UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Room 3711, China Shine Plaza

No. 9 Lin He Xi Road

Tianhe County

Guangzhou City

P.R.C. 510610

(860) 20 22057860

(Address, Including Zip Code, and Telephone Number, Including

Area Code, of Registrants’ Principal Executive Offices)

 

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities to be registered pursuant to Section 12(g) of the Act:  Common Stock, $.001 par value per share

 

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

 

 

SINO AGRO FOOD, INC.

FORM 10

TABLE OF CONTENTS

 

 

Explanatory / Cautionary Notes

Sino Agro Food, Inc. is filing this Registration Statement on Form 10 under the Securities Exchange Act of 1934 ("Registration Statement") on a voluntary basis to provide current public information to the investment community and to comply with applicable requirements for the quotation or listing of its securities on a national securities exchange or other public trading market.   In this Registration Statement, unless otherwise indicated, the terms “SIAF,” “Volcanic Gold, Inc.,” “Volcanic Gold,” “Company,” “we,” “us,” and “our” refer to Sino Agro Food, Inc. and its subsidiaries.

Regarding Forward-Looking Statements

Certain of the matters we discuss in this Registration Statement may constitute forward-looking statements.  You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions which concern our strategy, plans or intentions.   All statements we make relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. All of these forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions.  While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. There may be other factors not presently known to us or which we currently consider to be immaterial that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements and projections attributable to us or persons acting on our behalf apply only as of the date of this Registration Statement and are expressly qualified in their entirety by the cautionary statements included in this Registration Statement.   We undertake no obligation to publicly update or revise any written or oral forward-looking statements, made by us or on our behalf including any of the projections presented herein, to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

ITEM 1. BUSINESS

General

 Sino Agro Food, Inc. (“SIAF”) is an integrated developer, producer and distributor of organic food and agricultural products with its subsidiaries operating in the People’s Republic of China (the “PRC”).   The Company is focused on developing, producing and distributing higher margin agricultural and aquaculture products to meet what it believes is the increasing demand from the growing middle class consumers of the PRC for gourmet and higher quality food items.

Overview

Business History.

 Our Company was initially incorporated as Volcanic Gold, Inc. (“Volcanic Gold”) on October 1, 1974 under the laws of the State of Nevada. Prior to October 14, 2005, the Company operated as a mining and exploration company. Due to the fact that the Company was unable to generate sufficient cash flows from operations, obtain funding to sustain operations or reduce or stabilize expenses to the point where it could have realized a net positive cash flow, management and the board of directors determined that it was in the best interests of the stockholders to seek a strategic alternative so that the Company could continue to operate.

On August 24, 2007, we entered into a series of agreements to effect a “reverse merger transaction” via a share exchange with Capital Award, Inc. (“Capital Award”), a Belize Corporation incorporated on November 26, 2004. These documents included a Stock Purchase Agreement, pursuant to which Volcanic Gold issued 32,000,000 shares to stockholders of Capital Award in exchange for all of the shares of Capital Award. On August 24, 2007 the Company changed its name from Volcanic Gold, Inc. to A Power Agro Agriculture Development, Inc.

On September 5, 2007 we purchased 100% equity interest in Hang Yu Tai Investment Limited (“Hang Yu Tai”) that was incorporated in Macau on September 21, 2006 from two non-affiliated shareholders of Hang Yu Tai. Hang Yu Tai that has a 78% equity interest in ZhongXingNongMu Co. Ltd. (“ZhongXing”) that was incorporated in China on March 1, 2006. The purchase price was $26,910,000, satisfied by: cash payment of $10,000,000 and the issuance of 7,000,000 shares of our common stock

On September 5, 2007 we purchased 100% equity interest in Macau Eiji Company Limited, (“Macau Eiji”) that was incorporated in Macau on September 5, 2005 from non-affiliated shareholders of Macau Eiji. Macau Eiji has a 75% equity interest in Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd., which was incorporated in China on November 27, 2007. The purchase price was $6.75 million, satisfied by: cash payment of US$2,000,000 and the issuance of 2 million shares of our common stock.

 

 

On September 5, 2007 we purchased 100% equity interest in Tri-way Industries Limited (“Triway”) that was incorporated in Hong Kong on October 28, 2005. Triway controlled a 30% equity interest in TianQuan Science and Technology, Ltd. (“TianQuan Science”) that was incorporated in China on April 4, 1999. The purchase price was $3.25 million, satisfied by: cash payment of US$1,000,000 and the issuance of one million shares of our common stock. On October 9, 2007 the Company changed its name from A Power Agro Agriculture Development, Inc. to Sino Agro Food, Inc.

By an agreement dated October 29, 2008, Triway sold its 30% equity interest in TianQuan Science to an unrelated party for consideration of $4,500,000 that was satisfied by the payment of $4,500,000 on December 18, 2008 plus our share of TianQuan Science’s profits in 2008 which amounted to $1.25 million and was paid on November 15, 2008.

By an agreement dated November 12, 2008, Triway brought a patented “Intellectual Property” namely “Zhi Wu Jei Gan Si Liao Chan Ye Hua Chan Pin Ji Qi Zhi Bei Fang Fa” registered under the Patent Number “ZL2005 10063039.9” and Certificate number “329722” of China, (Livestock feed Manufacturing Technology), for the manufacturing of Livestock feed designed and applied for the consumption of beef cattle, cows, sheep and other animals from a non-affiliated owner of the Intellectual Property. As consideration for the transaction, we paid $8,000,000 that was satisfied by $4,500,000 that was paid on December 18, 2008. The remaining balance of $3,500,000 is to be paid by cash or the issuance of our shares in three installments. The first installment was satisfied by the payment of $1,000,000 on December 31, 2009. A second installment is due December 31, 2010 for $1,000,000 and a third and final installment is due December 31, 2012 for $1,500,000. If the payment is made in our shares, the price per share will be valued at a three months weighted average as quoted on the OTC Pink Markets prior to the date of settlement.

On December 28, 2008, the Company through its then subsidiary Pretty Mountain Holdings Limited (“Pretty Mountain”), a company incorporated in Hong Kong, the Special Administrative Region of the PRC, entered into a sino-foreign joint venture agreement with the following parties for the setting up of a sino-foreign joint venture company to be named as Qinghai Sanjiang A Power Agriculture Co. Ltd. (translation in English) (“Sanjiang A Power”) in the PRC, to manufacture bio-organic fertilizer, livestock feed and to develop other agriculture projects in the County of Huangyuan, in the vicinity of the City of Xining,  Qinghai Province :

·

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

·

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

In September, 2009, SIAF carried out an internal re-organization of its corporate structure and businesses, and on September 28, 2009, SIAF’s subsidiary A Power Agro Agriculture Development (Macau) Limited (“APWAM”) acquired the Pretty Mountains’ 45% equity interest in Sanjiang A Power by way of an assignment (“Assignment”).    Application was subsequently made by the Company to the Companies Registry of Hong Kong for deregistration of Pretty Mountains under Section 291AA of the Companies Ordinance. By virtue of the Assignment, APWAM assumed all obligations and liabilities of Pretty Mountains under the SFJVA.  APWAM is a 100% owned subsidiary incorporated in the Special Administrative Region of Macau, the PRC. 10% of the equity interest in APWAM has been registered in the name of one Mr. HUNG Moon Cheung in compliance with the requirements of the laws of Macau on ownership of a company incorporated in Macau by non citizens of Macau, and the same is being held by the said Mr. HUNG in trust for and, for the benefit of, Sino Agro Food Inc. pursuant to a Deed of Trust duly executed by the said Mr. HUNG on December 20, 2007 in favor of Sino Agro Food, Inc.

In January 2010, Pan Shi Fang and Deng Jie Min (“Chinese Businessmen”) and Capital Award have entered into a Consulting Service Agreement (“the Consulting Service Agreement”), wherein Capital Award would supply the equipment and provide consulting services for the installation and construction of the fish farm and the related supporting services in Enping City, Guangdong Province of the People’s Republic of China.  It was a term of the Consulting Service Agreement that the parties thereto would form a sino foreign joint venture company (SFJVC) to own and operate the fish farm, and that Capital Award would have the right to nominate its associate company or a company within its group of companies to substitute Capital Award as a party to the SFJVC.  Upon the nomination of Capital Award, Tri-Way entered into a joint venture agreement with the Chinese Businessmen to incorporate the SFJVC to be named as Enping City Bi Tao A Power Fishery Development Co., Ltd. to own and operate the fish farm.

Our Current Business and Corporate Structure

Our executive office in the PRC is located at Room 3711, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, the People’s Republic of China 510610.  Tel: (86) 20 22057860, 22057870.   Fax:  (86) 20 22057863, 22057873. We maintain a website at www.sinoagrofood.com.  Nothing on this website is part of this Registration Statement.

 

 

 

Revenues and Incomes Generating Businesses

We conduct our operations through five primary subsidiaries, namely:

•  Capital Award Inc ., a private limited company incorporated in Belize, engaged in modern fishery project management and consultancy services;

•  Jiang Men City Heng S heng Tai Agriculture Development Co. Ltd ., through Macau Eiji Company Limited, a 100% owned Macau subsidiary, we own 75% of Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd., a sino-foreign joint venture company incorporated in the PRC, engaged in farming of Hylocereus Undatus, commonly known as Bean Capers or Pitaya, at Juntang Town, in the vicinity of the City of Enping, Guangdong Province of the PRC ;

•  ZhongXingNongMu Co. Ltd ., through Hang Yu Tai Investment Limited, a 100% owned Macau subsidiary, we own 78% of ZhongXingNongMu Co. Ltd., a private limited company incorporated in the PRC, engaged in modern dairy cows and cattle farming in the Fengning County, Province of Hebei of the PRC; and

•  Qinghai Sanjiang A Power Agriculture Co. Ltd ., through A Power Agro Agriculture Development (Macau) Limited, a 100% owned Macau subsidiary, we own 45% of Qinghai Sanjiang A Power Agriculture Co. Limited, a sino-foreign joint venture company incorporated in the PRC, engaged in manufacturing of bio-organic fertilizer, livestock feed, cash crops farming and beef cattle rearing and fattening in the County of Huangyuan, in the vicinity of the City of Xining, Qinghai Province of the PRC.

•  Tri-Way Industries Ltd, which has the right initially by cash contribution to own 25% of the SFJVC, to be named Enping City Bi Tao A Power Fishery Development Co., Ltd., in Enping City, Guangdong Province of the People’s Republic of China to own and operate the fish farm in Enping City.  The application to incorporate the SFJVC is pending approvals of the relevant authorities of the PRC Government, and we anticipate such approvals will be granted on or before May 31, 2011. Capital Award is the consultant on this fish farm project.

 

 

 

 

Capital Award Inc.

Capital Award Inc. (“Capital Award”) is currently engaged in modern fishery project management and consultancy services. We provide consulting and management services to fish farms that are adopting the “A Power Technology”.

The A-Power Technology

A-Power Technology (“APT”) is an engineered, self-contained water treatment and re-circulating aquaculture system (“RAS”) for the growing of aquatic animals on a commercial scale.  It mainly consists of the A-Power Grow Out Basin and the A-Power Treatment Stack equipment and operating techniques and procedures which Capital Award has established as essential or desirable for the establishment development and operation of the A-Power aquaculture system.   In an APT designed fish growing system, fish produced are free from diseases commonly associated with other outdoor aquaculture methods.  The system is fully integrated, automated and climate-controlled.  With strict water quality management, APT fish growing system creates a stress-free environment for the fish.  These ideal growing conditions enable improved productivity, mortality rates of less than 8% and feed-to-fish conversion ratio of 1:1 for pallet feed and 2:1 for non pallet feed.  The system is housed on land in an enclosed environment under fully controlled conditions, and by avoiding contact with any outdoor contamination and using treated water, APT RAS produces healthy farmed fish guaranteed free of antibiotics and other pollutants.

It is an environmentally friendly system that recycles all water used in the farm.  It enables the production and supply of fish in the vicinity of urban area all year round consistently.  The RAS has been commercially applied in Europe and Australia for the past 30 years and APT has been commercially developed and used in Australia since 1998.  However the RAS and APT are relatively new to the Asian countries including China.

APT is not a patented technology as it was developed upon the platform and principles of the RAS, but many component parts of the APT fish farms or the improved version thereof were designed and/or developed by Capital Award, such as:

·

solid waste filter and separator;

·

micro-bio filter for the treatment of soluble wastes;

·

ultra violet light disinfection chamber;

·

air blower configuration;

·

designs of the grow-out tanks;

·

designs of the quarantine station;

·

designs of the nursery station;

·

designs of the farm’s fish storage tanks; and

·

designs of stock feed processing lay-out plans.

APT is a unique system as it is coupled with the farm operation and management systems and supporting services developed by Capital Award, which include:

·

systems for rotational stocking of fish and rotational harvesting of fish, designed to stock the growing fish tanks with certain variety of fish of certain sizes and age group at pre-determined intervals, to provide constant production of multiple varieties all year round or as and when the markets require;

·

quality control systems to keep the quality of the water and production in check;

·

diseases control and prevention system to enhance better production cycles of the farms;

·

maintenance programs to ensure the smooth running of the farms’ equipment; and

·

training programs for the workers on standard operating procedures.

A standard A-Power Module has a surface area of 70 square meters and contains approximately 145 cubic meters of water.

 

 

The APT system is designed to attain economic efficiencies in the areas of reduced energy requirement, water usage, labor cost, low fish mortality rates and good feed-to-fish conversion rate, as compared to the conventional methods of fish farming.   

 

 

Fish Farm Development

On January 15, 2010, we executed a service and consulting contract with a group of Chinese businessmen (Chinese Businessmen), wherein Capital Award would supply the equipment and provide consulting services for the installation and construction of the fish farm and the related supporting services in Enping City, Guangdong Province of the People’s Republic of China.  It was a term of the Consulting Service Agreement that the parties thereto would form a sino foreign joint venture company (SFJVC) for the operation and management of the fish farm, and that Capital Award would have the right to nominate its associate company or a company within its group of companies to substitute Capital Award as a party to the SFJVC.  Upon the nomination of Capital Award, Tri-Way entered into a joint venture agreement with the Chinese Businessmen to incorporate SFJVC to be named as Enping City Bi Tao A Power Fishery Development Co., Ltd. to own and operate the fish farm in accordance with the terms and conditions as prescribed therein.  

The farm in Enping is being designed to have a production capacity of 500 metric tons of fish per year.    We shall provide services amounting to about $3.5 million,  includes the APT sub-license fees of $400,000, supply part of the plant and equipment up to $2,500,000, supervision and consultancy in the building of the farm structure, the grow out tanks and related installation, training of workers and other associated professional services amounting to $600,000.   The Chinese businessmen are funding this capital development amount. The species of fish intended to be grown in the Farm will be the “Sleepy Cod”, which we believe is a Chinese species in demand in the local market.  It commands average wholesale price of US$27.00 (live fish) and US$23.00 (live fish) per kilogram (recorded on June 21, 2010 and December 31, 2010 respectively).

The current progress report on the fish farm development as at December 31, 2010 is as follows:

·

All land clearing, leveling and fencing at the development site have been completed.

·

All soil testing, water quality testing and water in flow rate testing have been done.

·

Majority of the plants and equipment have been delivered.

·

Construction of the farm buildings has been in progress and within schedule (subsequently the construction of the fish farm was completed on November 26, 2010).

·

Construction of all 16 fish tanks were constructed, fully installed and fitted on December 5, 2010, and since the end of December 2010, the farm underwent a nurturing period to nurture and to grow filtration bacteria needed in the tanks for consumption of bio-mass, and as such we expect that the tanks will be ready for stocking up fingerling to grow-out into marketable size fish on or before the mid-February 2011.  We target the first sale of fish to start by July 2011.

·

Contracts on the provision of related services and consultancies needed for the operation of the farm have been organized By December 26, 2010, a new management team for the operation of the farm has been recruited consisting at present of 10 personnel including the farm manager, supervisors, skilled and non-skilled workers.

·

300,000 fingerlings have been ordered for delivery from September 2010 through November 2010.  On our last inspection at the supplier’s farm on August 18 2010, the fingerlings were at an average size of 60 mm and growing healthily.  In anticipation of a possible colder early winter, we subsequently at the end of November 2010 helped our supplier to install heating systems to cover their outdoor farms where our fingerling were being kept to ensure that our fingerlings would not suffer from any adverse effect arising from severe winter weather.   The aforesaid measure was effective and timely as the Southern China is experiencing one of its coldest winter in the early weeks of January 2011,

·

As at December 31, 2010 the Chinese Businessmen have funded just under US$3.9 Million for the development of the

Fishery covering the followings:

§

Standby diesel powered generator capable of providing electricity during outages;

§

All underground and surface drainage, water works and electrical connections;

§

Heating provided by boiler driven heat exchangers capable of heating each tanks water 6° C in 30 minutes

§

Dry storage of approximately 9,000 m²;

§

Guard house, office and staff quarters to handle up to 15 personnel;

§

Farm building measuring over 4,000 m² housing16 grow-out tanks each with the capacity to hold up to 120,000 liter of water with built-in solid waste and soluble waste filters, ultraviolet and O³ disinfectors, and aerators that will have the capacity to grow-out an average of 25 tons of fish per tank per year;

§

A nursery facility that has the capacity to grow-out 2 million fingerlings per year from 25mm per piece to 100mm per piece;

§

Freezing and cool room facilities;

§

Feed processing facilities and feed preparation rooms;

§

Landscaping areas covering more than 15,000 m² and all boundary fences of the complex; and

 

·

Subsequently the Chinese Businessmen will need to provide a further sum estimated up to US$1.3 million as working capital to cover the followings within and up to the next 8 months before incomes will be generated from the sales of fish:

§

Up to a period of 2 months for trials and testing of plants and equipment and water, nurturing of bacteria, trial growing and recording of sample species of fish to be grown in the farm, etc.;

 

 

§

Training of staffs and workers;

§

Purchases of operational, feed preparation and office plants and equipment and laboratory instruments, etc.

§

Up to 8 months of daily administration and operation expenses;

§

Stocking of spare parts and components and feed staffs etc.; and

§

Gradually and rotationally stocking of fingerlings in the farm from February to March 2011 in order to achieve the targeted sales of grown fish from July 2011 onwards.

 

Supplies of Fingerling Stocks and Feed Stocks to the proposed fish farm

Presently fingerling stocks of Sleepy Cod are readily available in the PRC, but they are not disease free (DF) fingerlings. However, a nursery, quarantine station and laboratory will be developed in the fish farm in Enping.  Capital Award will provide the training of and education for, the staff of the farm on the development of DF fingerlings so that the Sleepy Cods fingerlings will be DF certified before being released into the grow-out tanks for their grow-out.  A farm of an annual capacity of 500 tons when fully developed will require over one million pieces of fingerlings per year within one full year of operation.  As described above, we have already started ordering the fingerlings. 

“Blue bait,” which is an ocean captured small bait fish available in the PRC, will be used as the core raw materials as feed for Sleepy Cod.  The workers at the farm will be trained by Capital Award’s personnel on the preparation and formulation of the fish feed.

Sales of Fish

Sleepy Cods, especially being supplied live, have good niche markets in the local Chinese markets as well in the Asian markets. As such, Capital Award aims at selling mainly live fish and it anticipates that local wholesalers and distributors will pick up their purchase orders directly at the farm gate without the farm having to be concerned itself with the issues of delivery and logistic. All fish produced from the farm will have uniform quality standard, i.e. they will be free of any chemical and other pollutants and will be marketed and promoted accordingly.

Future Sale of Fishery Plant and Equipment and Consulting Services

In 2008, management of Capital Award studied the feasibility and viability of engaging a number of the Chinese manufacturers and factories to manufacture the main parts and components of the APT Module in the PRC and then assemble the parts and component by Capital Award’s own team of workmen.   The finished plants and equipment were found to be comparable to most the imports in quality standard but to cost up to 55% less.   Based upon this experience, Capital Award will have up to 60% of the plants and equipment required for the farms manufactured in the PRC and assembled by its own team of workmen at the fishery project sites as required by the purchasers of the fish farms.

Order Backlog

There is no backlog of orders at present in respect of any of Capital Award’s sales and services.

Competition

Many of our existing and potential competitors have substantially greater financial, marketing and distribution resources than we do.   Many of these companies have greater name recognition and more established relationships with our target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can.  If we are unable to compete successfully, our business may suffer and our sales cycles could lengthen, resulting in a loss of market share or revenues

We believe that competition within the industry is based principally on a combination of quality, price, design, responsiveness and delivery, reputation, production capacity and after sales customer services. We distinguish ourselves from our competitors by being focused on RAS technology.

There are really no competitors in the PRC as far as RAS farm is concerned.  We provide and support the APT fishery development with complete services from the designs of a farm’s lay-out and farm building’s structure to all filtration systems; from the supplies of core plants and equipment to their maintenance services; from training of workers to full management of operation services; and from the development of SPF fingerlings to the sales and marketing of the farmed fish and fish products.  There is no other RAS supplier in the PRC providing what we have provided for our clients in the PRC. Our teams of management have significant experience in the industry that covers all aspects of the industry, including RAS technologies know-how, management of farm operation, training of operators and extensive knowledge of the markets and sales.

 

 

In respect of the sales of fish, we are competing against growers/suppliers of fish and fish products of sub-standard quality, estimated to be supplied to the local markets in tens of millions metric tons per year. There is in fact no commercial farm in the PRC producing chemical and pollution free fish.  Our quality fish and fish products will be competing against high quality imports, consisting of mostly frozen items, which are being sold at premium prices.   We are confident that our live or fresh chilled fish and fish products will have better competitive edge as much logistic cost will be saved, and hence better pricings.

We also believe that by building the APT farms in the PRC will significantly reduce the investment capital required, as it would be much costly if they were to be built in any other countries. By reducing the development capital, the cost of production and sales of the fish will be reduced, whereas the competitive edge of our fish and fish products will be very much increased.

Patents, Trademarks & Licenses

We do not have ownership of any patented or trademarked intellectual property.  The APT was designed and developed by Infinity Environmental Group, a Belize corporation.  Capital Award was granted a Master License for APT for the territory of the PRC in March 2005 for a term of 60 years.   Capital Award subsequently has made many improvements to the plants and equipment to suit the conditions in the PRC, and has developed operating techniques and procedures which Capital Award has established as essential or desirable for the establishment development and operation of the APT farms.

Environmental Matters

All new developments such as the fish farm in the PRC are required to furnish an Environmental Impact Assessment (“EIA”) Report to the local authorities.   The EIA was submitted together with the aforesaid SFJVC agreement to the relevant PRC Authorities on October 29, 2010 for the application for the formation of the SFJVC.  Normally the process will take anywhere up to eight months from date of submission.

Research and Development

We have no research and development expenses.

Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd.

Macau Eiji Company Limited (“Macau Eiji”) is a 100% owned subsidiary incorporated in the Special Administrative Region of Macau, the PRC.   10% of the equity interest in Macau Eiji has been registered in the name of one Mr. HUNG Moon Cheung in compliance with the requirements of the laws of Macau on ownership of a company incorporated in Macau by non citizens of Macau, and the same is being held by Mr. HUNG Moon Cheung in trust for and, for the benefit of, Sino Agro Food, Inc. pursuant to a Deed of Trust duly executed by the said Mr. HUNG on December 20, 2007 in favor of Sino Agro Food, Inc.

Macau Eiji entered into a sino-foreign joint venture agreement with Enping City Juntang Town Hang Sing Tai Agriculture Co. Ltd. on September 5, 2007, for the setting up of a sino-foreign joint venture company known as Jiang Men Shi Heng Sheng Tai Nong Ye You Xian Gong Si (English translation: Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd.) in China.

Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd. (“HST”), in which we have a 75% equity interest pursuant to the aforesaid sino-foreign joint venture agreement, was incorporated in China on November 27, 2007.

HST is engaged in farming of Hylocereus Undatus, commonly known as Bean Capers or Pitaya or dragon fruits plant (“HU Plants”), at Juntang Town, in the City of Enping, Guangdong Province of the PRC.

We currently generate revenue by:

·

harvesting the green flowers from the HU Plants before they mature into fruits and sell them as vegetables;

·

drying the green flowers harvested and selling them as dried vegetables for human consumption; and

·

processing and packaging the dried and fresh flowers into salted, pickled and in brine vegetables.

All dried, processed and packaged green flowers are to be sold throughout the year, even after the HU Plants’ flowering season, which runs from July through October, is over.

Harvesting and Sales of HU Plant Green Flowers

HST has over 1,095.58 mu (Chinese acre), equivalent to approximately 181.79 acres, of land available for growing and processing HU Plants under Land Usage Rights granted for a term of 60 years commencing May 2007.  The land is located in the City of Enping in the southwest of Guangdong Province situated in the Zhujiang Delta Region.  It is 150km from the Guangzhou City and 250km from Hong Kong or Macau, and it has good freeway access from the aforesaid cities.

 

 

Enping is ideally suited for growing HU Plants because it has a tropical monsoon climate with short winter and long summer.  It is warm in the winter and cool in the summer with abundant rainfall.   It is one of the few areas, which have not been taken over by the progress of industrialization, ideal for growing of HU Plants in the PRC.   Before 1989, there were over 100,000 mu of HU plantation, situated among the fast growing districts in Guangdong Province, supplying HU flowers and products to the local and South East Asian markets.   By now there are less than 3,000 mu of HU Plantation left in the said old growing districts due to the industrialization progress of recent years.

A HU Plant normally takes three years to reach maturity which means that:

·

Year 1 plants yield only about 10% of green flowers, as compared to the matured plants.

·

Year 2 plants yield about 50% of green flowers, as compared to the matured plants.

·

Year 3 fully matured plants yield an average of 120,000 green flowers per year per mu over the next 25 years, the average production life span of a HU plant.

The harvesting period of HU Plants in Enping region is between middle of June to end of October each year, divided into approximately 14 harvesting intervals during the period.   During the harvesting period, HU plants naturally start to blossom with green flowers the following day after a rain, and the green flowers must be harvested right away before they bloom into colorful flowers, which are not marketable as vegetables.

Out of HST’s land holding, 187 acres were planted with HU Plants from late 2007 to current day consisting of 47 acres of 3 years old and 88 acres of 2 years old plants with the balance in new and year 1 old plants.

In 2008, the Year 2007 planting showed a yield of average of 7,500 flowers per mu in a year, resulting in a total yield of over 2.15 million pieces of flowers harvested and sold as fresh flowers.  In 2009, Year 2007 planting yielded over 16.5 million pieces of fresh flowers, whereas the Year 2008 planting showed a total yield of 2.5 million pieces of fresh flowers. Total harvesting for the season of 2010 was at about 31.5 million pieces of fresh flowers..

 

Sales of Dried Flowers Products after the Installation of the Drying and Processing Facilities

HST began in 2009 to develop the facilities for the drying and processing of the green flowers into value added products such as portion packed as “Steamed and dried flowers,” “N aturally dried flowers,” and “ Favorite dried flowers.”    In mid June 2009, the construction and fitting out of drying houses, for drying up to five metric tons of fresh green flowers per day, was completed on a 6,600 mІ plot.    The cool room facility and   the associated packaging facility were completed in March 2010.  Therefore the drying and processing facilities will be fully operational for the current season’s harvest.

All of our drying and processing facilities were developed using the traditional drying and processing systems and methods that have been used in the industry in the PRC for decades.  The traditional drying and processing methods are rather simple and straightforward processes as follows:

·

All harvested green flowers will be stored and kept cool in the cool room while waiting to be processed.

·

They will then be steamed in batches at boiling temperature for less than 15 minutes.  The naturally dried flowers will require washing and grading.  Flavored dried flowers will be aromatically cured after steaming.

·

Thereafter, they will be transferred to the drier to be dried at 140Celsius for about 3 hours and at gradually decreasing temperature for another 5 hours.

·

Packaging procedures will then follow.

·

They will then be stored and sold through the winter period until next harvest season.

Although these traditional facilities are less expensive to build than facilities using more modern dryers and processors, they are more labor intensive.  We chose the more traditional methods because of :

·

easy access to affordable pool of labor in the Enping region, and at the same time creating job opportunities for the local people .

·

our experience in the industry dictates that these traditional systems and methods produce the end products of such quality much preferred by the local markets.

·

These facilities located in the agriculture districts are regarded as temporary agriculture facilities, and as such prior approval of the regional council is not required, as long as the village committee of the County has been duly informed accordingly. In this respect, we have the consent of the village committee for the erection of the facilities.

At present, all dried flowers are being sold locally to the regional wholesalers and distributors.  They have been purchasing and collecting the dried flowers from our drying factory practically as soon as our products are ready for collection.  Therefore, we hardly have any stock of dried flowers by the end of December of the year.

 

 

Marketing and Sales

Fresh and dried flowers of HU Plants have been marketed in the PRC as well as in other Asian countries as a form of traditional health food for the Chinese population for many centuries.

However, the shelf life of fresh flowers is very short; maximum shelf life of about 3 days in non-refrigerated condition, and of about 7 days when stored at temperature of 15Celsius.   In most wet markets in the PRC, the distributors do not normally have refrigerating facilities, and as such during the harvesting seasons, the distributors do not have the capacity to sell all fresh flowers being produced across the country.

It is therefore essential for the bigger growers like us to equip the farm with drying, cooling and packaging facilities to space out sales of HU flowers all year round.

We have enough drying, cooling and processing facilities to handle the processing of the fresh flowers produced in our own farm for 2010.   However, as we shall plant more acres of HU Plants, we will need to increase the capacities of our drying and process facilities accordingly.

Fresh green flowers of HU Plants are normally sold as fresh vegetables to more than 25 wholesale markets around the City of Guangzhou.   There are many wholesalers buying dried and processed flowers directly from the processing factories without any need to sell them through any wholesale markets.

The wholesale prices for the dried HU flowers have risen from an average price of U.S. $4.68 per kilogram in 2007 to U.S. $5.85 per kilogram in 2008.  In 2009, our average selling price was at U.S. $7.06 per kilogram.     At December 31, 2010, the average wholesale price was recorded at US$7.23 per kilogram.

Future Sales and Marketing of Value Added Products

Between March and June of 2010, we processed our dried flowers into salted and pickled vegetable and in brine.  These value added flowers were packaged by packaging factories in the region into bottles, cans and vacuum packs.  We carried out sampling trial sale of such value added products in the PRC, Singapore and Malaysia in late May and early June of 2010 and found that the market receptions were promising.

We are negotiating an agreement with a Singaporean trading company to export these ranges of value added products to Singapore and Malaysia. However, we do not have a binding agreement with any of these potential sales agents at this time.

Order Backlog

There is no backlog of orders at present.

Competition

The market in the PRC for HU Plant products is extremely competitive.   According to the Chinese government statistics, at peak time there are more than 100 companies engaged in HU Plant product production in China and most of these operators source their flowers from their neighboring growers and their own farms.

Our major competitors are Zhao Qing Branch of Guangdong Zhong Dian Import & Export Inc. and He Yuan Livestock Import & Export Co. Ltd.  There are other smaller operators namely Qing Xiang Agricultural Product Co. Ltd., Sheng Yi Food Co. Ltd., Shi Feng Food Development Co. Ltd. and Hua Yao Business Farm.  At this juncture, we rank in the bottom levels of these competitors.  The larger corporations in general have greater financial and personnel resources and have achieved greater market penetration than we have.  We compete by producing quality products in a market in which we believe the rising demand for HU Plants products will supersede the supply in the foreseeable future.

Patents, Trademarks & Licenses

We do not own any patented or trademarked technology or design.

Environmental Matters

There are no material effects that compliance with national, regional or and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have upon our capital expenditures, earnings and competitive position.

 

 

We do not anticipate any capital expenditures for environmental control facilities for the remainder of our fiscal year or any future periods.

Research and Development

We have no research and development expenditures.

Government Regulation Specific to our Business

One of the incentives granted by the PRC Government to the agriculture industry, which is applicable to HST, is that the transportation of our fresh flowers to the markets are exempted from paying the toll fees charged on the highways.

 

ZhongXingNongMu Co. Ltd.

Hang Yu Tai Investment Limited (“HYT”) is a 100% owned subsidiary incorporated in the Special Administrative Region of Macau, the PRC.   10% of the equity interest in HYT has been registered in the name of one Mr. Hung Moon Cheung in compliance with the requirements of the laws of Macau on ownership of a company incorporated in Macau by non citizens of Macau, and the same is being held by Mr. HUNG Moon Cheung in trust for and, for the benefit of, Sino Agro Food Inc. pursuant to a Deed of Trust duly executed by the said Mr. HUNG on December 20, 2007 in favor of Sino Agro Food Inc

HYT has a 78% equity interest in ZhongXingNongMu Co. Ltd. (translation in English) (“ZhongXing”), and the same is being held in trust for and, for the benefit of, HYT by Mr. SUN Ximin, the owner of ZhongXing, pursuant to a Deed of Trust duly executed by the said Mr. SUN on November 12, 2007 in favor of HYT.

ZhongXing is currently operating in the following income generating activities:

·

Production and sales of fresh liquid milk;

·

Rearing and sales of beef cattle;

·

Planting of crops for the purpose of further processing into livestock feed;

·

Processing and sales of livestock feed; and

·

Processing and sales of fertilizer.

These activities are being supported by following integrated activities that are not income generating:

·

Breeding of cows and cattle; and

·

Veterinary services

 

Dairy Farm

ZhongXing’s main dairy farm operation is located in the County of Fengning, Province of Hebei in the PRC on lands approximately 1,985 acres in area, under various Land Use Rights granted by the County government.   It is about 90km away from Beijing, and a prime area for cattle and dairy cows farming as it has long daylight to sustain crops plantation up to seven months in a year.  The construction of a freeway between Beijing and Fengning is scheduled to be completed mid-year 2011.  When completed, it will take less than 1.5 hours drive to reach the Farm from Beijing, hence a much faster and easier access to the Beijing City.

The dairy farm is currently milking from 3,500 herds of cows and is equipped with:

·

the most up-to-date feed mixing machines and milking equipment;

·

efficient housing and supporting facilities that can accommodate up to 3,500 cows;

·

in house veterinary facilities and services;

·

a modern and well equipped quarantine station that has the capacity to handle up to 2,000 cows;

·

significant feed and forages storages areas to stock up to 25,000 tons of livestock feed;

·

a crop plantation on more than 1,000 acres of land; and

·

processing factories for the manufacturing of livestock feed and fertilizer.

ZhongXing’s business objective is to produce premium quality organic milk and milk products.  Organic fertilizer manufactured in house is applied in its crops plantation.   It manufactures high quality livestock feed for its herds of animals by using raw materials organically grown in the crops plantation.  In November 2008, ZhongXing’s liquid milk was certified by the China Agriculture Authority as ‘Organic Milk’, and accordingly ZhongXing has since become a commercial organic milk producer in China.   ZhongXing sold its fresh unprocessed organic milk during 2009 at an average of RMB4,500 (equivalent to $662) per ton. In early January of 2010 the PRC Government set an average wholesale price of fresh un-processed milk across the country at RMB4,100 per ton (equivalent to US$616.50 per ton based on exchange rate as at December 31, 2010 of US$1=RMB6.65) and we currently sell at this price.

 

 

At present, ZhongXing sells its fresh liquid milk mainly in bulk directly to the value added manufacturers, who process the same to make products such as yoghurt, milk candies, cream cheese and 300 other types of products.

In late November 2009, a group of associates of ZhongXing completed the development of a value added processing factory with 6 production lines situated within close proximity of ZhongXing’s headquarter in the town center of Fengning.  ZhongXing supplies fresh unprocessed liquid milk to the processing plant to for manufacturing of dairy products such as milk candy bars, yoghurt, cream cheese products, etc. in a brand name created by ZhongXing.

ZhongXing inaugurated its production of three different varieties of cream cheese products in December 2009 and sales of such products were launched at some of the Beijing City’s retailers’ premises in late December 2009 under the label of YuanTianRan, which means green and natural, and YuanTianRan products are being sold in Wal-Mart and Huahyuan supermarket stores in Beijing since March 2010.

Livestock Feed

ZhongXing also sells part of the livestock feed produced by ZhongXing in Fengning to the farmers in the region.   Raw materials such as corn, sunflowers and various other types of cereal seeds and pasture grass are shredded and mixed to the exact nutrients contents desired for the dairy cows or cattle by using our specially designed mixing machines.   Excess livestock feed is stored in our storage facilities up to 25,000 tons at a time for use during winter period that normally lasts approximately 5 months of the year.

There are many cash crops growers in Fengning that grow corn, sunflowers and various other types of cereal seeds and pasture grass crops.  We do source such raw materials from these growers for our livestock feed manufacturing operation by way of barter trade by supplying to these growers organic fertilizer manufactured by us, to ensure that these raw materials are organically grown at source.

Organic Fertilizer

Manure of our herds of animal is collected and processed into fertilizer, part of which is sold to the regional farmers in the region.

Currently we are producing more fertilizer than we could use for our purpose, and therefore we sell our fertilizer by way of barter trade by supplying the regional farmers with our organic fertilizer in return for their harvested produces as the raw materials for our livestock feed manufacturing operation.

Customers

The four sizeable value added manufacturers to whom ZhongXing supplies bulk liquid milk are:

·

Zhang Zheng Xi (agent of TianJin Mu Dairy Co. Ltd.), (ZZX).

·

Siao Shu Dong (agent of Chengde Huang Yuan Dairy Co. Ltd.) ,(SSD).

·

Wang Cheng Xiang (agent of Mengniu Dairy Group), (WCX).

·

Jun Heng (agent of Yili Dairy Group), (JH).

 

We did not enter into any written contracts with these customers.  Our liquid milk is sold to them on the best offer basis.

We supply our livestock feed to many smaller farms in the region.   Such farmers normally do not have the storage capacity to hold enough feed for their livestock through the winter.  We enter into unwritten barter trade arrangement with the farmers, whereby the farmers may pay for the feed by cash payment or with their livestock.  We added more than 2,800 young cows to our stock of herds through this arrangement in 2010.

ZhongXing currently produces more fertilizer than it can utilize for its crops plantation, and therefore it sells the excess fertilizer so produced to the farmers in the region in return for the crops these farmers grow as raw materials for our stock feed manufacturing.

Order Backlog

At present, ZhongXing does not have an order backlog.

 

 

Competition

The dairy business in China is highly competitive.  Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do.   Many of these companies have greater name recognition and more established relationships with our target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can.   If we are unable to compete successfully, our business may suffer and our sales cycles could lengthen, resulting in a loss of market share or revenues.

There are a number of big value added dairy companies such as Mengniu Dairy Group and Yili Dairy Group that have significant financial resources and modern value added productions lines churning out all ranges of dairy products.   However, most of these corporations are collecting fresh milk from regional small dairy farmers and own only a small number of dairy farms to cater for their own needs.   Thus the milk sourced is not of uniform or standardized quality and it often requires supplement of undesired substance to increase its nutrient level.

Although ZhongXing is not able to compete on a national scale with the bigger corporations as far as value added products are concerned, it will maintain a comfortable position in the niche market in the PRC for high quality organic milk, in view of the rising demand from the growing middle class consumers of the PRC.  With the integrated way of producing organic milk, we believe we could compete against other local sellers of milk in terms of quality and purity of the milk produced.  We do not face significant competition from the imports because most of the milk imported is in powder form.

What is known as the Contaminated Milk Scare in China during the first quarter of 2009 has considerably increased the awareness of the consumers in the PRC on the issue of adulterated milk and dairy products.  The consumers are now more prepared to pay a bit more for quality products.

In addition, ZhongXing is in a good position to capture a small share of the retail markets with its organic milk and other dairy products.  As far as we know, and after checking with the Agriculture Department, there is no other certified commercial producer in the PRC producing organic.

Producing our own organic livestock feed enhances further ZhongXing’s competitive edge as there is insufficient high quality livestock feed all year round to sustain the production of high quality milk especially in the northern, north western and north eastern part of the country where most of the dairy farms are located.   Small dairy farmers in such areas are not getting adequate returns to be able to nourish their cows with quality feed to house their cows in suitable facilities.

Patents, Trademarks & Licenses

ZhongXing does not own any patent, but it has been awarded the ‘Organic Milk’ certification by the China Agriculture Authority in November 2008. The certification has been reviewed by the Agriculture Department of the PRC Government in subsequent years and currently is effective for fiscal year 2011.

Environmental Matters

Being one of the main suppliers of water to Beijing, the County of Fengning is designated as a region free of any other industries except agriculture.  ZhongXing, being an agriculture company, has complied with all local environmental impact regulations and procedures, and has conformed to all rules regarding zero discharge of any industrial waste, zero emission of any toxic material, and transportation of manures in properly equipped vehicles.  So far ZhongXing has not encountered any environmental issues causing concerns of the relevant authorities.  We do not anticipate any capital expenditures for environmental control facilities for the remainder of current fiscal year or any future periods.

Research and Development

ZhongXing has not had any research and development expenses in the past year.

Regulatory Environment

In addition to general regulatory matters affecting all businesses operating in the PRC as discussed below, there are following regulations that govern ZhongXing’s business:

ZhongXing was established in March 2006 as a “Joint Stock company” (“JSC” defined in China as a company that is permitted to issue shares under the Company Act of China) in the PRC.  With the inclusion of SIAF as a shareholder thereof, ZhongXing is required to be converted as a sino-foreign joint venture company (“SFJVC”), and such conversion requires prior approvals of both the local government as well as the central government of the PRC.   In this respect, the local government granted its approval in November 2007.    The shareholders of ZhongXing, namely SIAF and Mr. SUN Ximin, have been advised by their Chinese lawyers that upon conversion to a SFJVC, SIAF as its foreign partner and Mr. Sun as its local owner must inject further sums of approximately U.S.$6.70 million and $1.9 million respectively within a period set by the approving authority.   As a result, the shareholders of ZhongXing have decided to defer submission of the aforesaid application to the central government until the completion of SIAF’s current exercise of registering its securities.  Meanwhile the PRC’s Foreign Exchange Control Act will restrict SIAF’s repatriation of its investment in and, investment return gained on, ZhongXing, and accordingly SIAF will not enjoy the legal protection as accorded under the Chinese laws governing foreign investment.

 

 

Qinghai Sanjiang A Power Agriculture Co. Ltd.

On December 28, 2008, the Company through its then subsidiary Pretty Mountain Holdings Limited (“Pretty Mountain”), a company incorporated in Hong Kong, the Special Administrative Region of the PRC, entered into a sino-foreign joint venture agreement with the following parties for the setting up of a sino-foreign joint venture company to be named as Qinghai Sanjiang A Power Agriculture Co. Ltd.(translation in English) (“Sanjiang A Power”) in the PRC, to manufacture bio-organic fertilizer, livestock feed and to develop other agriculture projects in the County of Huangyuan, in the vicinity of the City of Xining, Qinghai Province :

·

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

·

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

Sino-Foreign Joint Venture Agreement

The principal terms of the Sino-Foreign Joint Venture Agreement dated December 28, 2008 (“SFJVA”) are as follows:

The objectives of the joint venture are to employ modern technologies to undertake projects relating to organic fertilizer, organic livestock feed, aquaculture and agriculture waste treatment, which include :-

·

using environmental friendly technology to recycle agriculture waste for production of organic fertilizer;

·

using environmental friendly technology and bacteria to produce organic feed; and

·

using environmental friendly technology to increase dairy milk production and quality.

The total investment for the joint venture shall be US$2,00,000.00 as follows:

The Registered capital for Sanjiang A Power shall be US$1,400,000.00, out of which US$630,000.00 shall be contributed by Qinghai Sanjiang (45%), US$140,000.00 by Garwor (10%) and US$630,000.00 by Pretty Mountains (45%). The tenure for the joint venture shall be 30 years. The respective responsibilities of the parties are as follows;

Qinghai Sanjiang is to provide:

·

US$630,000.00 capital contribution;

·

appropriate plots of lands with the related “Land Usage Rights” or convertible old factory  suitable for the projects, that is:

·

land and buildings measuring up to 1,800 mu (about 297 acres) and 9,000 mІ of built-up areas for the development of the demonstration farms for the rearing of cattle and sheep; and

·

land and buildings measuring up to 480 mu (about 79.2 acres) and 155,040 mІ  of built-up area for the development of the manufacturing plants for bio-organic f ertilizer;

·

vehicles for use by Sanjiang A Power during pre-development and the implementation stage;

·

company office and accommodation for personnel from out of town;

·

the necessary facilities for the projects;

·

liaison in procuring governmental financial assistance or other incentives for agriculture projects to meet the needs of the projects;

·

first batch of premium herd of cows and goats for the demonstration farms; and

·

related plants and equipment and facilities for the production factories and laboratories of Sanjiang A Power.

Garwor is to provide:

·

US$140,000.00 capital contribution;

·

modern agriculture management system;

·

liaison in procuring financial assistance to raise development capital;

·

expertise in the sales and marketing needs of Sanjiang A Power;

·

international business network;

 

 

·

assistance to resolve any misunderstanding between the Chinese and foreign parties resulting from the difference in laws and regulation between the two concerned countries.

 

Pretty Mountains is to provide:

·

US$630,000.00 capital contribution;

·

the rights to use the relevant patented technologies and the related trademarks and brands;

·

the rights to use the patented Bacterial and Bio-organic Fertilizer Manufacturing Technology, the Stock Feed Manufacturing Technology;

·

the right to use related conversion techniques associated with the Bio-organic Fertilizer and Livestock Feed Manufacturing;

·

business and sales network and the right to operate and generate financial benefit using the above mentioned technologies, techniques, systems, trademarks and labels; and

·

knowledge and connections for securing financings for its developments.

If any of the technologies, techniques, systems, designs, brands and trademarks mentioned above are the properties of Pretty Mountain, Sanjiang A Power shall have no ownership right to any of them except in the circumstances if they would be developed and/or invented by Sanjiang A Power during the course of its developments and operation.  In these events if anyone of the joint venture parties should use any of the new inventions, such party shall pay Sanjiang A Power compensation, the values of which will be determined in accordance with the international market values at the time of usages.

Pretty Mountain shall conduct feasibility studies on the projects, in coordination with Qinghai Sanjiang, and such feasibility studies reports shall be the properties of Sanjiang A Power.  In the events if any one of the Joint Venture partners should use any of the referred studies, such party shall pay Sanjiang A Power compensation, values of which will be determined in accordance with the international market values at the time of usages.

Sanjiang A Power will appoint Sino Agro Food, Inc. as its consultant for the purpose of applying the necessary treatment to make its group and organization structures, business strategies and operation on par with the international corporate standards, to facilitate realization of its planned listing exercise on overseas bourses.

If any of the assets, plant and equipment required to be purchased by Pretty Mountain for and on behalf of Sanjiang A Power, it shall be verified and approved by the relevant authority.  Within three months after verification and approval of the relevant authority, the personnel of Sanjiang A Power shall inspect and verify the purchased items and execute the necessary letters of credit. Pretty Mountain shall ship all of the purchased goods to a sea port directed by Sanjiang A Power within 6 months calculated from the date of issuance of the letter of credit.

The Board of directors of Sanjiang A Power shall consist of 7 members; 3 appointees from Qinghai Sanjiang, 1 from Garwor, and 3 from Pretty Mountains, and the Board shall meet once a month.   The term of the Chairmanship of the Board will be for 3 years, and the chairman will be selected by the board of directors.  It is agreed that a director appointed by Qinghai Sanjiang shall be made the first term Chairman, whereas a director appointed by Pretty Mountains shall be made the first term Finance Director cum Chief Financial Officer.

Should the shareholders decide to continue with the joint venture 6 months before the expiration of this joint venture, the shareholders may apply to the relevant authorities to extend the validity period of this joint venture.

Sanjiang A Power may be dissolved during the currency of this joint venture if:

·

Sanjiang A Power suffers severe financial losses and is not able to continue operation as a result;

·

a party hereto fails to fulfill its obligations herein, and Sanjiang A Power is not able to continue operation as a result;

·

force majeure; and

·

Sanjiang A Power fails to achieve its business objectives, and has no prospect of development.

 

Formation of Sanjiang A Power

Qinghai Sanjiang submitted the application for the incorporation of Sanjiang A Power to the relevant authorities on March 11, 2009.   The relevant Authorities in this instance are consisting of various governmental departments covering the business registration, project evaluation, technology assessment, custom, imports and exports, environment, foreign trade, foreign exchange control, agriculture, industrial, commerce and local departments of town planning and public health.

On May 8, 2009, the Business Registration Department of Xining City Government approved the terms and conditions of the SFJVA and the constitution for the formation of Sanjiang A Power upon the following terms:

 

 

·

The Name of the company shall be Sanjiang A Power Agriculture Co. Ltd. (translation in English)

·

Total Investment Capital : U.S.$2 million

·

Registered Capital: U.S. $1.4 million, out of which US$630,000.00 to be contributed by Qinghai Sanjiang (45%), US$140,000.00 by Garwor (10%) and US$630,000.00 by Pretty Mountains (45%).

·

7 members in the Board of Directors consisting of 3 appointees from Qinghai Sanjiang, 1 from Garwor, and 3 from Pretty Mountains.

On May 25, 2009, Sanjiang A Power was formally established. In September, 2009, SIAF carried out an internal re-organization of its corporate structure and businesses, and on September 28, 2009, SIAF’s subsidiary A Power Agro Agriculture Development (Macau) Limited (“APWAM”) acquired the Pretty Mountains’ 45% equity interest in Sanjiang A Power by way of an assignment (“Assignment”).    Application was subsequently made by the Company to the Companies Registry of Hong Kong for deregistration of Pretty Mountain under Section 291AA of the Companies Ordinance. By virtue of the Assignment, APWAM assumed all obligations and liabilities of Pretty Mountains under the SFJVA.

APWAM is a 100% owned subsidiary incorporated in the Special Administrative Region of Macau, the PRC. 10% of the equity interest in APWAM has been registered in the name of one Mr. HUNG Moon Cheung in compliance with the requirements of the laws of Macau on ownership of a company incorporated in Macau by non citizens of Macau, and the same is being held by the said Mr. HUNG in trust for and, for the benefit of, Sino Agro Food, Inc. pursuant to a Deed of Trust duly executed by the said Mr. HUNG on December 20, 2007 in favor of Sino Agro Food, Inc.

In December 2009, Sanjiang A Power applied to local government of the County of Huangyuan to:

·

change its place of business from the City of Xining to the County of Huangyuan;

·

effect the registration of APWAM as a shareholder of Sanjiang A Power, replacing Pretty Mountains; and

The Progress of Sanjiang A Power and the Development Projects

While pending the official approvals for the incorporation of Sanjiang A Power, the joint venture partners of Sanjiang A Power had commenced works on the planned projects since early March 2009.

In April 2009, a team of Sanjiang A Power’s personnel, who were mainly staffed by the technical people from SIAF, set up a temporary bio-organic fertilizer manufacturing factory at a rented building (“Temporary Site”) located near Qinghai Sanjiang’s operation in the vicinity of Xining, to deal with the problem of disposal of accumulating potato wastes generated by Qinghai Sanjiang’s starch manufacturing factory in an environmentally friendly manner.    On June 16, 2009, Sanjiang A Power produced its first batch of bio-organic fertilizer of 200 metric tons, the samples of which were applied in one of the Sanjiang Agriculture’s farm for evaluation of its quality standard.   Laboratory test, which was simultaneously carried out by Professor Yu of Xining University, showed that the fertilizer was of the country’s quality standard set for bio-organic fertilizer, that is the content of composed fiber >25%, nutrient elements (consisting of N, P & K) > 6% at ratio of 3:1:3, moisture content < 15%, PH value of 5.8 to 8.5, micro-organism count > 20 million units per gram, the ratio of bacterial infection < 20% and odorless.

From April through December 2009, pre-mobilization and pre-development works have been carried out by Sanjiang A Power as follows:

·

Investigation and feasibility study of the potential project sites;

·

Investigation and feasibility study of the supplies and production of raw materials;

·

Investigation and feasibility study of the sales and marketing of the products to be produced by Sanjiang A Power;

·

Investigation and feasibility study of the related facilities within the locations;

·

Investigation and feasibility study of applicability of SIAF’s technologies for bio-organic fertilizer and livestock feed under the local conditions; and

·

Investigation and analysis of potential cooperative activities with the regional government and the farmers;

·

Establishing trial facilities to test the production of bio-organic fertilizer and livestock feed, using locally sourced raw materials;

·

Laboratory testing of sample products of fertilizer and livestock feed on their respective standard of qualities; and

·

Financial feasibility studies of all aspects of the business operations.

On December 9, 2009, a co-operation agreement was entered into (“Development Agreement”) by the Department of Trade and Commerce of the County Government of Huangyuan (“Huangyuan Government”) and Sanjiang A Power for development of agricultural projects in the County of Huangyuan.   The principal terms and conditions of the Development Agreement are as follows:

·

The Huangyuan Government agreed to allocate the site of the old army goods and materials transfer terminal, consisting over 150 mu of land and over 20,000 mІ of built up area (39 buildings, each of approximately 538 mІ) (“Project Site”) to Sanjiang A Pow er for the purpose of the projects.

 

 

·

Sanjiang A Power shall register its place of business in the County of Huangyuan within 6 months of the Development Agreement.

·

Sanjiang A Power’s total investment and development capital for the projects shall be RMB96.2 million (equivalent to about U.S.$14.15 million), of which the fixed assets should amount to RMB50.20 million (equivalent to U.S.$7.382 million, based on the exchange rate of U.S.$1 = RMB6.80).

The time frame for the development shall be 3 years, covering the following projects:

·

Livestock Feed manufacturing

·

Cattle rearing and fattening stations

·

Manufacturing of bio-organic fertilizer

·

Plantation of pastures and crops as the raw materials for livestock feed.

As and when the fixed assets of Sanjiang A Power shall amount to RMB20 million (equivalent to U.S.$2,941 million) (to be jointly appraised by the valuation department of the Huangyuan Government and an independent firm of professional appraisers), Sanjiang A Power will apply to the Huangyuan Government for a grant of the “Land Usage Right” over the Project Site for a tenure of 50 years at a minimal consideration in accordance with the provisions of the Municipal Regulation No. 2009 (89) (estimated to be RMB3 million maximum, equivalent to U.S.$441,176).

Sanjiang A Power shall carry out the projects on the Project Site in accordance with the terms of the Development Agreement and the proposal submitted, and shall not alter the nature and purpose of the projects without the prior consent of the Huangyuan Government.   Sanjiang A Power shall not vary the usage of the Project Site, nor shall the company transfer or sublease the same during the currency of the development.

Sanjiang A Power shall not without good reason delay the development, and shall accept the supervision and inspection of Huangyuan Government and adhere to the rules and regulations of the relevant local policies.

In the event of occurrence of Force Majeure, natural disaster or change in the Central Government’s policies and regulations, resulting in any of the parties not being able to implement or partially implement the terms of the Development Agreement, then both parties may mutually agree to terminate this Agreement in accordance with the relevant policies or regulations.

In the event that if Sanjiang A Power shall fail to comply with the requirement as stated in the agreement, within 6 months after the signing of the Development Agreement, to register its place of registration or in other form setting up branch office, subsidiary or other company in the County of Huangyuan to replace Sanjiang A Power in carrying out the terms of the Development Agreement, then it will be deemed a breach by Sanjiang A Power of the Development Agreement, and Huangyuan Government shall have the right to terminate this Agreement if the value of Sanjiang A Power’s fixed assets does not reach RMB20 million and above within 2 years from the date of the Development Agreement, the Huangyuan Government will have the right to take back the Project Site, and in which case all un-movable properties on the Project Site will become the properties of the Huangyuan Government.

Any dispute will be referred to arbitration or the local court of law for adjudication, if the parties shall fail to reach an amicable settlement of the dispute.

Any supplementary agreements subsequently executed by the parties shall have equal legal force of laws.

From November 2009 to September 30, 2010, Sanjiang A Power has carried out the following works on the Project Site:

·

Renovation and building work on staff quarters, capable to house up to 70 workers at a time, and subsequently these were completed before end of March 2010;

·

Renovation and installation of facilities for six beef cattle fattening demonstration yards and buildings, with the capacity to house up to 120 heads of cattle per house, (Subsequently these were completed by November 17, 2010 as such by December 5 2010, two of these cattle houses are housing 240 heads of 6 months old cattle brought by SJAP);

·

Construction of a factory with the capacity to produce up to 20,000 tons of bio-organic fertilizer per year was completed last week of June 2010, and is now in operation producing up to 600 tons per day to fill its first order of 2,500 tons sold regionally, (subsequently by December 15, 2010 SJAP has sold more than 2500 Tons of fertilizer regionally with good responds from the buyers);

·

Invention of a new enzyme (“the Enzyme”) that is capable of allowing fermentation and germination processes in our manufacturing of livestock feed to take place at 4Celsius within 7 days, which is suitable in the colder northern China climates since it will save much additional heating costs to initiate the fermentation and germination process of the livestock feed, as compared to the old enzyme performing at 15Celsius within 21 days, (subsequently from July 2010 we used this Enzyme to produce our fertilizer and livestock feed successfully);

At a promotional campaign organized by the Huangyuan Government at the Project Site in early January 2010, all trial samples of 1,000 tons of livestock feed and 700 tons of bio-organic fertilizer manufactured by Sanjiang A Power were sold to the regional farmers.  The Huangyuan Government made available two specialists and Sanjiang A Power provided 15 technicians to take daily records of the growth of the crops planted in the regional farms that were applying Sanjiang A Power’s trial fertilizer products.   Performance data collection and analysis of the trial livestock feed, which was distributed to the 15 regional farmers having 800 heads of cattle and cows collectively, was undertaken for over a period of 3 months under the supervision of the Huangyuan Government’s Agriculture Department commencing January 2010.  By end of March 2010, the results were recorded as follows:

·

Additional weight gained average per beef cattle was recorded at one extra kilogram per day over their normal weight gains.

·

Additional fresh milk produced per cow was recorded at one and half kilograms of milk per day over and above their normal daily production.

·

All feeds were much easier to digest resulting in much cleaner environment in the cattle yards and houses.

·

No sickness during the period was recorded through the cause of consumption of our feeds, but there was one cow had an early abortion.

·

All cattle preferred to eat our feeds and reluctant to revert back to the consumption of their old feed after they had consumed our feed during the period.

In mid January 2010, the Huangyuan Government obtained a central grant of RMB500,000.00 (equivalent to U.S.$73,357 at the rate of U.S.$1 to RMB6.816) to assist Sanjiang A Power to meet its pre-development expenditure.

In early February 2010, Sanjiang A Power started planting of cash crops on various pieces of lands totaling approximately 10,000 mu, verbally granted by the Huangyuan Government to Sanjiang A Power for its use to grow raw material for its livestock feed and bio-organic fertilizer operations.

On April 22, 2010, Sanjiang A Power’s application to the Huangyuan Government to change its place of business from the City of Xining to the County of Huangyuan, and to effect the registration of APWAM as a shareholder of Sanjiang A Power, replacing Pretty Mountains, was approved by the Huangyuan Government, and a business license was issued to Sanjiang A Power accordingly.

On May 7, 2010, Qinghai Sanjiang sold and transferred its shareholding in Sanjiang A Power to Garwor. The aforesaid sale and transfer was approved by the “State Administration for Industry And Commerce of PRC” of Xining City Government and an amended Certificate of Approval for the incorporation of Sanjiang A Power as a sino-foreign joint venture company was subsequently issued on July 20, 2010.

 

Subsequently On November 5, 2010 the Authority of Business Registration Department of Xining City, PRC approved SJAP’s application to increase its Registered Capital to US$5,000,000.

 

The Business Plans of Sanjiang A Power  

Sanjiang A Power started to generate revenues from some of the following activities from July 2010 and we expect that the others will generate revenues from April 2011 onward as described below:

·

Manufacturing of livestock feed to achieve 20,000 tons, to be sold to the regional farmers and 10,000 tons to be consumed by our own cattle on the Project Site; subsequently we manufactured over 5,000 tons of livestock by the end of September 2010 and out of which we sold 2,000 tons to the local farmers and kept the other 3,000 Tons to be used for our own cattle that will be reared in our own cattle facilities.

·

Manufacturing of bio-organic fertilizer to reach 10,000 tons; subsequently we sold 2,500 tons of fertilizer by month of November 2010 with production rate running at 60 tons per day currently and we are producing right through the winter months made possible by our developed Enzyme.

·

Rearing and fattening of beef cattle to reach a minimum of 1,000 heads subsequently as at January 3, 2011 we bought more than 500 heads of young cattle housing in four of our 7 newly constructed cattle houses and expecting to increase the number of cattle to 2,500 heads within 2011.

 

Manufacturing of Livestock Feed

We use raw material consisting of crop wastes as well as locally grown and available wild wheat plus wild wheat sterns, wild peas with sterns and leaves, and selective pastures grown in the wild.

These raw materials will be finely cut and put through a number of aging and fermentation processes by adopting a technology and method called “Stock Feed Manufacturing Technology”, duly licensed by Tri-Way Industries Limited, a 100% owned subsidiary of SIAF, and catalyzed by the Enzyme developed by Sanjiang A Power as described above.  Thereafter, the end materials will be packed and sealed in air-tight and weather proof packaging ready for storage.

At our trials carried out in November 2009, we packed the feed into bags of various weight to suit the farms (i.e. if a farm has only 5 heads of cattle or 10 heads of cattle, then the weight of the feed in the bag was at 240 kg or 480 kg respectively), such that the respective farm would only need to store 2 bags of feed each time in their cattle houses to have enough feed for 7 days, and by such time the next two bags would be fermented and ready to be used for the next 7 days, etc.   As most cattle houses even in a very cold winter would have a room temperature above 4° Celsius, the farmers would not need to provide additional heat to ferment the feed.

We believe that the price of our livestock feed is and will be comparable to traditional livestock feed, which is being sold in Huangyuan currently at the Huangyuan Government’s recommended introductory price of U.S.$76.50 per ton to the regional farmers, while the Huangyuan Government has agreed to grant incentives to us by subsiding it at U.S.$29.40 per ton making total revenue generated per ton of livestock feed at U.S.$105.90 per ton. (Subsequently we sold over 2,000 tons of our livestock feed in November 2010 at an average price of US$114.25 / Tons based on exchange rate of US$1=RMB6.65, as such we are expecting that there may not be a need to obtain the said subsidy of US$29.04 / Ton granted by the Government although it is still available currently).

We also intend to manufacture a specifically formulated livestock feed as developed under the above mentioned “Stock Feed Manufacturing Technology” to cater for milking cows with added on nutrients to suit each stage of the milking cow’s growing cycles (i.e. from conceiving, carrying to weaning and to commercial milking period).

The first seven demonstration farms were constructed at the Project Site by the end of August 2010 and three of which are being used to house the newly acquired 500 heads of cattle with the others to be filled on or before May 1, 2011.

Manufacturing of Bio-Organic Fertilizer Using the Enzyme

Sanjiang A Power has completed the development of manufacturing plants and facilities for bio-organic fertilizer with a production capacity of 20,000 tons per year (“Fertilizer Factory) in accordance with design parameters of energy usage cost saving (by up to 300%) and reduced production days (by more than 300%) in mind.  By using the Enzyme as invented by Sanjiang A Power, the fermentation process of the fertilizer from raw materials to ready-to-mix materials is being achieved in 7 days at 4° Celsius, instead of the previous requirement of 15° Celsius within 15 days.  This Fertilizer Factory is now in operation having had met its purchase orders of 2500 tons for delivery on or before the end of November 2010.   It is currently has a production volume of 60 tons per day.

The bio-organic fertilizer produced is designed to revitalize and improve the soil environmental by:

·

eliminating toxic fat in the soil;

·

eliminating the adversity caused through frequent application of chemicals and antibiotics;

·

increase growth of micro organism in the soil to purify water toxicity;

·

improve the disease resistant ability of the root systems of plants;

·

neutralize the bad affect caused by the toxic mineral;

·

increase soil resistant to salinity ;

·

increase nutrient to the soil;

·

procure nutrient absorbing ability of the soil;

·

increase diseases resistant ability of the growing plants;

·

reduce plant diseases and the developments of insects;

·

multiply the growth of micro-organism and natural bacterial; and

·

reduce the usage of chemical fertilizer and improves the economic benefit of the chemical fertilizer. (In this respect, it is because of the use of bio-organic fertilizer will improve the soil’s overall ability to the absorb nutrients more consistently and easily, such that within a period of six months after the application of the bio-organic fertilizer, the soil in general will start to show the benefit and in the position to use less chemical fertilizer, the exact reduced usage quantity of chemical fertilizer is usually subject to how poorly the soil have been demanded by the pro-long usage of chemical fertilizer in the past, however it is evidenced frequently that the saving could be measured anyway from 30% up to 60% within a year cycle after the application of bio-organic fertilizer.)

 

 

The Physical Development Plan on Sanjiang A Power’s Property

At present, Sanjiang A Power’s property consists of over 170 mu (or the equiv alent of 122,200 mІ ) of land, on which there is over 21,000 mІ of built up areas provided for in 39 buildings with an average size of about 538 m2 each (“ Property” ). This Property was used as an army railway station previously, and therefore they were bui l t to last for decades and all basic infrastructures (i.e. underground water connections, electrical connections, communication connections, fencings, internal roads, drainages etc) were provided in the land to service the property.

The Business Development Plan of Sanjiang A Power

Sanjiang A Power will have the final capacity to fatten up to 5,000 heads of beef cattle per year based on the growth period of 6 months per head within Sanjiang A Power’s existing property, meaning the maximum housing facility will be at 2,500 heads at a six months interval.

We anticipate that in Year 3 Operation, Sanjiang A Power will need to have enough external breeders to help rear the extra 5,000 heads of beef cattle projected for Year 3 Operation. Sanjiang A Power’s strategy plan for the fattening of beef cattle operation is that, within Year 2 Operation, fattening operation within its own property will be leased out to the regional farmers on following terms and conditions :

·

Our cattle houses (22 of them) will be leased out to the regional farmers who will have the option to lease up to 4 houses at a time, such that they will supply their own young cattle for fattening and they will manage their respective operations.

·

We will provide all associated in-house facilities and services (i.e. veterinary service, utilities, laboratory analysis, ration and nutrient formulated mixing machines, etc.), supply the livestock feed, and marketing of their grown up beef cattle (“the Farmers’ cost”).

·

The breeders will grant us the first option to buy all grown up cattle stocks from them and in the event that they decide to sell to other buyers, such sales will be conducted through our account so that the Farmers’ cost will be deducted from the proceeds of sales.

By Year 3 Operation, it is anticipated that a similar concept will be adopted with the external breeders.  However, the selected external breeders must build their cattle houses in accordance with our designs and guidelines and manage the grow-out operation under our designed management system to be qualified.  We plan to grant financial assistance to the qualified breeders, if necessary. Currently our cattle houses are built in accordance with the designs as advised by some of country’s cattle growing professionals from the Agricultural Department and the Research and Development Department of the PRC Government.   Such designs are believed by us to be the best designs for cattle houses suitable for the Qinghai Province. Our module of operation is designed to enhance economic benefits to the regional farmers and growers and the local communities as a whole, as evidenced by our trials recorded from November 2009 to March 2010, for instance:

 

·

The regional farmers planting wild wheat, wild peas and wild pastures can now increase their yearly yield from 1.25 tons per mu to 4.5 tons per mu by using our organic fertilizer.

The regional cattle fattening farmers and growers who were used to grow one head of cattle from weaning to about 500 kg body weight within a period of 4.5 years and a head of sheep to 45 kg body weight within 2.5 years can now do it within 9 months by using our live stock feed.

·

The regional dairy farmers who were used to get an average of about 1.5 tons (or 1500 kg) of fresh milk from one head of cow per year based on maximum milking day of 180 days per year (due to long winter spell in Qinghai Province) can now get an extra 450 kg of milk per year using our livestock feed to feed right through the winter to maximize the milking days to 300 days per year.

Potentially, once our modules are fully implemented in the Huangyuan County, we believe that it will have significant impact on the communities of the Qinghai Province (a North Western region of China) as a whole if one were to consider that Huangyuan County, being  just a very small County of Qinghai, it is growing an average of 55,000 heads of cattle and milking cows collectively per year while the whole of Qinghai County is estimated to have more than 2.5 million heads of cattle and milking cows growing on an annual basis in all of its districts. Recently the Huangyuan Government has just completed a road bypassing the main city center of Huangyuan, thereby leading the regional traffic to the surrounding borders of the property. Therefore, the Sanjiang A Power’s property is accessible by good freeway connection.

 

Other Subsidiary

Tri-way Industries Limited

Tri-way Industries Limited (“Tri-Way”), a company incorporated in Hong Kong the Special Administrative Region of the PRC and a 100% owned subsidiary of the Company, by an agreement dated November 12, 2008, purchased the license to use and exploit the intellectual property of a technology and method for the manufacturing of livestock feed for the consumption of beef cattle, cows, sheep and other animals, known as “Zhi Wu Jie Gan Si Liao Chan Ye Hua Chan Pin Ji Qi Zhi Bei Fang Fa” (Stock Feed Manufacturing Technology) (“SFMT”) registered under the Patent Number “ZL2005 1 0063039.9” under the Invention Patent Certificate No: 3297232 issued by National Registry of Intellectual Property of China, from Mr. Shan Dezhang, the inventor of SFMT.    The consideration for the purchase amounting to U.S.$8,000,000.00 was satisfied by cash payment of $4,500,000, which was paid on December 18, 2008, and the balance of U.S.$3,500,000 were to be paid either by cash payment or by issuance of our shares at our discretion in three tranches as follows:

·

1st tranche of U.S.$1,000,000 on or before December 31, 2009, which was paid on December 28, 2009;

·

2nd tranche of U.S.$1,000,000 on or before December 31, 2010; and

·

3rd tranche of U.S.$1,500,000 on or before November 11, 2012.

  

If any of the payments is settled by way of issuance of shares, the shares issued will be valued at a three months weighted average of the OTCB Pinksheets price index counting backward from the date of settlement. (Subsequently all three tranches were fully paid on or before September 30, 2010 by the issuance of shares at an average price of US$0.75 / share).

 

Tri-way intends to generate operation revenues by engaging in following operations:

Sales of the following types of consulting services relating to SFMT:

·

Engineering designs of the livestock feed manufacturing factories;

·

Engineering designs of the factories’ plants and equipment;

·

Designs of various lay-out plans for the said factories and equipment;

·

Management of the related operation; and

·

Training of personnel of the related operation.

Tri-way has not generated any revenues through these services.

In addition, we also anticipate that Tri-way will generate revenues through participation in a fish farm project to be developed in the City of Enping, Guangdong Province, under the supervision and consultancy of Capital Award using the APT RAS, by taking up to 25% equity interest in a newly formed SFJVC for the purposes of development, operation and ownership of the fish farm.

SFMT, the Technology

Traditionally in China, livestock feed for cattle, sheep and cows is processed and stored in the following manner:

 

 

·

Field-cropped grass, corns, or other similar materials are cut and sun cured in the fields;

·

Raw materials are then transported to processing locations for further processing

·

Raw materials are finely cut and mixed together then stored in open concrete yards; or

·

Raw materials are compacted into various sharps and forms such as pellets, cubes, or square blocks, and then stored.

The large concrete yards to store the livestock feed have little economic efficiency due to its high cost of construction, constant costs in their maintenance and upkeep and exposure to seasonal weather variation that causes deterioration to the quality of the livestock feed.  Feed stored in this traditional manner is subject to the following problems:

·

Unsafe for consumption due to high count of bad bacteria;

·

Poor to taste due to high content of bad bacterial and rough to feel;

·

Non-uniform quality and generally low in nutrient, low in protein and vitamins with high fiber;

·

Poor digestibility usually evidenced by animal dropping.

This can result in adverse economic impacts through waste of natural resources and losses of animals through sickness and diseases enhancing higher cost of production.

Using our technology, we intend to produce two types of livestock feed through SFJVCs’ operations, and currently with Sanjiang A Power, for the China markets:

·

Type One is a more general application type of livestock feed suitable for beef cattle and sheep; and

·

Type Two is special ration designed for dairy cows that consists of various grades adaptable to various stages in the life of dairy cows from the time of  pregnancy, carrying period with calves to three months old, weaning of the calves to they are six months old, and continued milking period of the calves until they reproduce.

Manufacturing of Type One Livestock Feed

Unlike the raw materials used in the traditional process, the raw materials we use will consist mainly of crop wastes such as corn stems without the corn, wheat sterns without the wheat, sunflower stems without the sunflowers, peanut leaves without the peanuts and sugar beets leaves without the sugar beets.

These raw materials will be finely cut and put through a number of aging and fermentation processes.  Thereafter, the end materials will be packed and sealed in air-tight and weather proof packaging ready for storage.

The Type One feed is designed to help to:

·

reduce sickness in animal;

·

increase milking life span of cows;

·

reduce mortality rate of animals;

·

increase birth rate of cattle and sheep;

·

increase milk productivity of the cows;

·

increase weight gain in cattle and sheep; and

·

improve quality of the milk produced by cows.

 

Manufacturing of Type Two Livestock Feed

Initially, we intend to test Type Two livestock feed on small demonstration farms that may be owned by the SFJVCs or contracted with local farmers to demonstrate the economic viability of using Type Two livestock feed in the dairies. The first batch of demonstration farms are being constructed in Sanjiang A Power’s Huangyuan project.

Government Approvals

We do not require any authorizations from any Government authorities to sell our sublicenses of our stock feed manufacturing technology and associated services.

Tri-way’s future business

In January 2010, Pan Shi Fang and Deng Jie Min (“Chinese Businessmen”) and Capital Award haves entered into a Consulting Service Agreement (“the Consulting Service Agreement”), wherein Capital Award would supply the equipment and provide consulting services for the installation and construction of the fish farm and the related supporting services in Enping City, Guangdong Province of the People’s Republic of China.  It was a term of the Consulting Service Agreement that the parties thereto would form a sino foreign joint venture company (SFJVC) to own and operate the fish farm, and that Capital Award would have the right to nominate its associate company or a company within its group of companies to substitute Capital Award as a party to the SFJVC.  Upon the nomination of Capital Award, Tri-Way entered into a joint venture agreement with the Chinese Businessmen to incorporate SFJVC to be named as Enping City Bi Tao A Power Fishery Development Co., Ltd. to own and operate the fish farm in accordance with the terms and conditions as prescribed therein.  The documents related to the application for setting up of the SFJVC as provided in the joint venture agreement has been finalized by the Chinese party’s lawyer, and the above mentioned application was submitted to the relevant Authorities on October 29, 2010.

Principle terms and conditions of the aforesaid joint venture agreement are as follows:

·

The parties thereto shall share the indebtedness, risks and losses of the SFJVC as well its profit in accordance with their respective equity interest ratio in the SFJVC.

·

The tenure of the SFJVC shall be for a period of 50 years.  The SFJVC’s Board of Directors may decide to extend the tenure of the SFJVC by applying to the China Business Registration Department (or its related authorized approving authority) within 6 months from day of expiry thereof.

·

The total investment capital of the SFJVC shall be US$5 million to be invested over a period of 5 years, whereas the Registered Capital of the SFJVC shall be US$100,000 for the first year and be increased gradually to US$5 million by the fifth year subject to the decision made by the Board of Directors of the SJVC at the time.

·

The parties’ respectively registered capital contribution in the 5 years are as follows :

From the second year onward, Tri-way shall have the option to increase its share of equity interest in the SFJVC, and the parties will contribute their share of equity stake (or to increase part of the SFJVC’s registered capital by means of converting the SFJVC’s assets) in accordance with the guidelines as shown in the Table below:

Additional shareholders paid-in capital will be funded in cash by Triway and by the Chinese businessmen in form of cash and / or by converting some of the assets in manner as described in the tables listed below:

 

 

·

The responsibilities of the Chinese Businessmen:

1.

To pay their share of the Registered Capital on a timely manner.

2.

To apply to relevant Chinese Authorities in order to obtain the official approval, registration and business license for the incorporation of the SFJVC.

3.

To apply to the Land Authorities of China to obtain official approval of the Land Use Right of the project land.

4.

To introduce and to organize all local sub-contractors and contractors to carry out construction work relating to the scopes of civil engineering, designs, building and all other related matters for the SFJVC for the purpose of developing the fish farm.

5.

To introduce to and to organize all local suppliers and manufacturers for the SFJVC such that the SFJVC will be able to obtain supplies and manufacturing of plants and equipment for the fish farm.

6.

To apply to the customs authorities and to obtain import clearance for all imported plants and equipment of the fish farm and to arrange local transportation for the delivery of the imported plants and equipment to the project site.

7.

To introduce to and to organize all local contractors and sub-contractors for the SFJVC such that the SFJVC will be able to construct and to connect all basic infrastructure and utility services needed at the project site of the fish farm.

8.

To assist the SFJVC in recruiting Chinese management personnel, technical personnel, workers and other workers needed for its fish farm.

9.

To assist foreign workers and staffs of the SFJVC in their applications for entry visas, work permits and other associated local traveling arrangements.

10.

To co-ordinate other general necessities requested by the SFJVC from time to time during the development period of the SFJVC.

·

The responsibilities of Tri-way:

1.

To pay its share of the Registered Capital on a timely manner.

2.

To organize and to arrange supplies, purchases, delivery and related matters of all imported plants and equipment needed by the Fish Farm.

3.

To organize and to arrange all transportation and related logistics needed for the importation of imported plants and equipment for delivery to the appropriate sea port in China.

4.

To provide qualified technical supervisors, personnel and inspectors for the installation and commissioning of all plants and equipment of the fish farm.

5.

To provide training to the personnel and workers needed for the operation of the fish Farm.

6.

Being the Master license holder of the AP Technology, Tri-way shall ensure that the performance of the Fish Farm (including but not limiting to the productivity and durability of the Fish Farm) will be reached within the targeted schedule.

 

7.

To assist the SFJVC in other matters related to the Fish Farm Development works as and when requested by the SFJVC.

·

The Board of directors shall consist of 3 members; 1 appointee from Chinese Businessmen and 2 from Tri-way.  The director appointed by Chinese Businessmen shall be made the Chairperson, whereas 1 director appointed by Tri-way shall be made the Deputy Chairperson.  The tenure of the Chairperson and the Deputy Chairperson shall be 3 years, renewable at the discretion of the appointing party.

 

Intellectual Property

We own a patented “Intellectual Property” namely “Zhi Wu Jei Gan Si Liao Chan Ye Hua Chan Pin Ji Qi Zhi Bei Fang Fa” registered under the Patent Number “ZL2005 10063039.9” and Certificate number “329722” of China.  These patents were granted on 18 October 2008 for a duration of 30 years.

 

Business Synergies:  The interrelationship of the activities of our various subsidiaries

Our three technologies, including the Enzyme technology developed by Sanjiang A Power in 2009 and designed for the manufacturing of bio-organic fertilizer and livestock feed coupled with the A-Power Technology and the Stock Feed Manufacturing Technology give us the potential to develop a number of synergistic opportunities for our existing and potential future business activities.

A-Power Technology for fish farming – Capital Award

Capital Award holds a Master License for A-Power Technology, or “APT,” which is a fish growing system and technology including the designs of A-Power Integrated Water Treatment System covering all related parts and components and the A-Power farm operation’s management systems and procedures.  Infinity Environmental Group, or Infinite, an Australian company, is the inventor and developer of the APT Technology.  We were granted our Mater License by Infinite for the territory of China on August 1, 2005 for term of 55 years originally that was amended to 60 years in an supplementary agreement on December 19, 2005.

This technology can be applied in the business operation of future SFJVCs in which we will have an interest.

At the same time, all insoluble wastes from the fish farms will be collected and processed into one of the raw materials needed for the manufacturing of fertilizer that will be applied in our HU plantations and other cash crops that the HU plantations or Sanjiang A Power  will crop in future.

In addition, we intend to establish and develop distribution centers in countries where we shall sell the fish raised in our farms, and they will also act as distribution centers for the HU plant product of Hang Sing Tai Agriculture Development Co. Ltd. and the beef and beef products of Sanjiang A Power.

The Enzyme Technology for Livestock Feed & Bio-Organic Fertilizer – Sanjiang A Power

Sanjiang A Power, as the owner of this invention, will apply this technology in the business operation of future SFJVCs in which we will have an interest.

In addition, the bio-organic fertilizer can be used in HU plant products of HST and for the growth of the raw materials for livestock feed of ZhongXing.

SFMT, the Stock Feed Manufacturing Technology – Tri-way

Tri-way owns a patented SFMT, the Stock Feed Manufacturing Technology, registered under the Patent Number “ZL2005 10063039.9” and Certificate number “329722” of China, for the manufacturing of livestock feed designed and applied for the consumption of beef cattle, cows, sheep and other animals.

This technology is being applied in the business operation of Sanjiang A and will be applied in the business operation of future SFJVCs in which we will have an interest.

In addition, the livestock feed can be used for our dairy feed for livestock of ZhongXing and future SFJVCs in similar businesses in which we will have an interest.

 

 

Capital Award has over the years improved and refined the application of the A-Power Technology, in particular the design and functionality of the component parts and equipment, to the extent that the present form of A-Power Technology is very much different from its original form, although it is still named as A-Power Technology.  Capital Award has control over the manufacturing rights to its re-designed plants and equipment, including some of the parts and components. Therefore, it is no longer valid whether the original tenure of the Master License obtained was for 60 years or more, as Capital Award in fact is the inventor and designer of the present form of A-Power Technology and the essential plants and equipment.

It is the same scenario for the Stock Feed Manufacturing Technology, as evidenced by the fact that in as short span of time in its application, Sanjiang A Power already managed to develop the new Enzyme Technology, the introduction of which has brought changes to the livestock feed manufacturing method.

The Result of the Synergistic Operation

The Company’s ultimate aims and directions are as follows:

·

To produce uniform and high standard of quality “Organic Food” in efficient and economically manner, supported by sustainable markets to meet the middle income population of China as well as other Asian countries.

·

To bring the farmed produce and products directly from farms to the end consumer’s markets, thus providing more efficient services and cost saving benefits to the end consumers as a whole.

·

To bring better economic benefits to the farmers and growers, thus improving their living standard and bringing economic benefits to the communities as a whole.

Our bio-organic fertilizer will start the food chain in the right direction by re-conditioning the soil to organic soil to produce organic produce, which will be fed to the animals to produce organic end produces or products.

All these chains of operation will be under the roof of our Company such that we shall be able to have quality and quantity of production controlled to ensure uniform and high quality standard of the end produce and products, made possible by the application of our technologies.

Regulatory Environment in China

China is transitioning from a planned economy to a market economy. While the Chinese government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the Chinese economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the Chinese government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the Chinese government are unprecedented or experimental, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating revenues may be reduced by changes in China's economic and social conditions as well as by changes in the policies of the Chinese government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of additional restrictions on currency conversion.

China’s legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, China began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

We are subject to many general regulations governing business entities and their behavior in China and in any other jurisdiction in which we have operations. In particular, we are subject to laws and regulations covering food, dietary supplements and pharmaceutical products. Such regulations typically deal with licensing, approvals and permits. Any change in product licensing may make our products more or less available on the market. Such changes may have a positive or negative impact on the sale of our products and may directly impact the associated costs in compliance and our operational and financial viability. Such regulatory environment also covers any existing or potential trade barriers in the form of import tariff and taxes that may make it difficult for us to export our products to certain countries and regions, such as Japan, South Korea and Hong Kong, which would limit our international expansion.

We are subject to the law on foreign investment enterprises in China, and the foreign company provisions of the Company Law of China, which governs the conduct of our wholly owned subsidiary and its officers and directors. Additionally, we are also subject to varying degrees of regulations and permit system by the Chinese government.

 

 

Regulation of Sino-Foreign Joint Venture Companies in China

We are conducting and intend in the future to conduct some of our business operations in China through ownership interests in Sino-Foreign Joint Venture Companies.

A Sino-Foreign Joint Venture Company (SFJVC) is a joint venture between a Chinese and a foreign company within the territory of China. The Chinese company usually provides the labor, land use rights and factory buildings, while the foreign company brings in the necessary technology and key equipment, as well as the capital. This joint venture is based on a cooperative joint venture contract in which matters like the terms of cooperation, the division of earnings, the ownership of property upon the termination of the contract term of the SFJVC, the sharing of risks and losses, and other matters governing the operations of the SFJVC are set forth.

A SFJVC is entitled to all tax benefits and incentives granted by the China Government to domestic entities in the agricultural industry.  Thus, operating as an SFJVC allows us to take advantage of China Government agriculture industry exemptions including:

·

No income tax

·

No value added tax, subsidizes in transportation within the country

·

No import tax on imported plants and equipment

·

Rebate of development capital calculated up to 33% of development assets

·

Advantageous loans with no interest or fixed terms of repayment

·

“Land Usage Rights” being accepted as collateral that can be pledged against bank borrowings

The foreign partners of the SFJVCs are allowed by the Foreign Investment Department of China to repatriate their investment capitals and returns.

The application of the formation of any SFJVC must be submitted to and approved by 15 authorities of the local County and Provincial government that require different kind of information must be compiled in accordance with all local laws and regulation, as follows:

Provincial Government departments covering:

·

Environmental

·

Business Registration

·

Foreign Investment and Trade

·

Foreign Exchange Control

·

Finance

·

Commerce and Business

·

Statistic and Records

·

Customs

·

Land

·

Taxation

County Government bodies covering

·

Town Planning

·

Business and Commerce

·

Land Development

·

Health

Regulations Concerning Land Ownership and Usage in China

Under the 1982 Constitution, urban land in China is owned by the State and collectives own the rural land. Since the local and central governments administer the rural collectives, it can be construed that all land ownership is under control of the State. However, the Constitution's Amendment Act of 1988 to Article 10 adopted on April 12, 1988, states that a land use right may be transferred in accordance to law. Based on this statement, a land use right becomes divisible from land ownership, thus making land use right likely to be privatized. Individuals, including foreigners can hold long-term leases for land use. They can also own buildings, apartments, and other structures on land, as well as own personal property.

Real estate transfers in China take place in the form of transfer of right to use land. To obtain land-use rights, the land user must sign a land-grant contract with the local land authority and pay a land-grant fee up front. The grantee will enjoy a fixed land-grant term and must use the land for the purpose specified in the land-grant contract. Depending on the type and purposes of land use, the maximum term of a land grant ranges from 40 years for commercial usage, 50 years for industrial purpose, to 70 years for residential use.

 

 

The application of “Land Usage Right” on any leased land must be submitted to and approved by many authorities of the local and central government supported by a minimum of 80% of the signatories of its original land leasers who had leased the land from the government before they transfer the land to the new leasers.

ITEM 1A. RISK FACTORS

 

Smaller reporting companies are not required to provide the information required by this item.

  

ITEM 2.  FINANCIAL INFORMATION.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10.

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  The Private Securities Litigation Reform Act of 1995 is not available to us as a non-reporting issuer.  Further, Section 27A(b)(2)(D) of the Securities Act and Section 21E(b)(2)(D) of the Securities Exchange Act expressly state that the safe harbor for forward looking statements does not apply to statements made in connection with an initial public offering.

Forward-looking statements are, by their very nature, uncertain and risky.  These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulating statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.  You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

Overview

We are an integrated developer, producer and distributor of organic produce and agricultural / aquacultural products of high quality standard, with our subsidiaries operating in China.

 

Currently we are generating revenues from four divisional businesses, namely:

·

The Dairy business, through a combination of Hang Yu Tai Investment Limited and ZhongXingNongMu Co. Ltd.

·

The Plantation business, through a combination of Macau Eiji Company Limited and Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd.

·

The Fishery business, through a combination of Capital Award Inc. and SIAF.

·

The Beef business , through a combination of Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd. and Qinghai Sanjiang A Power Agriculture Co. Ltd.

 

Consolidated Results of Operations Fiscal Year 2009 Compared to Fiscal Year 2008

 

Revenues

 

Revenues increased by $5,536,372 or 34.19% to $21,725,839 for the year ended December 31, 2009 from $16,189,467 for the year ended December 31, 2008.  The increase was primarily due to higher fresh liquid milk prices and higher productivity of cows as they became more mature in the dairy’s operation. And in the Plantation operation, there were higher yield from the HU Plants when majority of them are reaching two years old (as explained in Overview above)

 

The following chart illustrates the changes by category from the year-ended December 31, 2009 to December 31, 2008.

 

 

Cost of Goods Sold

 

Cost of goods sold increased by $1,437,783 or 18.09% to $9,385,442 for the year ended December 31, 2009 from $7,947,659 for the year ended December 31, 2008.  The increase primarily due to increase of sale’s revenue and reduction on direct production cost as our operations are gradually moving into the efficient economical scale of operation.

 

The following chart illustrates the changes by category from the year-ended December 31, 2009 to December 31, 2008.