 1,700 employees and approximately 19,900 mu of arable land. Hongtai mainly grows, processes and sells products such as cotton,
corn, barley, onions, potatoes, apples, pears, apricot, wolfberry, cumin, and licorice
Registration Authority: Jiuquan Prefectural Administrative Bureau for Industry and Commerce. The business license was issued by Jiuquan Prefectural Administrative Bureau for Industry and Commerce, Gansu, Province. Legal Domicile: Aviation Road No. 2, XiaHeqing, Jiuquan City, Gansu Province.
5.
Gansu Jinta Yuantai Commercial Trading Co., Ltd.
Gansu Jinta Yuantai Commercial Trading Co., Ltd is located in Jinta County, Jiuquan City, Gansu Province, founded in 1999. It has 175 employees. The company mainly grows, processes, and sells products such as barley. The company
is also a commercial enterprise that engages in the buying and selling of agricultural and subsidiary products as well as the supply of agricultural production materials. During the season, the company sends representatives to places such as Jiuquan, Zhangye, and Wuwei to set up purchasing/sales centers. Annual average purchase of brewer’s barley is about 10,000-30,000 tons; annual purchase of chemical fertilizers and other materials is about 30 tons.
Registration Authority: Jinta County-Level Administrative Bureau for Industry and Commerce, Gansu Province. The business license was issued by Jinta County-Level Administrative Bureau for Industry and Commerce, Gansu Province. Legal Domicile: ShengDiwan Jinta County, Gansu Province
6.
Gansu Jinta Hengsheng Agricultural Development Co., Ltd.
Gansu Jinta Hengsheng Agricultural Development Co., Ltd is located in Jinta County, JiuQuan City, Gansu Province and mainly grows processes and sells products such as cotton, soybeans, onions, potatoes, apples, pears, apricot, hops, and black seeds. It
has over 1,600 employees and approximately 19,100 mu of arable land.
Registration Authority: Jinta County-Level Administrative Bureau for Industry and Commerce, Gansu Province. The business license was issued by Jinta County-Level Administrative Bureau for Industry and Commerce, Gansu Province. Legal Domicile: ShengDiwan Jinta County, Gansu Province.
7.
Gansu Jinta Xingsheng Industrial Co., Ltd.
Gansu Jinta Xingsheng Industrial Co., Ltd is located in Jinta County, Jiuquan City, Gansu Province, with over 1,600 employees and approximately 30,000 mu arable land. The company mainly grows, processes and sells products such as cotton, alfalfa, barley, onions, peas,
apples, pears, apricot, and black seeds.
Registration Authority: Jinta Count-Level Administrative Bureau for Industry and Commerce, Gansu Province. The business license (County level) was issued by Jinta Count-Level Administrative Bureau for Industry and Commerce, Gansu Province.
Legal Domicile: ShengDiwan Jinta County, Gansu Province.
8.
Gansu Yasheng America Trade Co., Ltd.
Gansu Yasheng America Trade Co., Ltd was set up as a subsidiary of Yasheng Group. The main responsibilities of this company will be (i) to manage investment funds coming from the Company through equity offerings, debt, or other financing methods. The funds will be invested
into various subsidiaries and new growth projects for the Company; (ii) to manage incoming revenues from foreign sales or import and export businesses; (iii) to set up new product development, sales, and marketing entities with domestic and international administration consolidated into the company; (iv) to manage outgoing funds from the PRC for the purpose of trade, investment, or other types of financial transactions.
Registration Authority: Gansu Provincial Industrial and Commercial Administration Bureau. The business (Provincial Level) was issued by Gansu Provincial Administrative Bureau for Industry and Commerce.
Legal Domicile: 12/F, East of Yasheng Bldg. 105 Qin’an Road, Chengguan, Lanzhou, Gansu Province.
Three new subsidiaries
9.
Rouge Mountain Mining Group Corp (AZ)
On November 21, 2012, we formed Rouge Mountain Mining Group Corp. in Arizona. This subsidiary is an exploration stage company formed to develop mining claims in La Paz County, Arizona and to facilitate future joints ventures with other mining companies in the United States. This new subsidiary has no operations yet.
Registration authority: State of Arizona, File number: 1805099-3
Legal Domicile: 490 Moon Mountain Ave. #111, Quartzite, AZ 85346
Lemco Yasheng LLC
We entered into a Letter of Intent dated November 1, 2012 with LEMCO Investments Limited, (the BVI and the UK), whereby both parties expressed an interest in forming a joint venture to explore opportunities of mutual interest for the development of land-use and forestry conservation projects, including industrial agriculture, carbon emissions reductions
and other forms of payments for environmental services on lands primarily in Latin America owned or controlled by LEMCO.
On January 25, 2013, the Company formed Lemco Yasheng LLC to facilitate the joint venture once executed. The company is in its due diligence phase of the endeavor.
Registration Authority: State of California, entity number: 201306310223
Legal domicile: 805 Veterans Blvd, #225, Redwood City, CA 94063
Yasheng Greenphil LLC
We entered into an agreement in September 2012 with Greenphil Agua-Culture & Hydroponics Holding, Inc (Manila, Philippines) and Greenphil Aqua-Culture & Hydroponics, LLC (California), where all parties expressed an interest in forming a joint venture to conduct business development in the Republic of the Philippines. This business will include
agua-culture and Hydroponics, fanning, mining and other projects.
February 8, 2013 the Company formed Yasheng Greenphil LLC to facilitate the joint venture once executed. The Company is in its due diligence phase of the endeavor.
Registration Authority: State of California, entity number: 20304210136
Legal Domicile: 805 Veterans Blvd., #228, Redwood City, CA 94063
Angel Star Nutrition LLC
Dec 31, 2013 Angel Star Nutrition LLC -- a Delaware-based Limited Liability Company.
Yasheng Group and IBC will be co-owners of Angel Star Nutrition LLC, with each party holding a 50% stake in the venture. Mei P. Wu (President of Yasheng Group) will serve as CEO, while Steven P. White (President of Intermountain Brands Corporation) will serve as President. The purpose of the new venture is to produce powdered infant formula and other
nutrition products for distribution worldwide.
Registration Authority: State of Delaware, entity number: 140012521
Legal Domicile: 2282 South President Drive., Suite F, West Valley, Utah 84120
As a result of the Swap we no longer have the right to manage and operate the above companies with the exception of (i) Rouge MTN (AZ), (ii) Lemco Yasheng, and (iii) Yasheng Greenphil.
OUR INDUSTRY
Overview of China’s Agriculture Climate
China is the world’s most populous country and one of the largest producers and consumers of agricultural products. Over 40% of China’s labor force is engaged in agriculture. China has only seven percent (7%) of the global arable land, but feeds one-fifth (1/5th) of the world’s population. China is among the world’s largest
producers of rice, corn, wheat, soybeans, vegetables, tea, and pork. Major non-food crops include cotton, other fibers, and oilseeds.
Over the past three decades, the PRC agricultural sector has been fundamentally restructured. Agricultural production and farm household income has grown rapidly, due to a large extent to agricultural reforms undertaken by the government. Beginning in 1978, a series of institutional reforms significantly transformed a collectivized planned agricultural
sector into something resembling a capitalist structure. The crucial milestones have been the abolition of the communal property base, the introduction of the household contract responsibility system, price and market liberalization, the revision to the Land
Administration Law in 1998, and China’s admission to the World Trade Organization (WTO) in 2001. The farm household correspondingly has become an active agent in the marketplace in contrast to a passive production unit in the planned economy
In addition to the undertaken agricultural reforms and favorable policies, the Chinese government increasingly allocates more financial resources to “Villagers, Countryside and Agriculture”. The Chinese government also determined that in 2011 it will apportion $150 billion dollars into “Villagers, Countryside and Agriculture”,
an increase of $20 billion dollars over the previous year, which helps to enhance the construction of agricultural infrastructure with a focus on water resource facilities, continue improving livelihood in rural areas, and increasing peasant incomes. Further, Chinese Central Bank specifically arranged $1.5 billion more to refinance agricultural enterprises in the Northwest (including Gansu Province) which were adversely affected by the drought in 2010, thus supporting the agricultural harvests for next year.
In February 2015, the world market prices of staples food biggest gain since the middle of 2012.
The Food and Agriculture Organization of the United Nations report that the February food price index reached 208.1 points, 5.2% higher than in January, emphasizes at the same time, last month the price still 2.1 % lower than the same period of last year.
At the same time, in February of this year, the average meat prices increased by the 0.5%, and other Food prices increased by the 3.6%, vegetable oil and sugar rise respectively 4.9%, 6.2%, and dairy products prices increased by 2.9%.
FAO pointed out that Ukraine’s political tension is one of the reasons for the rise in food prices, the prices of other factors including the drought in Brazil, Southeast Asia and South America exceeding one’s expectations of weather conditions, and the demand of North America, including food and biofuel production.
The Food and Agriculture Organization of the United Nations has predicted recently that global food prices will remain high in 2015. Under the current situation of low food storage, if there happens to be poor global harvests, a new round of price increases may probably occur.
Food Supply Issues Facing China
Although China has limited arable land, China agriculture produces enough food supply to feed the country with a large population. With only seven percent (7%) of the world’s cultivated land, China has to feed one fifth (1/5th) of the world’s population. As a result, China’s agriculture is an important issue and draws wide attention
from its government and the world.
The agriculture sector has developed rapidly since reforms in the rural areas began in 1978. The major reforms were: the household contract responsibility system, which restored to the farmers the right to use land, arrange farm work, and to dispose of their output; canceling the state market monopoly of agricultural products, and of price controls
over most of agricultural and ancillary products; abolishing many restrictive policies, allowing farmers to develop diversified business and set up township enterprises so as to fire their enthusiasm for production. The reforms emancipated and developed rural productive forces, promoted the rapid growth of agriculture, particularly in grain production, and the optimization of agricultural structure.
In the 1990s, China’s agriculture and rural economy faced unprecedented difficulties and challenges. But development momentum maintained fairly good, with most products in surplus and supply and demand basically in balance every year. According to the United States Department of Agriculture (“USDA”), China leads the world in output
of grain, cotton, oil plants, fruit, meat, eggs, aquatic products and vegetables in volume.
Since 2009, prices in agricultural products have significantly risen in China. According to the prediction of Ministry of Agricultural of China, the uptrend in prices will be irreversible for a long time. There are various reasons for this uptrend in agricultural product prices. First, the supply and demand are structurally imbalanced in japonica
rice, edible oil, soybean and protein feed market where the demand increases rapidly. Second, natural disasters are showing aggregating trends which impact the risks of food production. Due to global climate changes, natural disasters occur more frequently in China. In recent years, China’s annual grain has lost up to 50 billion kilograms. Third, the situation of depending on Heaven for harvest has not fundamentally changed in China. Chiefly, agricultural infrastructure is relatively weak with a poor capacity
to resist natural disasters. Finally, the increase in production cost adversely affects the comparative benefit of food producing. The growing cost, including the increase in prices in energy resources, labor force and land, boost the increase in food price. Food production is gradually entering a high-cost era.
According to Food and Agriculture Organization of the United Nations (“FAO”), the global price soaring in basic food has triggered a new round of food crisis which is primarily due to the surging oil price and recent sharp incline in global cereal stock and will intensify the risk the supply crisis. According to USDA, it forecast a record
price increase in farm-gate products and sequent food price inflation in [2011.] [update to 2015]
Growth of China’s Agriculture Industry
According to the USDA, China and the United States are among the world’s largest agricultural producers and exporters of agricultural products. China’s agriculture continues to change as it responds to the rising and increasingly sophisticated demands of domestic and foreign consumers, adapts small-scale farm structure to global food
markets, and competes with other sectors for labor, investment capital, and scarce land and water resources.
China’s agricultural products trade has increased by 63.8% to $92.3 billion dollars in 2009 from $56.4 billion dollars in 2005, which makes China become the third largest agricultural products trading nation worldwide. The market share in the United States (“U.S.”), Association of Southeast Asia Nations, and South America is stably
rising; The market share in the European Union is essentially flat; West Asia and Africa are being actively expanded; and market share in Japan and Korea slightly declines. In this process, eastern China maintains its leading role and central China achieves steady development while northwest China (Including Gansu Province) rises in excess of the average increase, which leads to a good balance in agricultural product trade and facilitates agricultural industry restructuring and comparative advantages among different
regions.
(including Gansu Province) rises in excess of the average increase, which leads to a good balance in agricultural product trade and facilitates agricultural industry restructuring and comparative advantages among different regions.
Furthermore, the Chinese government has established the following policies to support agricultural industry and companies in China:
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Intensifying reforms of agricultural tax, exempting the agricultural tax and agricultural surtax.
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For those farmers who grow crops, the country will implement the policy of giving direct subsidies to those farmers who grow wheat and corn.
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Implementing the policy of giving direct subsidies to those farmers who acquire and renew their large-scale agricultural equipment.
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Increasing fine seeds subsidy investment.
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Stabilizing the prices of agricultural means of production.
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Conscientiously implementing the national and provincial policies of tax cuts and exemptions and price control. Providing support to enterprises in terms of taxation, investment and financing, the use of resources, personnel policy.
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Income taxes is exempted for agricultural enterprises and institutions (including the enterprises and institutions such as agriculture, land reclamation, agriculture and animal husbandry, fisheries, forestry, water conservancy, meteorology and overseas Chinese farms) engaging in planting and breeding industries and initial handling of agriculture and forest products.
CORPORATE DEVELOPMENT STRATEGY AND GROWTH
Our strategic plans mandated by the Swap include the reorganization and expansion of our product portfolios and steam-lining of our company operations to focus on key business lines that have potential for long term growth into domestic and international markets. Through the Swap reorganization, we intend to streamline management and begin to structure
the operations and internal controls to lay the foundation for global and international expansion. We have enlisted many international experts and consultants as well as added key management with western and eastern business and finance experience. We are also in the process of implementing an enterprise system to upgrade internal and external communications and internal management controls.
Our growth strategies include the following:
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Hold and grow existing domestic market positions with premium quality products with a focus on customer satisfaction with consistent availability. Continue the strategic consolidation and segmentation of our products with a focus on products with high margins and high potential growth rates.
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Continue the transformation from the collective family farms to industrial scale farming resulting in more control over the quality, consistency, and yields of our products.
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Expand product line with new byproducts by utilizing modem processed food technology (such as CO2 extraction techniques, deep processing, concentrates technology and bio mass for alternative fuels) that produces high quality products and environmental friendly products that meet the demands of the domestic and international markets. Byproducts include fruit and vegetable concentrates, food extracts, nutritional
beverages, edible and bio oils, organic and environmental friendly products, frozen and fresh vegetables, and packaging.
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Strengthen industry research focusing on shifting trends and demands for strategic cultivation. Maintain flexibility and diversification to efficiently increase or decrease production or cultivate new products that are in demand. Continue to implement the long term strategy of supplying key core food staples to domestic and international markets.
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Continue to implement product quality upgrades through high tech agro technology. Continue to acquire and develop new hybrid strains agro products that improve quality, yield, and overall cultivation methods. Expand cultivation area by implementing more high tech irrigation systems and other modem agriculture techniques. Expand seeding and propagation technologies to consistently supply growers and meet
the demands by expanding the company’s agriculture base.
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Expand domestic and international business development and sales departments to open the doors to new markets. Strategic product development to meet the demands of specialized markets such as institutions, organic niche markets, and retail volume outlets. Continue to establish long term relationships and business networks with industrial scale agricultural contracting to food and beverage processors and
distributors. Strengthen global and domestic logistics and distribution networks.
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Expand animal husbandry division, agriculture chemicals, fertilizers, animal feed, and environmental products and continue to implement the vision as leading company in sustainable agricultural practices.
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Internal and external acquisitions that bring added value in technology, management, production capabilities, and open up new markets and distribution points.
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Continue to develop high end environmental products. Currently, we have the technology and the infrastructure to grow many types of bio mass materials. We have also completed several feasibility reports and R&D for the development of bio friendly products such as bio plastics, bio mass molding products, bio fuels and others. We already have the technology and know-how to grow large quantities of bio
mass materials. We plan to develop more agriculture products from our current product portfolio by utilizing current resources and investment into processing facilities as the PRC national policy moves towards alternative energy. We are also seeking outside cooperation in building large scale alternative energy projects, such as bio plastics, bio fuels, methane, and others.
Merger & Acquisitions Strategy
We are seeking strategic cooperation and acquisition opportunities with companies that own new technology, new distribution network and innovative management with high returns. One of our long term objectives is to generate revenue and build assets and long term distribution channels outside of China through mergers and acquisitions.
We will primarily focus on acquiring companies that have a direct relationship to our existing businesses and industries. A strict due diligence process is required and a feasibility study will be conducted to ensure these acquisitions will yield long term benefits and support the global expansion plan.
Industry related distribution companies will be targeted in all product categories which can expand our reach by opening channels and upgrade the overall logistics systems. Parameters will be set to stay in line with the master plan in relation to geographical markets and strategic positioning. Long term client relationships will justify the investment
in solid quality distribution systems.
A major focus of our mergers and acquisitions strategy will be seeking profitable technologically advanced companies that have advantages and can be adopted by the Chinese operations. We believe by building from the outside - we expect to achieve our goal in becoming a global leader. Successful and innovative technologies will remain a key principle
in our policies into the future. Developing these areas will be essential in maintaining a competitive advantage.
Yasheng has successfully completed the first shipment of its Angel Star infant formula from the United States to China. Angel Star infant and toddler formulas are composed of milk ingredients sourced from high quality U.S. suppliers – all of which are under stringent USDA/FDA inspections. Other key ingredients are sourced from US suppliers
known to produce the highest quality/purity ingredients. All facilities that produce process or package Angel Star products conform to USDA and FDA inspection and license requirements. However, we have not yet received approval from the Chinese version of the FDA to sell Angel Star products in China.
Company Merger & Acquisitions in 2015
On account of the Chinese government vigorously promoting ecological protection policy and the changes of market prices of the agricultural products, we realized in 2015 that the production and operation of our company in the next few years will face the following changes:
First, the lands we farmed before the Swap were mostly distributed in the Hexi Corridor in Gansu Province in China, Although the Qilian Mountain glacier melt water can bring convenience to irrigation, the surrounding wide area belongs to semi-desert areas of China. In order to restore the ecological environment in these areas, the Chinese government
is implementing the policies of “close wells and reduce farmland areas” and “return the grain plots to forestry” in existing agricultural areas in the northwest area, strictly control and compress farming water, water has been diverted to desert regions to restore the ecological environment, which will lead to the result that our company’s farming scale will be reduced year by year.
Secondly, looking from the structure of planting, under the influence of domestic market, the prices of hop and cotton were falling.
In 2015 we realized that the influence of the above changes on our company will be long-term and that it would be difficult to further improve operating revenue and profit levels in the future. To ensure that our company can have good support of agricultural development in the future, after careful research and analysis, and the support after consultation
with the agricultural and financial experts, the company major shareholders, the Board of Directors of Gansu Yasheng Salt Group and the Board of Directors of the United States Yasheng Group, implemented the Swap on December 29, 2015 to cross over and recombine the efficient agricultural resources which are rich in water resources being operated by the wholly-owned subsidiary, Gansu Yasheng Agricultural, Industrial and Commercial Company of the major shareholder Gansu Yasheng Salt Group with the existing farmland
fields being cultivated by US Yasheng Group in the form of equivalence, which will inject US Yasheng Group better and more efficient operating assets. Our objective in the Swap was to grow pollution-free high-value-added products and facing the two markets at home and abroad, to build a brand new US Yasheng Group in order to ensure sustainable growth in operating income and profitability of US Yasheng Group.
BUSINESS SEGMENTS
Our businesses primarily consist of farming products which were grown in Northwest China up to the date of the Swap. As such, with the exception of Gansu Baiyin Agriculture and Reclamation Company, all other subsidiaries of the Company are primarily agricultural enterprises. Included in our consolidated financial statements are results from the Company’s
cement manufacturing. For the years ended December 31, 2015 and 2014, the cement business contributed less than 1% of total consolidated sales for either year. The business volume of this segment has been and is expected to continue to remain relatively constant and is not significant to warrant separate segment reporting. See Item 7. Management’s Discussion and Analysis of Financial Condition & Results of Operations.
AGRICULTURAL MARKET
Our primary business segment is premium specialty deep processed food and agricultural by- products. We specialize in cultivating, processing, marketing, and distributing a variety premium specialty agriculture product grown in Northwest China up to the date of the Swap. Our product portfolio was diverse within a broad range of industries.
A substantial portion of our products are classified as “Green Food”, and reach PRC and international quality standards. Through our R&D department, we continue to raise quality and standards as well as develop new products. We have the ability to adapt to industry trends and market factors with a flexible product portfolio. Our diverse
product portfolio includes perishables and processed foods sold in volume, repackaged into units, or sold directly to consumers in local markets. We produce main staples for animal feed, fertilizers, and agro-industry products such as edible oils, or bio-construction materials. We also grow many fresh fruits and produce which we supply the local and provincial markets.
AGRICULTURAL PRODUCTS
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Up to the date of the Swap, our primary product offerings included over 30 agriculture products under the following six areas.
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Field Crops: Cotton, Corn, Barley, Wheat, Flaxseed, Alfalfa
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Vegetables: Onion, Potato, Beet, Pea
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Fruit: Apple, Pear, Apricot
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Specialty Crops: Hops, Wolfberry, Cumin, Hemp, Liquorices Root
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Seeds: Black Melon Seeds, Sunflower Seeds, Corn Seed, Hemp Seed, Flax Seed
In additional to the major products listed above, we also produce many additional fresh fruits and vegetables which supply the local and provincial markets. We plan to further diversify our product mix and increase the processing volume to meet market demands. We also intend to establish new deep processing lines for the current product mix, which
will allow us to develop high end byproducts with the greatest growth potential, reaching new markets. Furthermore, we plan to continue to focus on our higher margin deep processed products in the future and have begun implementing a strategic plan to expand our product line with byproducts from our core cultivated agro raw materials.
We generated approximately 24.5% of our revenues from field crop based products, 15.1% from vegetable based products, 24.5% from fruits, 20.1% from specialty crops, 13.9% from seeds, and 1.9% from poultry products and the residual from other production through December 29, 2015.
Agricultural Production Markets.
The following are the categories of agricultural production markets in which our products are marketed:
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Strategic Commodities
are produced to supply domestic demands. These products are sold directly to a network of local, provincial, and national purchasing houses based on the current global market price managed by the PRC agriculture department. The products are then resold to processors for use in different industries.
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Institutional Contract Growing
is a large part of our business model. Institutions and large food and beverage processors establish long term contracts to grow products that meet the processors needs and standards. We work closely with processors to establish demands and assure quality for long term contracts.
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Consumer Direct Wholesale Markets
purchase our perishable fruit and produce to sell to the public. These products are sold directly as well as through small distribution companies and sold on a locally, provincially, and nationally.
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Domestic & Export Food Distribution
companies pre-arrange volume purchase contracts for our fresh and processed products of the Company. These products are distributed to high end markets such as Hong Kong, other coastal cities, and for export. The products are then sold to the public through supermarkets and or sold to food processors.
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Animal Husbandry
division consists primarily of eggs to be sold fresh and or packaged to wholesale food markets for resale to consumers.
PRODUCTION
Production Bases
The production of our products was supported by seven large scale agriculture bases spread out over a vast geographical area within the Northwest of China up to the date of the Swap. Over the past 30 years we have transformed the family plot style farm into industrial agriculture operations with infrastructure to support long term growth. R&D
support has fueled development with new and high tech products, placing the Company as a major strategic player within the industry. Infrastructure needs such as water, roads, and power are supported in coordination with local governments.
Prior to the Swap each of our wholly-owned subsidiaries was considered an agro-base with several types of properties making up the operations. The seven agro-bases are made up of fields, orchards, hop houses “Green houses,” with infrastructure, processing and storage areas, irrigation systems & water storage, wind breaks, power generation
plants and transmission lines to feed the agro base operations. Each company had standard storage for cultivation equipment and processing harvest materials as well as the necessary capabilities for packaging and pre-delivery storage. Post Swap we will have similar storage on cultivation equipment.
Each agro-base was made up of both modem industrial farm and local farming operations with many types of processing lines. The majority of farms use high tech irrigation allowing for water efficiency, reducing the presence of insects, therefore minimizing the need for heavy pesticides. Our focus on efficiency by applying new high breed strains, high
tech growing techniques, modem processing and storage facilities, supported by modem logistics that maximize our products’ abilities to compete. Our vision has been to establish sustainable farms utilizing agro techniques that are beneficial not only to the consumer but also to the environment.
Production Infrastructure
Up to the date of the Swap, we made substantial investments in improving fields and building infrastructure such as transportation routes, high tech irrigation, green houses, wind shelters, and cold storage. We possessed the ability to produce high quality seed stock, bio-fertilizers, bio friendly pest control technology, strict quality controls
with specifications of our operational processes such as breeding, harvesting and grading. We also established a strong technical management team to train and monitor the operations.
Prior to the Swap each of our agro-bases had a company office where administrational functions take place. Total office space was approximately 30,000 mu of land use rights of 70 years with about 35 average years left. Each agro-base administration office had a centralized system for supporting management and employees. Residence quarters for employees
and managers were provided adjacent to offices, with medical, recreational, & food services. Schools were also part of the agro-base supporting employees’ families as well as training centers for further education. In certain areas, high speed internet access was also available.
All properties pre-Swap were within the Gansu province and include modem national highways and railways to all major cities. The agro-base properties also had fuel stations, general commodities stores, and other sideline businesses.
Production Efficiency-High Tech Agriculture
We also seek to increase efficiency by applying new high breed strains, high tech growing techniques, modem processing and storage facilities, supported by modem logistics that maximize our products’ abilities to compete. Our vision has been to establish sustainable farms utilizing agro techniques that are beneficial not only to the consumer
but also to the environment.
We also invested in several new hi-tech industrial projects including the introduction of the most advanced drip-irrigation system, through a joint venture with Netafim, a global leader in advanced drip irrigation systems, and Gansu Yasheng Industrial Group. The facility has an annual capacity of 120 million meters, all of which is carried out according
to Netafim technical standards. The facility offers irrigation systems and related technology that aid in the optimization of water and fertility of crops, which increases yields while lowering production costs.
The shift from traditional farming to modem, hi-tech precision agriculture is expected to make us the largest, high efficiency agriculture base in China.
Expansion of Production Capacity
We believe that an expansion of capacity is needed to satisfy increased demand for our products. In order to increase our production capacity, we must make capital investment to build additional cultivation bases and processing facilities to satisfy the projected demand of our products.
LOCATION
Our farms pre-Swap were mainly located in Gansu Province in China. The terrain in Gansu Province is long and narrow with very different geomorphologic landforms. The annual average rainfall is 100-300 mm with long hours of sunshine and sandy land.
The irrigation water mainly comes from the Yellow River and the glacial mineral waters of the Qilian Mountains. The soil and climate in Gansu Province are very suitable for the growth of potatoes, watermelons, tomatoes, barley, hops and orchards and other crops. There is also low humidity in the air and large temperature difference between day and
night. Such special climatic conditions not only reduce the occurrence of plant diseases and insect pests, but also increase the sugar density and starch accumulation in the fruits and crops of various types, resulting in producing high quality products.
Temperature in all parts of Gansu Province are expected to be higher. The increased rate of the temperature is increasing slightly from east to west. Temperature increase range is between 0.68 degrees and 0.95 degrees. The temperature increase in the western region of Gansu Province is slightly higher than that in the other parts.
Our operations were located in Gansu Province Northwest prior to the Swap where the environment is not impacted by industrialization as much as other areas in China.
We utilized various irrigation methods, including drip irrigation, river irrigation, well irrigation, pipe irrigation (tube feeding), and sprinkler irrigation, etc. The irrigation water used for our company’s pre-Swap cultivated land located in the western part of Gansu Province came primarily from the snow glacial water of Qilian Mountains.
The irrigation water used by our company’s cultivated pre-Swap land located in central and eastern parts of Gansu Province came mainly from upper Yellow River.
Among other things, 70% of our arable pre-Swap land adopted drip irrigation with a focus on fruits, corn, cotton and hops. The crops adopting the methods of river irrigation, well irrigation and pipe irrigation (tube feeding) are mainly barley and wheat. The crops adopting sprinkler irrigation are mainly liquorices and alfalfa.
To conserve water resources and to alleviate the problem of water supply shortage, pre-Swap drip irrigation became an increasingly popular choice. Modern drip irrigation technology can optimize water usage while enhancing plant beauty and health. It will control both biochemical and physical indices for crop and flower growth and allows precise adjustment
of water, fertilizer and, insecticide usage. It also moderates the extreme cooling effects sometimes produced by flood-type irrigation. We introduced the most advanced water-efficient drip irrigation techniques and equipment from Israel to ensure efficient water use on large-scale intensive agricultural projects in the fertile but water-scarce Hexi Corridor. The first drip irrigation project in Jiuquan region was completed in September 1998 and is now in successful production.
We have built four large reservoirs with a water storage capacity of 260,000 cubic meters each. The crops served by drip irrigation generally can get water-soluble liquid fertilizer through the drip irrigation system. These fertilizers mixed directly with irrigation water, fertilizing the crops through the drip irrigation plastic pipes.
In the course of cultivation, we made full use of drip irrigation and plastic mulching to plant our agricultural products. Its roles are hydra and heat preservation which improved the utilization of fertilizer, reduced costs, and ultimately increased crop yield and quality. We have dedicated many resources to implementing modern agriculture techniques
into the fields.
SALES AND MARKETING
Our products are derived from years of agriculture experience and over the years these products have grown to be distributed to high end markets all over China, including Hong Kong. We have established a significant presence in supplying the demand for food products in China with long term contracts and cooperative relationships in meeting quality
standards. Historically, we have been able to meet supply needs by establishing agro bases with diverse portfolio products that stretch across many agriculture and food product types. We also work closely and collaborate with local government and have established an effective group of managers to minimize over production and watch global industry trends closely. In addition, we have also established strategic distribution and processing partners and who have their own distribution and processing abilities. We
anticipate no change in a distribution post-Swap.
The per unit costs of producing our products are subject to the supply and price volatility of raw materials, especially fresh fruits and vegetables which are affected by factors such as weather, growing condition and pest that are beyond our control. We believe our pricing remains competitive because of our control over necessary resources and low
cost labor, high tech agriculture practices as well as long term relationships with our customers.
Production Development, Marketing, and Sales Coordination
Our business development, marketing, and sales team is made up of staff at the local, provincial, domestic and international levels. Our business development team works directly with intuitional buyers and coordinated production. Marketing and sales teams in different regions adapt strategies to the regions needs as well as interface with customers,
business development, and directly to production bases. We have established customer direct communications with production bases with institutional buyer to ensure quality control, tracking, and delivery.
Sales Channel and Distribution Network and Pricing
Our products are sold directly to buyers and distributed through food suppliers. We also belong to the strategic commodities distribution network as a preferred supplier. We take pride in the long term relationships it has established for a consistent flow of product with continued product satisfaction. A major portion of the Company’s business
is contract growing for institutional food and beverage processors and sold directly to processors.
We currently sell our products to both distributors and direct customers across 19 provinces in China including: Gansu, Shanxi, Beijing, Shandong, Liaoning, Guangdong, Tianjin, Shanghai, Ningxia, Qinghai, Hebei, Inner Mongolia, Xinjiang, Jilin, Hubei, Guizhou, Xizang, and Hainan. At December 31, 2014, we had approximately 238 distributors and 41
direct customers in China. We export our products indirectly through the Chinese companies with import and export qualification and licenses.
Our distributors sell our products to their various customers, including food processors, supermarkets and wholesale stores. Since 2002, we have been fully implementing the operation approach of “contracted management, unified purchase and sale”. We begin to grow crops in March and April each year. The harvest seasons are from the end
of June to mid-November. About 70% of our sales are sold across the country through the distribution network. At the end of each year and at the beginning of the second year, supply and sale contracts of that year will be entered into between the retail traders and the subsidiaries. In the contracts, purchase volume and products specifications will be determined generically, but the contracts do not determine the price for which the products will ultimately be sold. The price in the distribution contracts is
usually determined by the market price of the year’s harvest seasons. In the busy farming seasons, as a result of large farms, we employ tens of thousands of temporary workers in order to ensure the timely completion of harvest task.
We typically enter into annual contracts with some of our distributors that are renewed at the beginning of the year. We maintain stable relationships with our distributors, and many of them have been our distributors for more than three years. No customer or distributor accounted for more than 10% of our total revenue in fiscal year 2015.
RESALE SUPPLIERS
Up until December 29, 2015, we derived a substantial portion of the materials from which we produce our products for resale from many suppliers in Gansu and Northern China. Dependence upon a limited number of suppliers poses business risks, which is one reason that we have a diverse choice of vendors for our operations. These suppliers make up seed,
animal feed, fertilizer, agro business materials, incidental construction materials, and other related agriculture industry supplies companies.
COMPETITION
Since we were the largest agriculture company in Northwest China and provide premium quality products to the market, we believe we faced little direct competition in Northwest of China. Most of our competitors are smaller-sized local farms or medium size food processing companies. Compared to these competitors, we believe we have more diversified
products, higher production capacity and greater resources as well as long term strategic relationships with national clients. We are designated as a national strategic supplier of commodities and supported with long term contracts with major institutions.
Finding a competition model is difficult because our product portfolio is very diverse across six agricultural and food industry markets. Our business model is unique in the way that our agro bases cultivate, process, and distribute many agricultural products but also produce many byproducts. However, we expect more competition to come from overseas
as the
WTO opens up the market to foreign competition. With increased international and domestic investment into medium enterprises, we anticipate that there may be more competition from niche enterprises focusing on high end products.
Some of Chinese major agriculture companies, such as Chaoda, continue to diversify their product portfolio focusing on industries related to us. We are also facing competition from the following companies:
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China National Cereals, Oil and Foodstuffs Corporation (COFCO) operates many businesses, among them a food importer and exporter and a bottler for Coca-Cola products in mainland China. The company holds a monopoly on mainland China’s grain trade, but COFCO’s interests are diversified to include tea, wine, edible oils, canned food, confectionery, ingredients, livestock and meat, hotels, packaging,
real estate, and finance. Nine major divisions and more than 30 subsidiaries offer brands including Fortune edible oils, jellied candies, Jojok meat, Great Wall wines, the Gloria Hotel Group, and Le Conte chocolate. COFCO is state-owned and under the administration of China’s Assets Supervision and Administration Commission.
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China Grains and Oils Group (CGOG) processes and sells a variety of grain and oil products. Its activities include grain, oil food, and feedstuff processing, and domestic and international distribution of various food products. The company operates through some 21 subsidiaries that distribute wheat, corn, rice, oil and fat, oilseeds, coarse grain, and beans, among other products. CGOG sells to international
customers in the US, Europe, Japan, and throughout Southeast Asia. The company is state-owned and under the administration of China’s Assets Supervision and Administration Commission.
Competitive Position
Before the Swap all of our operations and manufacturing were located in the Northwest of China. We benefited from the favorable operations and manufacturing environment in the Northwest of China, such as lower labor rates and lower raw material costs for most of our products compared to other areas in China and the world. Our access to China’s
operational and manufacturing environment advantages is one of primary strengths. The economies of scale play an important role in our products competitiveness in the market place. We controlled vast land and natural resources that were integrated and utilized in the production of all our products. This is an important factor in being competitive in the markets served. The ongoing addition and implementation of state-of-the-art production and manufacturing technology, for both agricultural and industrial products,
provides a buffer between us and the competition for the majority of our products. Utilizing the most current production and manufacturing technology assures high quality and cost effective product.
Our Competitive Advantages
We believe that our success to date can be attributed to a combination of our strengths, including the following:
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Industry Trend Flexibility
. Our ability to adjust our agricultural structure and improve the quality of agricultural products has resulted in the comprehensive development of the agricultural economy. Planting structure has also been continuously optimized which has developed from traditional agriculture to cash crops. The production of the cash crops such as cotton,
oil, sugar, hemp, fruits, vegetables and other crop production have access to rapid development.
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Scale advantage over local competitors.
The PRC agriculture market currently is highly fragmented. We are larger than many of our domestic competitors. This provides us with many competitive advantages, including the resources to ensure high quality products and better controls to secure consistent and reliable supplies to large customers. Our scale and increasing
nationwide market exposure supports development of our brand name.
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High Tech Agriculture Abilities
. We have the characteristics of advanced level of modern agricultural technology, a high degree of organization, a large market capacity. Our ability to compete is better, we believe, than the traditional agriculture companies. The application of agricultural techniques, such as biological husbandry, genetically modified agriculture
and water-saving irrigation, has increased agricultural single rate and quality.
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Alignment with PRC Agriculture Development Policies.
We can ensure sustained and stable growth of modem agriculture in the aspects of capital, technology and manpower, and can speed up the process of industrialization of modem agriculture and export-oriented operations and can also enhance its international competitiveness. The development of our Company can adapt
to China’s development direction of agricultural policy. Based on our own funds each year, the Agricultural Development Bank of China can provide partial supporting funds.
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Successful Operating Mode.
Our operating mode of modem agriculture in our Company has reached advanced domestic level in the aspects of policy arrangements, institutional design, coverage, as well as large farms covering small farms and processing enterprises linking the farming households. We have set up and amplified a sound modem agricultural operation system which
incorporates processes to accommodate and maximize efficiencies, such as job responsibility, multilevel operating, multi-channel and multi-level responsibility sharing.
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Long Term Established Relationships.
Local, provincial and national long term relationships have been a key advantage for the company as they have established long roots in Northwest China. [Update for new location post-Swap] Our ability to take on challenges, implement large scale projects, and produce national leading products have brought much respect and confidence
by the governmental and other business leaders in China. We have been honored as one of the top leading industrial companies in China, therefore receiving preferential policies and most favored abilities to take on new projects promoted by the Central Government.
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Extensive Sales and Distribution Network.
Our extensive sales and distribution network allows us to reach a wide range of customers all over the nation. As of December 31, 2015 we had approximately [218] major regional distributors in 18 provinces. Our distributors sell our products through their own network in the region to their various customers, including food
processors, supermarkets and wholesale stores. We have a stable and effective group of distributors who helped to sell our products all over China.
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Experienced Management Team.
Our management team has over 30 years of experience in the agriculture industry. Our senior management staff has extensive local industry experience combined with international experience. We believe that our management team’s experience and capabilities have contributed greatly to our significant growth in the past years.
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High Tech Irrigation Techniques.
In our pre-Swap farming we used drip irrigation for the most efficient water application keeping the costs down. Ground and runoff water from the upper reaches of the Yellow River or Qilian Mountain glaciers therefore lowering the impact of pollution coming into the water table. Gansu province has a direct water source and is not downstream
from neighboring industrial provinces.
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Significant Barriers for New Competitors.
We have spent the past three decades investing significant resources to acquire land, build infrastructure, research and development to grow its business. A new competitor would need to acquire large tracts of land within the same geo agro conditions we have to develop the same type of diverse product line. The new competitor
would have to deal numerous local and provincial government agencies and current land tenants to secure leases and land use rights needed for large scale operations. If the competitor was able to secure the land, it would need a substantial amount of time, investment, and resources to bring operations up to our capacity. It would also take a lot of time to reach profitable operations.
COMPANIES HOLDING PROPERTIES BEING SWAPPED OUT
The names of the companies GAAT has the right to manage and operate and which have the long term land farming rights that were swapped out to GY are set forth in the following table:
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COMPANIES
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Gansu Tiaoshan Agricultural Industrial Commercial Group Co., Ltd
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Gansu Hongtai Agricultural Technology Co., Ltd.
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Gansu Xiaheqing Industrial Co., Ltd.
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Gansu Jinta Hengsheng Agricultural Development Co., Ltd.
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Gansu Jinta Xingsheng Industrial Co., Ltd.
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Gansu Jinta Yongsheng Agricultural Development Company.
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Gansu Jinta Yuantai Commercial Trading Co., Ltd.
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These seven companies are all wholly owned subsidiaries of our parent corporation, Gansu Yasheng Salt Chemical Industrial Group.
BACKGROUND OF Swap TRANSACTION
During the last quarter of 2014 management realized that because the Chinese government started promoting a new ecological protection policy and because of changes in market prices of our agricultural products, we will face the following challenges with respect to our GAAT subsidiary’s right to manage and operate the seven companies which hold
the land farming rights to the agricultural properties operated by GAAT:
First, the properties are mostly distributed in the Hexi Corridor in Gansu Province in China. Although the Qilian Mountain glacier melt water can provide water for irrigation, the area is a semi-desert. In order to restore the ecological environment in these areas, the Chinese government has begun to implement the policies of “close wells and
reduce farmland areas” and “return the grain plots to forestry” where the properties are located which limits the use of the glacier water for irrigation. As a result of this policy, the properties would be subject to restriction as to the amount of water that may be used for irrigation of crops. Consequently, we projected that GAAT’s farming operations with respect to the properties will be reduced year by year due to restrictions on our water supply.
Secondly, under the influence of domestic market forces, the prices of hop and cotton were falling, thus reducing the operating income GAAT can expect from selling these crops.
Management concluded that the influence of the above changes on our company will be long-term; that it would be difficult to further improve operating revenue and profit levels in the future. To ensure that our company will have good agricultural prospects, after careful consideration, our Chairman, Ye Dong, on or about October 2014 met with the Management
of our major shareholder, Gansu Yasheng Salt Chemical Industrial Group at Lanzhou, Gansu and proposed that GAAT transfer its right to manage and operate the seven companies that have the land farming rights over the agricultural properties currently being farmed by GAAT and in exchange receive the long term lease farming rights for the agricultural properties of our sister company, GY. The reason for the Swap was that the agricultural properties of our sister company are rich in water resources and more suitable
for farming than GAAT’s properties. Furthermore, the mix of crops grown by our sister company are not as subject to downward price pressures as are GAAT’s hop and cotton crops because they grow premium-value fruit and vegetables which can be sold at higher prices.
On or about January 2015 the Management of Gansu YaSheng Salt Chemical Industrial Group met and considered the proposal by our Chairman. The meeting took place in Lanzhou, Gansu. The Management agreed to review the proposal by our Chairman to exchange GAAT’s existing agricultural properties for those with better water supplies and higher market
prices.
Beginning in January 2015 and continuing through the spring and summer of 2015 our management reviewed and identified agricultural properties of our sister company GY, and determined that their farmlands would be appropriate for the Swap due to their better access to water and the fact that the prices for their crops were not declining as some of
GAAT’s crops. Thereafter during the period from June through August 2015 our Chinese counsel prepared documents for the Swap and our Chairman had numerous discussions with management of Gansu Yasheng Salt Chemical Industrial Group regarding the implementation of the Swap. Thereafter we procured appraisals of the incoming and outgoing properties and an audit report on the incoming assets and our Board of Directors took action by written consent on August 18, 2015 and approved the Swap. Thereafter from September
23, 2015 through September 25, 2015 our Board members reviewed this Information Statement and took action by consent on September 25, 2015 to approve the filing of this Information Statement. The Swap became effective December 29, 2015.
DESCRIPTION OF FARMLANDS BEING SWAPPED IN
The following describes the farmlands under lease management right contracts held by GY to be swapped in
:
INTRODUCTION
:
The farmland rights acquired in the Swap from GY, our sister company, consists of 76,557 mu (12,633 acres) of land in Taizhou City, Zhejiang Province, PRC, among which: 24,300 mu (4,010 acres) is a broccoli plantation, 18,000 mu (2,970 acres) is a moso bamboo and bamboo shoot plantation, 25,200 mu (4,158 acres) tangerine plantations, and 9,057 mu
(1,495 acres) is waxberry plantation. GY farmed these crops under 30 year land management leases. These properties all of which were swapped in are described as follows:
A.
24,300 mu (4,010 acres) of Broccoli Plantation
:
The plantation is located on a coastal plain in Linhai City Zhejiang Province with fertile land and favorable spring and winter weather conditions, ensuring the premium quality and high yield of broccoli. The plantation produces winter and spring broccoli. The broccoli plantation takes up 20% of the total planted area of Taizhou City. The yield of
the broccoli plantation is 1600 plants per mu per crop, with an export conformity rate of 62.5%. The plantation harvests 3 crops a year. It yields 7,290 broccoli plants conforming to the exporting standards.
B.
18,000 mu (2,970 acres) of Moso Bamboo & Bamboo Shoot Plantation
:
The plantation is located in Huangyan District Taizhou City Zhejiang Province. The yearly yield of commercial production at the plantation of moso bamboo is 45,000 tons. The plantation also yields 2,700 tons of bamboo shoots (100 kilograms of spring bamboo shoots and 50 kilograms of winter bamboo shoots per mu).
C.
25,200 mu (4,158 acres) of Huangyan Tangerine Plantations
:
The Huangyan tangerines are grown in two plantations, one consisting of 9,200 MU and another of 16,000 MU located in Huangyan District Taizhou City. Huangyan tangerines are considered premium quality and were formerly served as tribute to ancient emperors. The yearly yield of Huangyan tangerines grown at the plantations is 65,100 tons.
D.
9,057 mu (1,495 acres) of Waxberry Plantation
:
The plantation is located at Xianju County Taizhou City Zhejiang Province, being a major waxberry production zone in China with more than 100 varieties grown in the area. Donghuai waxberry is a premium quality fruit. The plantation is at high altitude with a considerable temperature difference between day and night, and the area enjoys abundant sunshine.
The waxberries at this plantation contain a high sugar level. The plantation only grows Donghuai waxberry. The yearly yield of waxberries grown at this plantation is 14,500 tons.
General Description of Growing Conditions
:
The bamboo, waxberry and Huangyan tangerine plantations are all built on small hills in mountain areas in Taizhou, a city of mild, damp and rainy climate, meeting the plants’ need for water, sunshine and temperatures. Therefore, no investment in irrigation infrastructures is needed. Moreover, the tangerine plantation has a complete irrigation
system. The broccoli plantation is built on a coastal plain with complete water, electricity, transportation and irrigation infrastructures.
Detailed Descriptions of the Particular Crops
:
Huangyan tangerine: Thin peel (0.11 cm on average), glossy yellow and orange color, small and dense oil sacs, 8-12 segments, shape of kidney, segment clothed with thin membranes, yellow juice pulps, soft and juicy, rich and sweet, smooth, tasty with aroma. Its juice contains citric acid, multivitamins, sugar, amino acid, phosphorus, iron and calcium,
etc.
Xianju Dongkui is known for its waxberry production. Dongkui waxberry grown in Xianju has a beautiful color and sweet taste. It has a big shape and a small kernel with shorter maturation period. It becomes ripe and available in the market in early June. Our waxberry is strictly managed. It has characteristics of short maturation period, and high yield.
The fruit looks beautiful from the outside. It’s big, juicy and has a unique taste. The average fruit weight is 21 grams. The highest record weight is 54 grams. Our waxberry abounds in protein, sugar, AHA, calcium, iron, glucose, fructose, citric acid, malic acid and multivitamins. It contains 10.9-14.6% soluble solids, 0.97% titratable acid, 15.23 mg vitamins per 100 g. Dongkui waxberry is a premium quality fruit.
Broccolis are identical with cauliflowers and cabbages in shape and growth habit. They belong to the cruciferae family, brassica rapa genus, cabbage species. Thanks to superb soils and favorable weather conditions, the broccoli in the plantation contains rich and comprehensive nutrition, including protein, carbohydrate, fat, minerals, vitamin C and
carotene. Based on analyses, every 100g fresh broccoli blossoms contain 3.5g-4.5g protein, wide varieties of minerals, calcium, phosphorus, iron, potassium, zinc and manganese. The broccoli grown in our plantation is exported to markets overseas, such as Japan, Korea and Russia.
Bamboo shoots are Chinese traditional cooking materials. They are tasty, crispy and have a long history of being part of peoples’ cuisines in China. They abound in protein, amino acid, fat, sugar, calcium, phosphorus, iron, carotene, vitamin B1 and B2 & C. Every 100g fresh bamboo shoots contain 3.28g protein, 4.47g carbohydrate, 0.9g fiber,
0.13g fat, 22mg calcium, 56mg phosphorus and 0.1mg iron. They contain multivitamins and carotene more than twice as much as in Chinese cabbage. As a healthy vegetable, they contain superior protein, lysine, tryptophan, threonine and phenylalanine that are critical to the human body, glutamic acid that is needed for significant protein metabolism, cystine that sustains protein structuring.
Moso bamboos belong to the grass family, phyllostachys genus, and uniaxial scattered type. They are bamboo plants in the shape of evergreen trees with giant culms as high as 20m or above and as wide as 18cm in diameter. Moso bamboos have tall culms and are evergreen for all seasons. They have beautiful looks and are resistant to frigid winters. The
bamboo also has high aesthetic and economic values. They are used in paper making, furniture manufacturing, construction and weaving hand craftsmanship.
Description of Growing Conditions of Crops Being Swapped Out
The crop plantations operated by our wholly-owned subsidiary, GAAT, which were swapped out were located in Northwest China Gansu Hexi Corrido, 32°11′42°57′ N, 92°13′~108°46′ E. GAAT’s plantations mostly dwelled in Gansu Hexi Corrido of Northwest China, which was a dry climate and lacks rainfall, with
an average yearly temperature between 0~14
℃
. The average yearly temperature of Gansu Hexi Corrido is between 4~9
℃
, and Qi Lian mountain areas 0~6
℃
, with an average yearly precipitation of about 300mm. Precipitations vary widely within the area with a difference of 42~760mm. Rainfall decreases from southeast to northwest with huge seasonal differences,
mainly concentrating from June to September. Most of the area is a dry desert climate where crops are very susceptible to disastrous weathers like sandstorm, frost and hail. Agricultural operations have relied on melting glaciers and groundwater for irrigation.
However, due to a great deal of land reclamation in recent years, underground water has been over-drawn, resulting in a substantial decrease of underground water level by more than 20m in ten years. Even though the central government of China as well as local governments has been working to launch a series of ecological restoration policies, forbidding
the use of wells to conserve farm land, converting farm land into forests and grassland, the area of arable land is shrinking continuously. Additionally glacier water has been diverted by the government to other non-agricultural areas and uses.
Despite these challenges our company were able to maintain stable revenues and profits in the past few years by using glacier melt water and groundwater, but due to further tightened national ecological restoration policies and continuously worsening farming conditions, we were not able to continue to operate sustainably under these conditions. In
order to maintain the company’s future prospects, after extensive research and field work, we decided to swap-in to GAAT, the crops GY, in Southeast China and swap-out GAAT’s low-efficiency agriculture in West China.
The below table sets forth the crops swapped in and the crops swapped out
:
|
Crops being swapped in from GY
|
Crops being swapped out from GAAT
|
|
Broccoli
|
Wheat
|
|
Moso bamboo
|
Dried corn
|
|
Bamboo shoot
|
Onion
|
|
Tangerine
|
Fruits
|
|
Waxberry
|
Pear
|
|
|
Apricot
|
|
|
Liquorice
|
|
|
Barley
|
|
|
Melon seed
|
|
|
Cotton
|
|
|
Hop
|
|
|
Malt
|
|
|
Potato
|
|
|
Medicago
|
|
|
Cumin
|
|
|
Wolfberry
|
|
|
Beet
|
|
|
Pea
|
|
|
Soybean
|
|
|
Flaxseed
|
|
|
Hybrid corn
|
|
|
Egg
|
Summary of Factors Driving Swap
The Board of Directors believe that the past agricultural business of GAAT, which was located in West China, was heavily influenced by disastrous weathers like sandstorm, frost and hail and could not produce agricultural products with high added value. The past model was unable to develop into an expandable farming operation yielding high value crops.
Also, we would have needed to make large investments in protecting agricultural production from natural disasters such as the construction of sand-fixation forests, artificial precipitation and artificial hail removal equipment. The new crops swapped-in will give a high-efficiency agriculture operation in Southeast China. As a result, the major impact of bad weather conditions of West China will no longer affect our company. While we have been successful in the past by adapting to the conditions, the government’s
ecological restoration policies will make it more difficult to support the sustainable development of our company because one of GAAT’s primary water sources will be redirected away from us over a period of years. While we did not see an immediate threat to our operations, in order to support our future growth we believe the Swap is the best strategy.
Moreover, in West China where we formerly operated, the average value per mu is about RMB 2,000 while in Southeast China coastal areas, where the farmlands being swapped in are located, the minimum value is RMB 3,600, and can be as high as over RMB 100,000 per mu.
Financial Terms of Swap
The Swap was a non-currency transaction executed between, GAAT, and, GY, whereby there was an exchange of GAAT’s farmlands by which we mean GAAT’s right to manage and operate the seven companies which hold land use farming rights currently operated by GAAT, for those managed by GY.
Summary of Lease Management Rights Held by GY)
The crop plantations described above which were swapped in were under long-term management lease agreements which entitled our sister company to grow crops on the land and realize any profits from the sale of the crops for periods and for the one-time up-front lease payments made by, GY, to the lessors of the land as summarized in the following table:
|
Plantation/crop
|
Expiration Date of Management Lease
|
Amount of up-front lease payments made by GY to the lessors
|
|
1. Tangerine Plantation (9,200 MU)
|
Dec. 31, 2039
|
RMB 184,000,000; USD $29,629,629
|
|
2. Tangerine Plantation (16,000 MU)
|
Dec. 31, 2039
|
RMB 320,000,000; USD $51,297,790
|
|
3. Broccoli Plantation (24,000 MU)
|
Dec. 31, 2039
|
RMB 240,000,000; USD $58,647,342
|
|
4. Moso Bamboo Plantation (13,000 MU)
|
Dec. 31, 2039
|
RMB 10,200,000; USD $1,643,512
|
|
5. Waxberry Plantation (9057 MU)
|
Dec. 31, 2039
|
RMB 180,000,000; USD $28,985,507
|
In order to implement the swap-in, our parent corporation and, GY, have caused the land lessors of the agricultural properties described above to enter into new lease management agreements directly with GAAT which agreements were effective upon completion of the Swap on December 29, 2015. The following is a summary of the lease management agreements
which were entered into by GAAT and the land lessors pursuant to which GAAT is entitled to all the profits earned from farming these properties for the lease term, for no additional payments to the land owner beyond those which GY already paid when it originally was granted the lease management rights:
|
Plantation Crop
|
Party From Whom We Are Receiving Lease Management Rights
|
Expiration of Term of Lease Management Rights
|
|
1. Tangerine Plantation (9,200 MU)
C
|
Linhai City Tengfei Fruit & Vegetable Professional Cooperative
|
12/31/2039
|
|
2. Tangerine Plantation (16,000 MU)
C
|
Linhai City Sitian Fruit & Vegetable Professional Cooperative
|
12/31/2039
|
|
3. Broccoli Plantation (24,000 MU)
A
|
Linhai City Sitian Fruit & Vegetable Professional Cooperative
|
12/31/2039
|
|
4. Moso Bamboo Plantation (18,000 MU)
B
|
Taizhou City Huang Yan Hou Ao Asparagus and Bamboo Professional Cooperative
|
12/31/2039
|
|
5. Waxberry Plantation (9,057 MU)
B
|
Xianju County Xiajing Golden Plum Farming and Breeding Professional Cooperative
|
12/31/2039
|
Summary of Contract Terms of the Lease Management Rights
GAAT Acquired Directly
Formerly Held by GY:
●
GAAT is entitled to the profits from managing the property and from the crops grown on the property.
●
GAAT may build production and living facilities on the land for purposes of producing the crops and housing any necessary farmhands on the property.
●
GAAT may not use the land for non-agricultural purposes.
●
GAAT may not re-lease the land to a third party or transfer the management rights to a third party.
●
At expiration of the lease management term, GAAT will be required to clean up all ground facilities and installations on the land.
INTERESTS OF CERTAIN PERSONS IN THE Swap TRANSACTION
Our Chairman, Ye Dong, is the Executive Director of our parent corporation, Gansu Yasheng Salt Chemical Industrial Group. Mr. Dong as a result of his affiliation with our parent corporation may be deemed to control 83.25% of our shares. GY, is wholly-owned by our parent corporation, Gansu Yasheng Salt Chemical Industrial Group. See "Security Ownership
of Certain Beneficial Owners and Management."
INTELLECTUAL PROPERTY
Patents
The following Chinese patents were material to protecting our products and processes in the business we previously constructed before the Swap. Chinese patents have a term of 20 years.
Patents
|
Title
|
Pat. #
|
Issued
|
|
Granular sodium sulfide production process
|
ZL03152783 .3
|
1/18/2006
|
|
A medicinal recombinant human lysozyme fusion gene and access to the methods of the drug protein
|
ZL03100582.9
|
6/1/2005
|
|
Foot and mouth disease vaccine by recombinant
|
|
|
|
Protein gene expression in the establishment of
|
|
|
|
Livestock disease foot and mouth disease virus detection antibody technology
|
ZL03100579.9
|
6/1/2005
|
|
Access to vaccine used in the production of
|
|
|
|
Foot-and-mouth rape chloroplast transgenic plants
|
ZL01145166.1
|
7/27/2005
|
|
A cloning vector to produce the treatment of
|
|
|
|
Microbial disease gene vascular endothelial
|
|
|
|
Growth factor-2 drugs naked DNA
|
ZL03100580.2
|
11/2/2005
|
|
Preparation method of natural carotene
|
ZL95 1 15709.4
|
12/3/1999
|
|
Punching with inlay-style flat-type water dropper
|
ZL2004 2 0085127
|
11/9/2005
|
|
Bored potent type inlay bonded with a flat-type water dropper
|
ZL2004 2 0085126.5
|
11/9/2005
|
|
Bored with inlay-style flat-type water dropper
|
ZL2004 2 0085125.0
|
11/9/2005
|
|
Punching-type bond with the powerful flat- type water dropper
|
ZL2004 2 0085128.4
|
11/9/2005
|
The above patents were transferred to our sister company, GY, in conjunction with the Swap and are no longer necessary for growing the crops we are focused on post-Swap. However, in the event our agronomy personnel deem such patents necessary or useful, GY will provide us with a non-exclusive royalty free license to such patents.
Trademarks
We own eight PRC registered trademarks, “YASHENG”, “TIAO SHAN”, “XIA HE QING”, “LV JIA”, “XING WEI”, “LIN DAN”, “TING TAP”, “TAI YU” “ JIUAN” “ANGEL STAR”, except for “YASHENG” and “SILVER STAR” which we
retained, the other trademarks were transferred to GY in conjunction with the Swap, as they were no longer relevant to us.
EMPLOYEES
As of December 31, 2015, we had over 10,000 employees. The majority of employees are based in China, and approximately 9 employees or contract employees are based in our U.S. headquarters. Some of our employees in China are members of a labor union. Among all the employees, approximately 59% employees are farm workers, 14% employees are salespeople,
8% employees are management staff, and 19% are technical staff.
The farm workers of Yasheng Group have been reduced from 15,000 to about 10,000 people in recent years. With the gradual improvement of quality of the leading enterprises of agricultural industrialization of Gansu Province, a large number of enterprises have gradually got rid of the development model of labor intensive and resource consumption, science
and technology have been used more and more, independent innovation grows with each passing day, make it big, make it perfect and make it strong, which has extended the industrial chain and improved the product added value.
Develop agricultural industrialization, transform step by step from an agrarian-dominated economy to an industry-dominated economy. Driven by the leading enterprises, agricultural industrialization operation will reduce the agricultural population labor and labor costs, increase sales profits, and achieve great development of modernized agriculture.
For our employees in China, we are required to contribute a portion of their total salaries to the Chinese government’s social insurance funds, including medical insurance, unemployment insurance and job injuries insurance, and a housing assistance fund, in accordance with relevant regulations. We believe that we maintain good relations with
our employees as well as offer incentive and training programs to motivate our workers. Our employees are entitled to retirement benefits calculated with reference to their salaries basis upon retirement and their length of service in accordance with a PRC government-managed retirement plan. The PRC government is directly responsible for the payments of the benefits to these retired employees. We are required to make contributions to the government-managed retirement plan based on certain percentages of the employees’
monthly salaries.
We provide the following benefits for our employees in China:
●
Employee Welfare Fund.
An amount equal to 14% of payroll is set aside by the Company for standard employee benefits.
●
Open Policy Pension.
We pay to national and community insurance agents an amount equal to 20% of payroll. This insurance continues to cover the employee subsequent to retirement
●
Unemployment Insurance.
We pay to the national employment administration entities an amount equal to 1% of payroll. Any dismissed employee thereby receives a specified amount of Family-support funds for a designated period.
●
Housing Surplus Reserve.
We pay to the national housing fund administrative entities an amount equal to 10% of payroll for deposit into the employees’ future housing allowance accounts.
RESEARCH AND DEVELOPMENT
Our research and development of new products was before the Swap primarily conducted through Yasheng Academy of Sciences and Yasheng Research Institute of Agricultural Technology, as well as several pilot and testing and training programs within our operations. Yasheng Academy of Sciences and Yasheng Research Institute of Agricultural Technology
are quasi-governmental entities that assist in the development of food products promote the development of the region. Yasheng Academy of Sciences and Yasheng Research Institute of Agricultural Technology are funded approximately 80% by the Company and the balance by the Chinese government.
Post-swap we have determined that we can have greater access to agricultural scientific research by cooperative relationships with the provincial Bureau of Agriculture and to state owned universities whose funding is broader based that that of the Yasheng Research Institute of Agricultural Technology or the Yasheng Academy of Sciences.
QUALITY CONTROL ASSURANCE
Food Quality, Safety, and Management Controls Quality Control
Food quality, safety, and management controls are of primary importance to us. We have established quality control and food safety management systems for all stages of our business, including raw material sourcing, producing, packaging, storage and transportation of our products.
Most of our products have been certified “green food” by national standards. Standards of quality and safety of agricultural products include the whole process of agricultural production. They are standards of agricultural products varieties, as well as the environmental standards of manufacturing location, production and processing technical
specifications, product classification, safety and hygiene, packing, storage and transit. We have been implementing and practicing “The Food Safety Law of the People’s Republic of China,” and incorporating international standards and procedures to meet the quality and food safety requirements of many markets.
Our products have strict quality assurance measures. For example, our hops, beer barley, cotton, potatoes and other products go through intense inspection and testing by the “PRC National Quality Inspection Bureau”. Our hops and beer barley have to meet strict standards for national beer manufacturers who have special hops and barley
quality standards, such as acid content, color and purity. Our potatoes are mainly used for producing starch and mashed potatoes with high demands on the starch content and utilize certain strains designated by our customers, such as KFC, Pepsi, and McDonalds.
Tracking Systems
We have implemented different levels of tracking for each industry and product. These systems allow our products to be traced back to the agro base and farm plot of origin and can be crossed check by our reports from our production management and technical support team. This allows for quick and efficient identification of the source of the problem
and allow for quick correction or measures to ensure safety.
Standardized Cultivation
Assuring food safety and quality controls is dependent on a system of standardized cultivation that can produce consistent products in size and flavor that are safe to consume. We implement quality control measures to ensure that through the production process from start to finish that our management, technicians and labor force follow these guidelines.
Seeds, Clones, and Sprouts
Seeds, clones, and sprouts from inception are tested and trialed to ensure consistent traits in growing performance, size, appearance, flavor, and nutrition. At this stage of cultivation the companies technical and production management team intend to be actively involved in assuring the standards are met.
Bio Friendly and Organic Fertilizers
Fertilizers are very important and we take all measures to utilized organic fertilizers. The company internally produces organic fertilizer materials within the company’s sustainable operations concept. The fertilizers used are friendly to the environment and nontoxic to water systems. Our efforts are to reduce the effects of over farmed land
on fertile soil and create a
medium for enhanced water saving techniques as well as adding additional nutrients. The quality of soil is vital and this approach achieves that goal. This approach also allows for a higher quality product with more nutrients, flavor, and appearance.
Pest and Disease Controls
The production management and technical management team regularly inspects at each operations potential problems for pest or disease. We have established a specific pest and disease management system to focus on this vital part of a successful harvest and delivery to our clients. We utilize the following techniques to minimize and control any pest
or disease issues.
●
Physical inspection is done utilizing many methods such as anti pest nets, light and other traps, sticky boards, and other techniques to minimize where pests and disease can flourish.
●
Biological methods are also implemented utilizing natural predators to the other harmful pest, as wells as organism to fight off this ongoing problematic issue. The company also utilizes natural methods such as planting other plants next to the main crops that naturally ward off pests such as, herbs, spices, and hemp.
●
We practice responsible crop management that maintains a healthy and sustainable atmosphere for our cultivation operations. This reduces the risk of pest and disease by providing the optimal conditions for our production to be hardy to withstand threats from pest and disease. This is where implementation of crop rotation and utilizing quality seeds, spouts, or transplants come into effect.
Bio Friendly Pesticides
We utilize many methods of to reach an optimal cultivation atmosphere to avoid using pesticides. We only utilize pesticides only when needed as a last choice. We reduce the need for toxic pesticides and in many cases our cultivation practices do not use them at all. We take every measure necessary to avoid products and the environment. We develop
other bio friendly pesticides that it utilizes in its own operations and plans to develop retail products for the Agro business pesticides supplies industry. The policy behind the company is to avoid any use of pesticides that would harm the quality of the product, soil, water system, or human work force. The selection of the geographic location of our production bases is also important. Part of our location selection criteria for our operations is climate that is dry and in an area that lessons the possibilities
of attacks.
Harvesting
Harvesting becomes one of the most important stages of cultivation. We also employ strict harvesting techniques to ensure product safety and quality. An entire crop can be lost or damaged because of bad harvest management. We approach this stage with care by directing a combination of resources to assure success by creating a checks and balances.
The production management team, technicians, and harvest labor force work in close coordination to properly choose the optimal time to begin harvesting and the deadlines for completion. The production managers organize and arrange for timely and secure transportation to the first stage processing area. This process is also documented and recorded with the other stages of cultivation.
Processing
We have a diverse product portfolio requiring many types of processing after production. Many techniques are undertaken and each product has a separate team to oversee this process. Processing facilities are equipped with cleaning, sorting, packaging, and required temperature storage be it dry or cold and the sales, marketing, and production management
team work closely to ensure quick delivery. All facilities follow PRC, ISO, and HACCP, processing and packaging standards and are monitored and managed by our production team and related departments.
Storage and Distribution
Our diverse product portfolio requires little storage accept for short term storage. We have also established cold and dry storage facilities for products that have those demands. All facilities are regularly inspected and follow PRC and ISO standards for cleanliness, organization, and safe working environment. Quality control measures implemented
by the production and technical management team continue all the way until the product is delivered to the customer desired location. These procedures are recorded in reports and filed for upper management.
Responsible Crop Planning and Rotation
Each agro-base is established to create a diverse product line as a balanced system within the staple needs of industrial agriculture. One product supports the growth of the other in coordination with other factors.
On an average, each base has four (4) to five (5) product focuses and a balance of supporting products that are rotated to sustain a healthy soil base. Utilizing horticulture grazing can also add value by operating responsibly. By soil testing the management team determines the lands ability to handle the needs of the prospective crop. One of our
advantages is vast amounts of land and the ability to rotate and create alternative plots while other soils rehabilitate by growing alfalfa or something similar.
SEASONALITY
Affected by seasonal agricultural production, our business is also seasonal. Our harvest seasons are from the end of June to mid-November. In the harvest seasons of crops, as a result of competition, the prices of various agricultural products demand a competitive low price, we will store our products, such as fruits, until the second year’s
Spring Festival waiting for the supply and demand to be appropriately adjusted so that prices of agricultural products can, in turn, be adjusted to an ideal price. The seasonal nature impact on our farming products are minimized by these practices.
As a result of seasonal sales price fluctuations, we have historically realized a greater portion of our net sales and of our gross profit during certain quarters of the year. The sales price of our agricultural products item fluctuates throughout the year due to the supply of and demand for that particular item, as well as the pricing and availability
of other agricultural items, many of which are seasonal in nature.
REGULATORY ISSUES AND POLICIES
Since substantially all of operations are based in China, we are regulated by all levels of governments of the People’s Republic of China, including central government, provincial government, and local governments. We are generally subject to state, local laws and regulations relating to the business, environment, health, and safety. Specifically,
we are subject to the following:
●
The Company Law of the People’s Republic of China
●
Labor Law of the People’s Republic of China
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Insurance Law of the People’s Republic of China
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The Food Safety Law of the People’s Republic of China
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Patent Law of the People’s Republic of China
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Law of the People’s Republic of China on the Prevention and Control of Water Pollution
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Law of the People’s Republic of China on Scientific and Technological Progress
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Energy Conservation Law of the People’s Republic of China
Regulations Relating to Business
Before the Swap our operations were conducted through our subsidiaries which are subject to the laws of People’s Republic of China. The practical effect of the People’s Republic of China’s legal system on our business operations in China can be viewed from two separate but intertwined considerations. First, as a matter of substantive
law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states. Similarly, the accounting laws and regulations of the People’s Republic
of China mandate accounting practices which are not consistent with U.S., Generally Accepted Accounting Principles. China’s accounting laws require that an annual “statutory audit” be performed in accordance with People’s Republic of China’s accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly
Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designate financial and tax authorities at the risk of business license revocation. Second, while the enforcement of substantive rights may appear less clear than United States procedures, Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the “United Nations’ Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).” Therefore, as a practical matter,
although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.
Regulations Relating to Crop Seed and Agriculture
The crop seed business is a highly regulated industry in the PRC. In July 2000, the Seed Law was enacted to foster the use of seed resources; to control the selection, production and use of seeds and to regulate related business operations; to protect the legal rights of producers, business operators and users of seeds; to promote seed quality; to
drive the industrialization processes of seeds and to accelerate the development of the planting and forestry industries.
Under the Seed Law, major crop seeds and tree varieties are subject to examination and approval as a pre-condition of their popularization. An applicant may apply directly for examination and approval at either the national or provincial level. Committees composed of professional experts have been established separately by the State Council’s
agriculture and forestry administrative departments and the provincial governments for the examination and approval of crop and tree varieties. Major crop seed varieties that are verified and approved by the State Council’s committee and the National Crop Variety Examination and Approval Committee may be marketed and distributed nationwide. Varieties that received provincial approval are only permitted to be marketed and distributed within the approved province.
For seed production, a permission-based system is currently in practice pursuant to the Administrative Regulation on Permission of Production and Operation of Crop Seeds, which was issued on February 26, 2001 and revised on July 1, 2004. A company engaged in the production of seeds must obtain a production license, which is issued at either the provincial
or the local level, entitling the licensee to engage in seed production in the permitted area. The level of issuing authority required for a production license varies based on the types of seeds to be produced. The production license also specifies the types of seeds the license holder may produce, the geographic region where seeds can be produced and the term of the production license. For seed distribution, a company must obtain a distribution license in order to distribute seeds in permitted areas. Generally,
a distribution license may be issued at the county level or above. A seed company must obtain a distribution license from the provincial government to distribute major crop seeds in that province, and a distribution license from the national government for national distribution.
Supervision of Agricultural Products Quality and Safety
On March 10, 2005, the Ministry of Agriculture issued the Administrative Measures for the Supervision and Spot Check of Agricultural Seed Quality, which became effective on May 1, 2005, and which permit the government’s administrations of agriculture at the county level or above to organize relevant seed administration and seed quality inspection
institutions to sample and inspect agricultural seeds that are produced and sold. A seed production and operation company that does not meet inspection standards must recall any seeds that have been sold. Such companies may not conduct sales until they meet inspection standards. A legal representative of the seed company must circulate information on the inspection to all employees, and the company must determine why the seeds failed to meet inspection standards and implement corrective measures. Such measures
include improving quality control processes, submission of rectification reports and submitting to subsequent examinations by the administration of agriculture. Our seeds have not been recalled in any inspections by the government authorities thus far.
Regulations Relating to Land
There is no private ownership of land in China. All land in the PRC is either state-owned or collectively owned, depending on the location of the land. All land in the urban areas of a city or town is state-owned, and all land in the rural areas of a city or town and all rural land are, unless otherwise specified by law, collectively owned. The state
has the right to reclaim land in accordance with law if required for the benefit of the public. Although all land in the PRC is owned by the state or by collectives, private individuals and businesses and other organizations are permitted to hold, lease and develop land for which they are granted land use rights. Land use rights can be obtained from the government for a period up to 70 years, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of
the Chinese State Land Administration Bureau upon payment of the required land transfer fee. We have received the necessary land use right certificates for our operating facilities as further described in Item 2 –Properties.
Regulations Relating to Foreign Currency
In addition, we are also subject to PRC’s foreign currency regulations. The PRC government has control over Renminbi reserves through, among other things, direct regulation of the conversion of Renminbi into other foreign currencies. Although foreign currencies which are required for current account transactions can be bought freely at authorized
PRC banks, the proper procedural requirements prescribed by PRC law must be met. At the same time, PRC companies are also required to sell their foreign exchange earnings to authorized PRC banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the PRC government.
Costs and Effects of Compliance with Environmental Laws and Regulations
We do not face any significant government regulation in connection with the production of our products. We do not require any special government permits to produce our products other than those permits that are required of all corporations in China.
Although we utilize many methods to reach an optimal cultivation atmosphere to avoid using pesticides, the use and disposal of some chemicals and pesticides are inherent aspects of our production operations. These activities and other aspects of production are subject to various environmental laws and regulations in the People’s Republic of
China. We are not a party to any dispute or legal proceeding relating to environmental matters where we believe that the risk associated with the dispute or legal proceeding would be material. We regularly monitor and review our operations, procedures, and policies for compliance with these laws and regulations. We have made substantial capital investments in our facilities to ensure compliance with environmental and regulatory laws. We believe that our operations are in substantial compliance with the laws and
regulations and that there are no violations that would have a material effect on us. Therefore, we do not anticipate that there will be any substantial costs associated with the compliance of environmental laws and regulations.
RISK FACTORS
Investment in our common stock involves risk. You should carefully consider the risks we describe below before deciding to invest. The market price of our common stock could decline due to any of these risks, in which case you could lose all or part of your investment. These factors may also cause actual results to differ materially
from the results contemplated by the forward looking statements in Management’s Discussion and Analysis. You should pay particular attention to the fact that we are a holding company with substantial operations in China and are subject to legal and regulatory environments that in many respects differ from that of the United States. Agricultural products account for a large portion of the Company’s revenues. Agriculture operations are subject to variations in supply and demand, weather, disease, input
costs and product liability. Our business, financial condition or results of operations could be affected materially and adversely by any of the risks discussed below and any others not foreseen. This discussion contains forward-looking statements. The list or risks below is not intended to be all inclusive. A complete listing of risks is beyond the scope of this document. However, investors, including our shareholders, should carefully consider, among other factors, the following risk factors set forth below.
RISKS RELATED TO OUR BUSINESS
Our agricultural assets are concentrated in one province in China and crop disease, severe weather, natural disasters and other conditions affecting the environment, including the effects of climate change, could result in substantial losses and weaken our financial condition.
Before the Swap our agricultural operations were concentrated in Gansu Province. This area is subject to occasional periods of drought. Crops require water in different quantities at different times during the growth cycle. The limited water resource at any given point can adversely impact production. Although we deployed drip irrigation systems
for its crops, the uncontrollable weather conditions may affect our agricultural productions.
Crop disease, severe weather conditions, such as floods, droughts, windstorms and hurricanes, and natural disasters, may adversely affect our supply of one or more product, reduce our sales volumes, increase our unit production costs or prevent or impair our ability to ship products as planned. Since a significant portion of our costs are fixed and
contracted in advance of each operating year, volume declines due to production interruptions or other factors could result in increases in unit production costs, which could result in substantial losses and weaken our financial condition. We may experience crop disease, insect infestation, severe weather and other adverse environmental conditions from time to time. Severe weather conditions may occur with higher frequency or may be less predictable in the future due to the effects of climate change.
An occurrence of such an event might result in material disruptions to our operations, to the operations of our customers or suppliers, resulting in a decline in the agriculture industry. There can be no assurance that our facilities or products will not be affected by any such occurrence in the future, which occurrence may lead to adverse conditions
to our operations and financial results.
Prices of agricultural products are subject to supply and demand, a market condition of which is not predictable.
Because our agricultural products are commodities, we are not able to predict with certainty what price it will receive for its products. Additionally, the growth cycle of such products in many instances dictates when such products must be marketed to achieve the maximum profitability. Excessive supplies tend to cause severe price competition and
lower prices throughout the industry affected. Conversely, shortages may drive the prices higher. Shortages often result from adverse growing conditions which can reduce the availability of the agricultural products affected. Since multiple variables can affect supply and demand, we cannot accurately predict or control from year to year what prices, either favorable or unfavorable, it will receive from the market.
In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop
products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, some of our agricultural products which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.
We could realize losses and suffer liquidity problems due to declines in sales prices for our agriculture products.
Sales prices for agricultural products are difficult to predict. It is possible that sales prices for our products will decline in the future, and sales prices for other agricultural products may also decline. In recent years, there has been increasing consolidation among food retailers, wholesalers and distributors. A significant portion of our
costs is fixed, so that fluctuations in the sales prices have an immediate impact on our profitability. Our profitability is also affected by our production costs, which may increase due to factors beyond our control.
We do not have long term commitments from our suppliers, and increases in commodity or raw product costs could adversely affect our operating results.
We may experience shortages of supplies and inventory because we do not have long-term agreements with our suppliers. Many factors may affect the cost and supply of our products, including external conditions, commodity market fluctuations, currency fluctuations, changes in governmental laws and regulations, agricultural programs, severe and prolonged
weather conditions and natural disasters. Increased costs for such commodity or raw product costs may adversely affect our operating results in the future.
Due to fluctuations in the supply of and demand for our products, our results of operations are subject to seasonal variability.
Our earnings may be affected by seasonal factors, which may cause the sale price of our products to fluctuate throughout the year, including:
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the seasonality of our supplies and consumer demand;
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the ability to process products during critical harvest periods; and
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the timing and effects of ripening and perishability.
We are subject to the risk of product contamination and product liability claims.
The sales of our products may involve the risk of injury to consumers. Such injuries may result from tampering by unauthorized personnel, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, or residues introduced during the growing, packing, storage, handling or transportation phases. While we are
subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, including internal product safety policies, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful, the negative publicity surrounding any assertion that our products caused illness or
injury could adversely affect our reputation with existing and potential customers and our brand image. We do not maintain product liability insurance.
We may not be successful in the implementation of our new technologies and new products, and our new products may be not widely accepted.
Our new technologies such as our drip irrigation system for precision agriculture or the introduction, testing and promotion of new agricultural varieties, must be able to adapt to local conditions. On the one hand, there exists the failure risk due to not being suitable for the local environment and market conditions; on the other hand, there are
risks of loss of competitive advantages due to the rising of producing similar products enterprises and other enterprises that follow to produce the similar products.
Our success depends on the same level services of our senior executives, the loss of which could disrupt our operations.
Our ability to maintain our competitive position is dependent to a large degree on the services of our senior management team. We may not be able to retain our existing senior management personnel or attract additional qualified senior management personnel. We have some employment agreements with our senior executives and loss of services or our
senior executive could disrupt our operations.
Our acquisition and expansion strategy may not be successful.
Our growth strategy is based in part on growth through acquisitions or expansion, which poses a number of risks. We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions and relationships with third parties. From time to time, we may engage in discussions regarding potential acquisitions or joint ventures.
We may not be successful in identifying appropriate acquisition candidates, consummating acquisitions on satisfactory terms or integrating any newly acquired or expanded business with our current operations. We may issue common stock, incur long-term or short-term indebtedness, spend cash or use a combination of these for all or part of the consideration paid in future acquisitions or to expand our operations. The execution of our acquisition and expansion strategy may entail repositioning or similar actions
that in turn require us to record impairments, restructuring and other charges. Any such charges would reduce our earnings. An unsuccessful material strategic transaction or relationship could result in operating difficulties and may have a negative financial impact on our business.
We cannot assure you that our acquisition growth strategy will be successful, resulting in our failure to meet growth and revenue expectations.
In addition to our internal growth strategy, we have also explored the possibility of growing through strategic acquisitions. We intend to pursue opportunities to acquire businesses in the People’s Republic of China that are complementary or related in product lines and business structure to us. We may not be able to locate suitable acquisition
candidates at prices that we consider appropriate or to finance acquisitions on terms that are satisfactory to us. If we do identify an appropriate acquisition candidate, we may not be able to negotiate successfully the terms of an acquisition, or, if the acquisition occurs, integrate the acquired business into our existing business. Acquisitions of businesses or other material operations may require debt financing or additional equity financing, resulting in leverage or dilution of ownership. Integration of
acquired business operations could disrupt our business by diverting management away from day-to-day operations. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures.
We also may not be able to maintain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits we anticipated when selecting our acquisition candidates. In addition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings. At
times, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. In addition to the above, acquisitions in the People’s Republic of China, including state owned businesses, will be required to comply with the laws of the People’s Republic of China, to the extent applicable. There can be no assurance that any given proposed acquisition will be able to comply with People’s Republic of China requirements, rules
and/or regulations, or that we will successfully obtain governmental approvals that are necessary to consummate such acquisitions, to the extent required. If our acquisition strategy is unsuccessful, we will not grow our operations and revenues at the rate that we anticipate.
We may have difficulty managing our growth.
We have been experiencing significant growth in the scope of our operations and the number of our employees. This growth has placed significant demands on our management as well as our financial and operational resources. It has and will require that we continue to develop and improve our operational, financial and other internal controls. The main
challenge associated with our growth has been, and we believe will continue to be, our ability to recruit and integrate skilled sales, manufacturing and management personnel. Our inability to scale our business appropriately or otherwise adapt to growth would cause our business, financial condition and results of operations to suffer.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
These conditions make it difficult for us to accurately forecast and plan future business requirements, and could cause us to slow or reduce our business activities. Furthermore, during challenging economic times, we may face issues gaining timely access to financing or capital infusion, which could result in an impairment of our ability to continue
our business activities. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in China, or in our industries. These and other economic factors could have a material adverse effect on our financial condition and operating results. In addition, further negative market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, lessened demand for our products and services, and increased default rates among
our customers. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in our industry.
Agriculture risks.
As an agriculture-stock company, which benefits from State preferential policies for agriculture and food, if the current preferential policies enjoyed are modified or cancelled, our business and profitability will be adversely affected. In recent years, as raw materials prices rise, international, national and private capitals are moving into the
agricultural processing industry on a large-scale to compete for resources, the purchase price of rice and other crops have risen, which has resulted in rising costs of agricultural products processing enterprises and decreased profits.
Macroeconomic policy.
Our development may be subject to multi-objective policies such as national fiscal, monetary, investment and price policies.
Natural Disasters.
Agricultural production is vulnerable to the formidable natural conditions such as wind damage, cold snap and drought, with crop yields prone to volatility.
Market competition and rising costs risks.
The agricultural market competition has become more intense, and the prices of agricultural production materials such as machinery, fertilizers, pesticides etc. which are necessary for agricultural production are increasing rapidly, which has caused a certain pressure to ours. We may not succeed in addressing these risks by improvement to agricultural
product varieties and adjustments to improve the yield and quality.
Financial risks.
Our future investment scale of the reconstruction or expansion projects is very large, which will posing a challenge to our financial management ability. We may be successful in taking an active interest in and study the national financial policies and industry guidance, actively carrying out a variety of financing activities, while taking efforts
on strengthening internal management and improving the enterprises’ profitability.
The funds required for the future development strategies and funding sources may not be raised.
As our processing enterprises purchase and store of a large number of raw materials every year, the demand for funds is large. We may not raise the funds required for the future development strategies in the capital markets using the combination of a variety of financial methods such as issuing medium-term notes, financial products and normal loan.
Risks Related to Assets and Operations in the People’s Republic of China.
Substantially all of our assets and our operations are located outside of the United States, a significant number of sales are generated outside of the United States subjecting us to risks associated with doing business in the People’s Republic of China
Our operations in China subject us to the laws and regulations of the People’s Republic of China. In addition, we are subject to risks inherent in international business activities, including:
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changes in overseas economic conditions,
fluctuations in currency exchange rates,
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potentially weaker intellectual property protections,
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changing and conflicting local laws and other regulatory requirements,
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political and economic instability,
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war, acts of terrorism or other hostilities,
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potentially adverse tax consequences, or
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Difficulties in staffing and managing foreign operations.
Limitations on Chinese economic market reforms may discourage foreign investment in Chinese businesses.
The value of investments in Chinese businesses could be adversely affected by political, economic and social uncertainties in China. The economic reforms in China in recent years are regarded by China’s central government as a way to introduce economic market forces into China. Given the overriding desire of the central government leadership
to maintain stability in China amid rapid social and economic changes in the country, the economic market reforms of recent years could be slowed, or even reversed.
Any material change in policy by the Chinese government could adversely affect investments in our business operations.
As a developing nation, China’s economy is more volatile than that of developed Western industrial economies. It differs significantly from that of the U.S. or a Western European country in such respects as structure, level of development, capital reinvestment, legal recourse, resource allocation and self-sufficiency. Only in recent years has the Chinese economy
moved from what had been a command economy through the 1970s to one that during the 1990s encouraged substantial private economic activity. In 1993, the Constitution of China was amended to reinforce such economic reforms. The trends of the 1990s indicate that future policies of the PRC government will emphasize greater utilization of market forces. For example, on March 14, 2004, an amendment to the PRC Constitution was ratified to protect private property, although private business will officially remain subordinate
to state-owned companies, which are the mainstay of the PRC economy.
Although the PRC government owns the majority of productive assets in China, during the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, we are unable to assure that:
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We will be able to capitalize on economic reforms;
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The PRC government will continue its pursuit of economic reform policies;
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The economic policies, even if pursued, will be successful;
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Economic policies will not be significantly altered from time to time; and
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Business operations in China will not become subject to the risk of nationalization.
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Since 1979, the PRC government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment
of the reform measures. This refining and readjustment process may negatively affect our operations.
Over the last few years, China’s economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the PRC government recently has taken measures to curb this excessively expansive economy. These measures have included revaluations of the Chinese currency, the Renminbi (RMB),
restrictions on the availability of domestic credit, and limited recentralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy’s excessive expansion or control inflation, and may result in severe dislocations in the PRC economy. The PRC government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects of our markets. In 2015 Chinese GDP
growth slowed and may further decline, resulting in a decline in domestic demand for our products.
Actions by the central government of China could have a significant adverse effect on economic conditions in the country as a whole and on the economic prospects for our PRC operations. Changes in policy could result in imposition of restrictions on currency conversion, imports or the source of supplies, as well as new laws affecting joint ventures
and foreign-owned enterprises doing business in China. Although China has been pursuing economic reforms, events such as a change in leadership or social disruptions that may occur upon the proposed privatization of certain state-owned industries could significantly affect the government’s ability to continue with its reform. Accordingly, there can be no assurance that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s political,
economic, and social conditions and by changes in policies of the PRC government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
To date, reforms to China’s economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future. However, we cannot assure you that, under some circumstances, the government’s pursuit of economic reforms will not be restrained or curtailed.
Uncertainties with respect to the People of Republic of China legal system could limit the legal protections available to you and us.
We conduct substantially all of our business through our operating subsidiaries in the People’s Republic of China. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The legal system is based on written statutes,
and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new People’s Republic of China laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the People’s Republic of China legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties,
which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.
Chinese legal and judicial system may negatively impact foreign investors.
In 1982, the National People’s Congress amended the Constitution of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in China. However, China’s system of laws is not yet comprehensive. The legal and judicial systems in China are still under development, and enforcement
of existing laws is inconsistent. Many judges in China lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the Chinese judiciary is relatively inexperienced in enforcing the laws that exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a
court of another jurisdiction. China’s legal system is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of PRC laws may shift to reflect domestic political changes. The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly
enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in PRC enterprises. We cannot assure that a change in leadership, social or political disruption, or unforeseen circumstances affecting China’s political, economic or social life will not affect the Chinese government’s ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
Restrictions under People Republic of China law on our People’s Republic of China subsidiaries ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise
fund and conduct our businesses.
Substantially all of our revenues are earned by our People’s Republic of China subsidiaries [Query post-split]. However, People’s Republic of China regulations restricts the ability of our People’s Republic of China subsidiaries to make dividends and other payments to their offshore parent company. People’s Republic of China
legal restrictions permit payments of dividend by our People’s Republic of China subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with People’s Republic of China accounting standards and regulations. People’s Republic of China laws and regulations allow each of our subsidiaries to allocate at least 10% of our annual after-tax profits determined in accordance with People’s Republic of China GAAP to a statutory general reserve fund until the
amounts in said fund reaches 50% of our registered capital. Payment to the statutory general reserve fund is at our discretion. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends.
Any limitations on the ability of our People’s Republic of China subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Our results of operations may be adversely impacted by currency fluctuations.
Substantially of our operations are in China. A significant portion of our revenue is in currencies other than United States dollars, primarily in Renminbi (RMB). Because our financial statements are reported in United States dollars, fluctuations in RMB against the United States dollar may cause us to recognize foreign currency translation gains
and losses, which may be material to our operations and impact our reported financial condition and results of operations.
Our Accounting Personnel have limited experience with US GAAP
Our accounting personnel have been predominately educated and trained in PRC GAAP which is different from International GAAP and US GAAP. This lack of experience and training could cause possible confusion in the application of US GAAP, weaknesses in internal control, and cause delays in the financial statement preparation process.
Lack of PCAOB Auditor Oversight Risk and Concerns
As a public company, we are required by the Sarbanes-Oxley law to be audited by a PCAOB registered auditor. Our auditor is based in China and has registered with the PCAOB. One of the requirements of this registration is to be inspected on a periodic basis by the PCAOB. These inspections include reviewing of the actual audit work papers prepared
by our auditors as well as a review of the quality control procedures of our auditor. The SEC and the PCAOB are endeavoring to arrive at a mutual understanding as to auditor inspections with the Chinese Government. The Chinese Government up until now has not allowed the PCAOB inspectors to review the work papers of our auditor.
Regular inspection by the PCAOB of public company auditors was one of the cornerstones of the Sarbanes-Oxley law. The lack of inspections is contrary to US law and deprives the current and future shareholders of any and all benefits that would be derived by this important oversight of auditors. This lack of oversight and the added expense associated
with the inspections also puts any US based audit firm in a distinct disadvantage when competing with a Chinese based audit firm for work in China.
Risks Relating to our Common Stock
There is a limited public trading market for our common stock.
Our Common Stock presently trades on the Pink OTC Markets, Inc. (“Pink Sheets”) under the symbol “HERB.” We cannot assure you, however, that such market will continue or that you will be able to liquidate your shares at the price you paid or otherwise. We also cannot assure you that any other market will be established in
the future. The price of our common stock may be highly volatile and your liquidity may be adversely affected in the future.
Our common stock is thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
The price of our common stock may be affected by a limited trading volume and may fluctuate significantly. There has been a limited public market for our common stock and we cannot assure you that an active trading market for our stock will develop or if developed, will be maintained. The absence of an active trading market may adversely affect our
stockholders’ ability to sell our common stock in short time periods, or possibly at all. In addition, we cannot assure you that you will be able to sell shares of common stock that you have purchased without incurring a loss. The market price of our common stock may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for the common stock in the future. In addition,
the market price for our common stock may be volatile depending on a number of factors, including business performance, industry dynamics, and news announcements or changes in general economic conditions.
We are controlled by our principal shareholders.
As of December 31, 2015, approximately 83% of our shares of outstanding common stock were held by our parent corporation Gansu Yasheng Salt Chemical Industrial Group, Ltd. We expect our principal shareholder to continue to use its interest in our common stock to direct our management, to significantly influence the election of our entire board of
directors, to determine the method and timing of the payment of dividends also limited by debt covenants, to determine substantially all other matters requiring shareholder approval and to control us. The concentration of our beneficial ownership may have the effect of delaying, deterring or preventing a change in control, may discourage bids for the common stock at a premium over their market price and may otherwise adversely affect the market price of the common stock. In addition, Gansu Yasheng may affect
certain corporate transactions such as a merger without seeking the other shareholders approval.
Our stock may be governed by the “penny stock rules,” which impose additional requirements on broker-dealers who make transactions in our stock.
SEC rules require a broker-dealer to provide certain information to purchasers of securities traded at less than $5.00, which are not traded on a national securities exchange. Since our common stock is not currently traded on an exchange, our common stock is considered a “penny stock,” and trading in our common stock is subject to the
requirements of Rules 15g-1 through 15g-9 under the Securities Exchange Act of 1934 (the “Penny Stock Rules”). The Penny Stock Rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also give bid and offer quotations and broker and salesperson compensation information to the prospective investor orally or in writing before or
with the confirmation of the transaction. In addition, the Penny Stock Rules require a broker-dealer to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction before a transaction in a penny stock. These requirements may severely limit the liquidity of securities in the secondary market because few broker-dealers may be likely to undertake these compliance activities. Therefore, the disclosure
requirements under the Penny Stock Rules may have the effect of reducing trading activity in our common stock, which may make it more difficult for investors to sell their shares
We have not and do not anticipate paying any dividends on our common stock; because of this the valuation of our securities could be adversely affected in the market.
We have paid no dividends on our common stock to date and it is not anticipated that any dividends will be paid to holders of our common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance our future expansion
and for the implementation of our business plan. As an investor or stockholder, you should take note of the fact that a lack of a dividend can further affect the market value of our stock, and could significantly affect the value of any investment in our Company.
As a U.S. public company we are subject to the U.S. securities laws, including Sarbanes-Oxley Act of 2002, and we have and may continue to incur significant costs and utilize our resources to comply with such laws.
As a U.S. public company we have incurred a substantial amount of accounting, legal, and additional expenses to comply with the reporting requirements under the U.S. securities laws. Our management and the former owners of the businesses we acquired were generally unfamiliar with the requirements of the United States securities laws. A failure to
adequately respond to applicable securities laws could lead to investigations by the SEC and other regulatory authorities that could be costly divert management’s attention and disrupt our business. Our current management and other personnel are devoting additional time to these new compliance requirements. These regulations have increased our legal and financial compliance costs and have made administrative cost more expensive. We will continue to incur significant costs as a result of operating as a public
company, and our management will be required to devote substantial time to meet these compliance requirements.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluations and testing of our internal controls over financial reporting to allow management to report on the effectiveness
of our internal controls over financial reporting, as required by Section 404 of the Sarbanes Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant management efforts. If we are not able to comply with the requirements of Section 404 in a timely manner, or if our accountants later identify deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.
We may issue shares of our capital stock or debt securities to complete a transaction, which would reduce the equity interest of our stockholders or subject our company to risks upon default.
We may issue our securities to acquire companies or assets. If we issue additional shares of our common stock, the equity interest of our existing stockholders may be reduced significantly, and the market price of our common stock may
decrease. If we issue debt securities as part of a transaction and we are unable to generate sufficient operating revenues to pay the principal amount and accrued interest on that debt, we may be forced to sell all or a significant portion of our assets to satisfy our debt service obligations, unless we are able to refinance or negotiate an extension
of our payment obligation. Even if we are able to meet our debt service obligations as they become due, the holders of that debt may accelerate payment if we fail to comply with, and/or are unable to obtain waivers of, covenants that require us to maintain certain financial ratios or reserves or satisfy certain other financial restrictions. In addition, financial and other covenants in the agreements we may enter into to secure debt financing may restrict our ability to obtain additional financing and our flexibility
in operating our business.
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