UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each Class |
| Trading Symbol |
| Name of each exchange on which registered |
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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period (September 30, 2022) covered by the annual report: there were issued and outstanding 5,990,604 ordinary shares as of September 30, 2022, and
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an emerging growth company.
☐ Large accelerated filer | ☐ Accelerated filer | ☒ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
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| International Accounting Standards Board ☐ |
|
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☐Item 17 ☐Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐Yes No
ORIGIN AGRITECH LIMITED
TABLE OF CONTENTS
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50 | |||
62 | |||
67 | |||
68 | |||
69 | |||
69 | |||
78 | |||
79 | |||
79 | |||
Material Modifications to the Rights of Security Holders and Use of Proceeds | 79 | ||
79 | |||
80 | |||
80 | |||
80 | |||
81 | |||
Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 81 | ||
81 | |||
81 | |||
82 | |||
82 | |||
83 |
2
INTRODUCTION
Except where the context otherwise requires and for purposes of this Annual Report only:
| ● | “we,” “us,” “our company,” “our,” the “Company” and “Origin” refer to Origin Agritech Limited and an intermediate holding company, State Harvest Holdings Limited, both companies formed in the British Virgin Islands and the following, which are collectively described in this Annual Report as “our PRC Operating Companies.” |
The PRC Operating Companies are:
1.State Harvest Holdings Limited (“State Harvest”), a company formed in British Virgin Islands, which is a 100% equity owned company of Origin, as a holding company for our other direct and indirect subsidiaries in China, including:
2.Beijing Origin State Harvest Biotechnology Limited (“Origin Biotechnology”), a company formed in China, collectively for itself and its six China formed subsidiaries listed below, all of which are, directly or indirectly, wholly or partly equity owned by State Harvest.
| (i) | Hubei Aoyu Agricultural Technology Limited, (“Hubei Aoyu”) in Hubei province, |
| (ii) | Anhui Aoyu Zhongye Technology Ltd. (“Anhui Aoyu”) in Anhui province, |
| (iii) | Xuzhou Aoyu Agricultural Technology Ltd. (“Xuzhou Aoyu”) in Jiangsu province, |
| (iv) | Henan Aoyu Zhongye Limited (“Henan Aoyu”) in Henan province, |
| (v) | Shandong Aoruixinong Agricultural Technology Limited (Shandong Aoruixinong), |
| (vi) | Hainan Aoyu Biotechnology Limited (“Hainan Aoyu”) in Hainan province and |
3.Beijing Origin Seed Limited (“Beijing Origin”), a company formed in China, and its subsidiary Xinjiang Originbo Seed Limited (“Xinjiang Origin”), a company formed in China, which together are held by Beijing Origin under a VIE arrangement.
4.OAL SMY Limited, a company formed in New Jersey, United States, is a 100% equity owned company of Origin.
| ● | “last year,” “fiscal year 2022,” “the year ended September 30, 2022” and “the fiscal year ended September 30, 2022” refer to the twelve months ended September 30, 2022, which is the period covered by this Annual Report; |
| ● | all references to “Renminbi,” “RMB” or “yuan” are to the legal currency of China; all references to “U.S. dollars,” “dollars,” “$” or “US$” are to the legal currency of the United States. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding. The translation of Renminbi amounts into United States dollar amounts has been made for the convenience of the reader. Such translation amounts should not be construed as representations that the Renminbi amounts could be readily converted into United States dollar amounts at that rate or any other rate; |
| ● | “China” or “PRC” refers to the mainland of People’s Republic of China; |
| ● | “Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China; and |
| ● | “shares” and “ordinary shares” refer to our ordinary shares, “preferred shares” refers to our preferred shares. |
3
Corporate Structure
The public company, Origin, in which investors hold shares, is a holding company incorporated in the British Virgin Islands. All of our business activities currently take place in China. Part of our operations are conducted in China through a variable interest enterprise, or VIE. The portion of the business that is a VIE is Beijing Origin and its subsidiary Xinjiang Origin. This portion of the business is the seed development operations of Origin. State Harvest owns 48.98% of the Beijing Origin equity and the VIE applies to the 49.98% ownership that State Harvest does not own as an equity position. The balance of our operations are conducted through wholly and partly equity owned operations, in or under Origin Biotechnology, which in turn is 100% equity owned by State Harvest.
| (1) | We are in the process of restructuring Beijing Origin Seed Limited based on the joint venture agreement with BC-TID, and both sides agreed to prolong the deadline to 2024 due to epidemic close-downs and BC-TID’s internal review processes. Currently, we have direct ownership interest of 27.36% in Beijing Origin Seed Limited through Origin Biotechnology, and we have an additional VIE interest of 71.16% in Beijing Origin Seed Limited through State Harvest Holdings Limited under a series of stock consignment agreements with the respective shareholders of Beijing Origin Seed Limited. Our total financial interest in Beijing Origin is 98.52%. Xinjiang Origin is a subsidiary of Beijing Origin Seed Limited which has a 51% equity ownership interest therein, and the Company is in the process of transferring this ownership from Beijing Origin Seed Limited to Hainan Aoyu. |
4
Due to PRC legal restrictions on foreign ownership in certain food development and production related businesses, such as our general seed development operations, we do not have full equity ownership of those parts of our business. Instead, we rely on contractual arrangements among our PRC subsidiaries and their nominee shareholders to control the portion of the business operations not owned by means of the VIE arrangements. These VIE contractual agreements enable us, we believe, to (i) exercise contractual control over the VIE, (ii) receive the economic benefits of the VIE, and (iii) have an exclusive call option to purchase all or part of the equity interests in the VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we consolidate the financial results of the VIE in our financial statements under U.S. GAAP. Investors in our ordinary shares are purchasing an equity interest in a British Virgin Islands holding company, which in turn has equity interests in some of its subsidiaries in China and a contractual arrangement with owners of the VIEs in another entity.
We and the VIE face various legal and operational risks and uncertainties related to doing business in China. Origin and the VIE are subject to complex and evolving PRC laws and regulations as a result. For example, we and the VIE face risks associated with regulatory approvals of offshore offerings, the use of variable interest entities, anti-monopoly regulatory actions, cybersecurity and data privacy, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of the ordinary shares of the parent holding company, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly decline in value or become worthless. Additionally, these concerns may limit the ability to maintain the listing of our ordinary shares on a securities exchange in the United States and in other capital markets.
Our corporate structure is subject to risks associated with the contractual arrangements with the VIE and the parties to those contractual arrangements. Investors in the BVI holding company may never have a direct ownership interest in the part of the business that is conducted by the VIE. If the PRC government finds that the agreements that establish the structure for operating our business in China do not comply with PRC laws and regulations, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we and the VIE could be subject to severe penalties or be forced to relinquish our interests in those parts of the operations. This would result in the VIE being deconsolidated for financial statement purposes. The seed development assets, including certain licenses to conduct that part of the business in China, are held by the VIE. A part of our revenues are generated by the VIE. An event that results in the deconsolidation of the VIE would have a material effect on our operations and result in the value of the ordinary shares being diminished or even becoming worthless. Our holding company, our PRC subsidiaries and the VIE, and investors of our ordinary shares face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the VIE and, consequently, significantly affect the financial performance of the VIE and our company as a whole.
Because of our operations in the development of genetically modified seeds and involvement in the production of seeds as well as for other reasons, the PRC government may intervene or act to influence our operations, or may exert more control over offerings conducted overseas and/or foreign investment in us. Such intervention or influence over the manner in which we operate could result in a material change in our operations or the value of our ordinary shares. Any actions by the PRC government to exert more oversight and control over offerings that are conducted overseas or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities and our other outstanding securities to significantly decline or be worthless.
On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severe and Lawful Crackdown on Illegal Securities Activities. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. These opinions and any related implementation rules may subject us to additional compliance requirement in the future.
With the trend of strengthening anti-monopoly supervision around the world, the PRC government has issued a series of anti-monopoly laws and regulations since 2021, paying more attention to corporate compliance. On February 7, 2021, the Anti-monopoly Commission of the State Council of the PRC promulgated the Guidelines for Anti-monopoly in the field of Platform Economy. On November 15, 2021, the State Administration for Market Regulation of the PRC promulgated the Guidelines for the Overseas Anti-monopoly Compliance of Enterprises. We believe that these regulations currently have little impact on us, but we cannot guarantee that regulators will agree with us or that these regulations will not affect our business operations in the future.
5
Cybersecurity and data privacy and security issues are subject to increasing legislative and regulatory focus in China. The State Council of the PRC promulgated the Security Protection Regulations for Critical Information Infrastructure (the “CII Regulation”) on July 30, 2021, which took effect on September 1, 2021. This regulation requires, among others, certain competent authorities to identify critical information infrastructures. The Cybersecurity Administration of China (the “CAC”) and a number of other departments under the State Council promulgated the Measures for Cybersecurity Review on December 28, 2021, which became effective on February 15, 2022. According to this regulation, critical information infrastructure operators purchasing network products and services and network platform operators carrying out data processing activities, which affect or may affect national security, are required to conduct cybersecurity review. We believe that these regulations have little impact on us, because we are neither a critical information infrastructure operator nor a network platform operator within the meanings of these regulation. However, we cannot guarantee that the regulators will agree with us.
On September 1, 2021, the PRC Data Security Law became effective, which imposes data security and privacy obligations on entities and individuals conducting data-related activities, and introduces a data classification and hierarchical protection system. In addition, the Standing Committee of the PRC National People’s Congress promulgated the Personal Information Protection Law (the “PIPL”) on August 20, 2021, which took effect on November 1, 2021. The PIPL further emphasizes processors’ obligations and responsibilities for personal information protection and sets out the basic rules for processing personal information and the rules for cross-border transfer of personal information. On July 7, 2022, the CAC promulgated the Security Assessment Measures for Outbound Data Transfers (the “Assessment Measures”) which became effective on September 1, 2022, subject to a six month implementation grace period, along with the guidelines. According to the Assessment measures, a data processor shall declare security assessment for its outbound data transfer to the CAC through the local cyberspace administration at the provincial level under any of the following circumstances: (a) where a data processor provides critical data abroad; (b) where a critical information infrastructure operator or a data processor processing the personal information of more than one million individuals provides personal information abroad; (c) where a data processor has provided personal information of 100,000 individuals or sensitive personal information of 10,000 individuals in total abroad since January 1 of the previous year; and (d) other circumstances prescribed by the CAC for which declaration for security assessment for outbound data transfers is required. We have the opportunity to contact, obtain or be exposed to personal information of our subscribers and their close relatives. We may be required to declare security assessment once we fall under any of the aforementioned circumstances and our business operations may be restricted according to the regulations above mentioned.
6
On December 24, 2021, the China Securities Regulatory Commission (“CSRC”) published the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), and Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), or, collectively, the Draft Overseas Listing Regulations, which set out the new regulatory requirements and filing procedures for Chinese companies seeking direct or indirect listing in overseas markets. The Draft Overseas Listing Regulations, among others, stipulate that Chinese companies that seek to offer and list securities in overseas markets must fulfill the filing procedures with and report relevant information to the CSRC, and that an initial filing must be submitted within three working days after the application for an initial public offering in an overseas market is submitted, and a second filing must be submitted within three working days after the listing is completed. Moreover, an overseas offering and listing is prohibited under circumstances if (i) it is prohibited by PRC laws, (ii) it may constitute a threat to or endanger national security as reviewed and determined by competent PRC authorities, (iii) it has material ownership disputes over equity, major assets, and core technology, (iv) in the past three years, the Chinese operating entities and their controlling shareholders and actual controllers have committed relevant prescribed criminal offenses or are currently under investigations for suspicion of criminal offenses or major violations, (v) the directors, supervisors, or senior executives have been subject to administrative punishment for severe violations, or are currently under investigations for suspicion of criminal offenses or major violations, or (vi) it has other circumstances as prescribed by the State Council. The Draft Overseas Listing Regulations, among others, stipulate that when determining whether an offering and listing shall be deemed as “an indirect overseas offering and listing by a Chinese company”, the principle of “substance over form” will be followed, and if the issuer meets the following conditions, its offering and listing will be determined as an “indirect overseas offering and listing by a Chinese company” and is therefore subject to the filing requirement: (i) the revenues, profits, total assets or net assets of the Chinese operating entities in the most recent financial year accounts for more than 50% of the corresponding data in the issuer’s audited consolidated financial statements for the same period; and (ii) the majority of senior management in charge of business operation are Chinese citizens or have domicile in PRC, and its principal place of business is located in PRC or main business activities are conducted in PRC. We cannot predict the impact of the Draft Overseas Listing Regulations on us at this stage.
Since these regulatory actions are relatively new, it is uncertain how soon legislative or administrative regulation-making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, or the potential impact such modified or new laws and regulations will have on our daily business operation, or our ability to accept foreign investments and listing on a U.S. or other foreign exchange. PRC laws and their interpretations and enforcement continue to develop and are subject to change, and the PRC government may adopt other rules and restrictions in the future.
Our financial statements contained in this annual report have been audited by B F Borgers CPA PC, an independent registered public accounting firm that is headquartered in Lakewood, Colorado. It is a firm registered with the U.S. Public Company Accounting Oversight Board (the “PCAOB”), and is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. Therefore, we believe, Article 177 of the PRC Securities Law, which became effective in March 2020, should not apply to us. That law provides that no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to overseas parties. The United States Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states that if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such ordinary shares from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. The SEC has adopted rules to implement the HFCA Act and, pursuant to the HFCA Act, the PCAOB has issued a report notifying the Securities and Exchange Commission of its determination that it is currently unable to inspect accounting firms headquartered in mainland China or Hong Kong. Further, the United States Senate has passed the Accelerating Holding Foreign Companies Accountable Act, or the AHFCA Act, which, if enacted, would decrease the number of “non-inspection years” from three years to two years, and thus, would reduce the time before securities may be prohibited from trading or be delisted. Currently, we do not believe that we are subject to the various laws mentioned above, and we do not believe our ordinary shares will be delisted from NASDAQ because of these laws.
7
Internal Cash Transfers and Dividends
Cash is transferred through our organization in the following manner:
Please refer to the selected condensed consolidated financial information below in this Section and the consolidated financial statements commencing at page F-1, included in this Annual Report on Form 20-F, as amended.
8
VIE Structure Evaluation
The consignment agreement, or VIE, structure that we have, provides contractual opportunity for foreign investment in China-based companies where Chinese law prohibits direct foreign investment in the operating companies. For example, foreign ownership in food production is subject to significant regulations in China. For accounting purposes, we receive the economic benefits of Beijing Origin and its subsidiary, in part, through certain contractual arrangements. Such contractual arrangements enable us to consolidate the financial results of the VIE and its subsidiary in our consolidated financial statements under US Generally Accepted Accounting Principles, or GAAP, which VIE structure involves unique risks to investors. Our ordinary shares are shares of Origin, the holding company in the British Virgin Islands, instead of shares of our PRC subsidiaries, or the VIEs or its subsidiary in China. As of the date of this report, the contractual arrangements have not been tested in court in either the PRC or the United States. Neither the investors in the holding company nor the Company have an full equity ownership in, direct foreign investment in, or control as effective as equity ownership of, the VIE.
Because we do not directly hold all equity interests in the VIE or its subsidiary, we and the VIE are subject to risks and uncertainties of the interpretations and applications of PRC laws and regulations, including but not limited to, the validity and enforcement of the contractual arrangements and uncertainties about any future actions of the PRC government resulting in disallowing the VIE structure. The loss of our operations conducted under the contractual arrangements would likely result in a material change in our operations, and the value of our ordinary shares may depreciate significantly or become worthless.
Origin evaluates all transactions and relationships with variable interest entities (“VIE”) to determine whether the Company is the primary beneficiary of the entities in accordance with FASB ASC 810, Consolidation. Origin’s overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two steps:
In performing the first step, the significant factors and judgments that the Company considers in making the determination as to whether an entity is a VIE include:
If the Company identifies a VIE based on the above considerations, it then performs the second step and evaluates whether it is the primary beneficiary of the VIE by considering the following significant factors and judgments:
Based on its evaluation of the above factors and judgments, as of September 30, 2020, 2021 and 2022, the Company consolidated any VIEs in which it was the primary beneficiary.
9
Risks Associated with VIE Structure
We discuss the risks of being a BVI holding company with operations only in the PRC in greater detail In Item 3, subpart D, at pages 28 of this Amendment N0. 2, to the Annual Report on Form 20-F, for the fiscal year ended September 30, 2022.
Selected Condensed Consolidated Financial Information
The following table presents our condensed consolidating schedule of financial position for our top-tier holding company, Origin Agritech Limited, our wholly-owned subsidiaries that are the primary beneficiaries of the VIEs under U.S. GAAP (the “Primary Beneficiaries of VIEs”), our other subsidiaries that are not VIEs (the “Other Subsidiaries”), and VIEs and their subsidiaries that we consolidate as of the dates presented were as follows:
(1) Parent: Origin Agritech Limited (BVI)
(2) Other subsidiaries that are equity owned: OAL SMY Limited (United States), Beijing Origin State Harvest Biotechnology (PRC) and its 6 majority owned subsidiaries Anhui Aoyu, Hainan Aoyu, Henan Aoyu, Hubei Aoyu, Shandong Aoruixinong, and Xuzhou Aoyu (all PRC)
(3) Primary Beneficiary of VIE: State Harvest Holdings Limited (PRC)
(4) VIE and VIE subsidiary : Beijing Origin Seed Limited (PRC) and Xinjiang Originbo Seed Limited (PRC)
Selected Condensed Consolidated Balance Sheets Data
As of September 30, 2022 | ||||||||||||
Other | Primary | VIE and | Eliminations | Consolidated | ||||||||
| Parent |
| Subsidiaries |
| Beneficiary of VIE |
| VIE subsidiary (PRC) |
| adjustments |
| Total | |
Intercompany receivables |
| 216,571 |
| — |
| — |
| 59,417 |
| (275,988) |
| — |
Total current assets |
| 223,896 |
| 56,807 |
| — |
| 76,825 |
| (275,988) |
| 81,540 |
Intercompany payables |
| — |
| 63,040 |
| 212,948 |
| — |
| (275,988) |
| — |
Working capital |
| 223,172 |
| (52,156) |
| (212,964) |
| (169,376) |
| — |
| (211,325) |
Investments in subsidiaries |
| — |
| 90,907 |
| — |
| — |
| (90,907) |
| — |
Benefits through VIE and VIE’s subsidiaries |
| — |
| — |
| 233,520 |
| — |
| (233,520) |
| — |
Total Assets |
| 223,896 |
| 165,831 |
| 233,520 |
| 112,123 |
| (600,415) |
| 135,955 |
Fiscal year ended September 30, 2021 | ||||||||||||
Other | Primary | VIE and | Eliminations | Consolidated | ||||||||
| Parent |
| Subsidiaries |
| Beneficiary of VIE |
| VIE subsidiary (PRC) |
| adjustments |
| Total | |
Intercompany receivables |
| 187,777 |
| — |
| — |
| 49,477 |
| (237,254) |
| — |
Total current assets |
| 197,667 |
| 45,895 |
| — |
| 51,835 |
| (237,254) |
| 58,143 |
Intercompany payables |
| — |
| 42,734 |
| 194,520 |
| — |
| (237,254) |
| — |
Working capital |
| 196,780 |
| (33,666) |
| (194,536) |
| (196,802) |
| — |
| (228,224) |
Investments in subsidiaries |
| — |
| 147,000 |
| — |
| — |
| (147,000) |
| — |
Benefits through VIEs and VIE’s subsidiaries |
| — |
| — |
| 233,520 |
| — |
| (233,520) |
| — |
Total Assets |
| 197,667 |
| 203,254 |
| 233,520 |
| 102,371 |
| (617,774) |
| 119,038 |
10
Selected Condensed Consolidated Statements of Operations Data
For the Year Ended September 30, 2022 | ||||||||||||
Other | Primary | VIE and | Eliminations | Consolidated | ||||||||
| Parent |
| Subsidiaries |
| Beneficiary of VIE |
| VIE subsidiary (PRC) |
| adjustments |
| Total | |
Third-party revenues |
| — |
| 45,000 |
| — |
| 7,580 |
| — |
| 52,580 |
Intra- group revenues |
| — |
| 2,584 |
| — |
| 3,224 |
| (5,808) |
| — |
Total revenue |
| — |
| 47,584 |
| — |
| 10,804 |
| (5,808) |
| 52,580 |
Third-party costs of Revenue |
| — |
| (31,591) |
| — |
| (4,795) |
| — |
| (36,386) |
Intra- group costs of Revenue |
| — |
| (2,584) |
| — |
| (3,224) |
| 5,808 |
| — |
Total costs of Revenue |
| — |
| (34,175) |
| — |
| (8,019) |
| 5,808 |
| (36,386) |
Total Operating expenses |
| (5,261) |
| (17,000) |
| — |
| (10,345) |
| 3,516 |
| (29,090) |
Income from subsidiaries and VIE |
| 6,316 |
| — |
| 6,316 |
| — |
| (12,632) |
| — |
Income (loss) from non-operations |
| — |
| (57,603) |
| — |
| 75,056 |
| (2,246) |
| 15,207 |
Income before income tax expenses |
| 1,055 |
| (61,194) |
| 6,316 |
| 67,496 |
| (11,362) |
| 2,311 |
Less: income tax (benefit) expenses |
| — |
| 14 |
| — |
| — |
| — |
| 14 |
Net income |
| 1,055 |
| (61,180) |
| 6,316 |
| 67,496 |
| (11,362) |
| 2,325 |
Less: net income (loss) attributable to non-controlling interests |
| — |
| — |
| — |
| 8,590 |
| — |
| 8,590 |
Net income (loss) attributable to Origin Agritech Limited’s shareholders |
| 1,055 |
| (61,180) |
| 6,316 |
| 58,906 |
| (11,362) |
| (6,265) |
For the Year Ended September 30, 2021 | ||||||||||||
Other | Primary | VIE and | Eliminations | Consolidated | ||||||||
| Parent |
| Subsidiaries |
| Beneficiary of VIE |
| VIE subsidiary (PRC) |
| adjustments |
| Total | |
Third-party revenues |
| — |
| 40,660 |
| — |
| 5,765 |
| — |
| 46,425 |
Intra- group revenues |
| — |
| 9,965 |
| 3,416 |
| (13,381) |
| — |
| — |
Total revenue |
| — |
| 50,625 |
| — |
| 9,181 |
| (13,381) |
| 46,425 |
Third-party costs of Revenue |
| — |
| (28,135) |
| — |
| (5,476) |
| — |
| (33,611) |
Intra- group costs of Revenue |
| — |
| (9,965) |
| — |
| (3,416) |
| 13,381 |
| — |
Total costs of Revenue |
| — |
| (38,100) |
| — |
| (8,892) |
| 13,381 |
| (33,611) |
Total Operating expenses |
| (19,316) |
| (57,790) |
| — |
| (78,357) |
| 4,735 |
| (150,728) |
Income from subsidiaries and VIE |
| (110,363) |
| (110,363) |
| 220,726 |
| — |
| — |
| — |
Income (loss) from non-operations |
| — |
| (3,792) |
| — |
| 16,940 |
| (2,137) |
| 11,011 |
Income before income tax expenses |
| (129,679) |
| (49,057) |
| (110,363) |
| (61,128) |
| 223,324 |
| (126,903) |
Less: income tax (benefit) expenses |
| — |
| (178) |
| — |
| — |
| — |
| (178) |
Net income (loss) |
| (129,679) |
| (49,235) |
| (110,363) |
| (61,128) |
| 223,324 |
| (127,081) |
Less: net income (loss) attributable to non-controlling interests |
| 1,492 |
| (37,044) |
| (35,552) |
| — |
| — |
| — |
Net income (loss) attributable to Origin Agritech Limited’s shareholders |
| (129,679) |
| (49,235) |
| (111,855) |
| (24,084) |
| 223,324 |
| (91,529) |
11
For the Year Ended September 30, 2020 | ||||||||||||
Other | Primary | VIE and | Eliminations | Consolidated | ||||||||
| Parent |
| Subsidiaries |
| Beneficiary of VIE |
| VIE subsidiary (PRC) |
| adjustments |
| Total | |
Revenues |
| — |
| 44,253 |
| — |
| 8,260 |
| — |
| 52,513 |
Costs of Revenue |
| — |
| (25,198) |
| — |
| (23,802) |
| — |
| (49,000) |
Total Operating expenses |
| (14,854) |
| (7,396) |
| (4) |
| (72,842) |
| — |
| (95,096) |
Income from subsidiaries and VIEs |
| (87,988) |
| (87,984) |
| 175,972 |
| — |
| — |
|
|
Income (loss) from non-operations |
| — |
| (9,212) |
| — |
| (1,622) |
| — |
| (10,834) |
Income before income tax expenses |
| (102,842) |
| 2,447 |
| (87,988) |
| (90,006) |
| 175,972 |
| (102,417) |
Less: income tax (benefit) expenses |
| — |
| (425) |
| — |
| — |
| — |
| (425) |
Net income |
| (102,842) |
| 2,022 |
| (87,988) |
| (90,006) |
| 175,972 |
| (102,842) |
Less: net income (loss) attributable to non-controlling interests |
| 2,304 |
| (19,885) |
| (17,581) |
| — |
| — |
| — |
Net income attributable to Origin Agritech Limited’s shareholders |
| (102,842) |
| (282) |
| (87,988) |
| (70,121) |
| 175,972 |
| (85,261) |
Selected Condensed Consolidated Cash Flows Information
For the Year Ended September 30, 2022 | ||||||||||||
Other | Primary | VIE and | Eliminations | Consolidated | ||||||||
| Parent |
| Subsidiaries |
| Beneficiary of VIE |
| VIE subsidiary (PRC) |
| adjustments |
| Total | |
Total cash provided by operating activities |
| (4,567) |
| (2,661) |
| — |
| 10,519 |
| — |
| 3,291 |
Total cash used in investing activities |
| — |
| (480) |
| — |
| (622) |
| — |
| (1,102) |
Total cash used in financing activities |
| 1,614 |
| 7,306 |
| — |
| (9,252) |
| — |
| (332) |
Effect of exchange rate changes |
| 447 |
| — |
| — |
| — |
| — |
| 447 |
Restricted cash |
| — |
| — |
| — |
| 14 |
| — |
| 14 |
Net decrease in cash, cash equivalents and restricted cash |
| (2,506) |
| 4,165 |
| — |
| 659 |
| — |
| 2,318 |
For the Year Ended September 30, 2021 | ||||||||||||
Other | Primary | VIE and | Eliminations | Consolidated | ||||||||
| Parent |
| Subsidiaries |
| Beneficiary of VIE |
| VIE subsidiary (PRC) |
| adjustments |
| Total | |
Total cash provided by operating activities |
| — |
| (24,693) |
| — |
| (384) |
| — |
| (25,077) |
Total cash used in investing activities |
| — |
| 639 |
| — |
| (1,715) |
| (133) |
| (1,209) |
Total cash used in financing activities |
| (8,637) |
| 26,142 |
| — |
| 2,200 |
| 133 |
| 19,838 |
Effect of exchange rate changes |
| (816) |
| — |
| — |
| — |
| — |
| (816) |
Restricted cash |
| — |
| — |
| — |
| 133 |
| — |
| 133 |
Net decrease in cash, cash equivalents and restricted cash |
| (9,453) |
| 2,088 |
| — |
| 234 |
| — |
| (7,131) |
For the Year Ended September 30, 2020 | ||||||||||||
Other | Primary | VIE and | Eliminations | Consolidated | ||||||||
| Parent |
| Subsidiaries |
| Beneficiary of VIE |
| VIE subsidiary (PRC) |
| adjustments |
| Total | |
Total cash provided by operating activities |
| — |
| 49,618 |
| (4) |
| (55,229) |
| — |
| (5,615) |
Total cash used in investing activities |
| — |
| (45,951) |
| — |
| 3 |
| 3,705 |
| (42,243) |
Total cash used in financing activities |
| 16,730 |
| (2,216) |
| — |
| 55,109 |
| (3,705) |
| 65,918 |
Effect of exchange rate changes |
| 1,371 |
| — |
| — |
| — |
| — |
| 1,371 |
Restricted cash | — | — | — | (147) | — | (147) | ||||||
Net decrease in cash, cash equivalents and restricted cash |
| 18,101 |
| 1,451 |
| (4) |
| (264) |
| — |
| 19,284 |
12
FORWARD-LOOKING INFORMATION
This Annual Report on Form 20-F contains forward-looking statements that are based on our current expectations, assumptions, estimates, and projections about our company and industry. All statements other than statements of historical fact in this Annual Report are forward-looking statements. These forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is/are likely to” or other similar expressions. The forward-looking statements included in this Annual Report relate to, among others:
| ● | our expectations for our future business and product development, business prospects, results of business operations and current financial condition; |
| ● | future development of China based agricultural biotechnology as a whole, including our genetically modified seed research and development and its distribution and acceptance in the China market; |
| ● | our ability to develop and commercialize any alternative businesses; |
| ● | address the scope and impact of the governing and regulatory policies and laws on our business, including that of the research and development of genetically modified seed products and any other ancillary businesses in which we engage, and importantly the regulation of VIE business structures in the United States and China; |
| ● | our plans to license or co-develop seed products or technologies; |
| ● | likelihood of recurrence of accounting charges or impairments; |
| ● | expected changes in our sources of revenues and income base and our ability to generate income from our diversified business lines, and how funds might be up-streamed to our holding company, and any limitations thereon imposed by China regulation; |
| ● | competition in our business lines, including the crop seed industry, development of GM seeds; |
| ● | our plans for current staffing requirements and research and development and business expansion; |
| ● | our ability to successfully raise capital to accommodate company needs which are under acceptable terms and at an acceptable share price; and |
| ● | adequacy of our facilities for our operations. |
We believe it is important to communicate our expectations to our shareholders. However, there may be certain events in the future that we are not able to predict with accuracy or over which we have no control. The risk factors and cautionary language discussed in this Annual Report provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations in these forward-looking statements, including among other things:
| ● | changing interpretations of Generally Accepted Accounting Principles (“GAAP”); |
| ● | outcomes of PRC and international government reviews, inquiries, investigations and related litigations, including PCAOB compliance issues and VIE issues; |
| ● | continued compliance with government regulations of PRC and other governments, including that about our business operations and corporate structure; |
| ● | legislative and regulatory environments, requirements or changes adversely affecting the businesses in which we and our PRC operating companies are engaged; and |
| ● | management of the growth of our business and introduction of genetically modified products. |
13
The forward-looking statements in this Annual Report involve various risks, assumptions, and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot be certain that our expectations will materialize. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in the risk factors included in this Annual Report.
The forward-looking statements made in this Annual Report relate only to events or information as of the date of the statements. Readers should read these statements in conjunction with the risk factors disclosed in this Annual Report.
All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events.
14
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A. Selected financial data.
The following selected consolidated financial information was derived from our fiscal year end consolidated financial statements. The following information should be read in conjunction with those statements and Item 5, “Operating and Financial Review and Prospects.”
Our summary consolidated statements of operations and comprehensive income data for the fiscal years ended September 30, 2020, 2021 and 2022, and our summary consolidated balance sheet data as of September 30, 2021 and 2022, as set forth below, are derived from, and are qualified in their entirety by reference to, our audited consolidated financial statements, including the notes thereto, which are included in this Annual Report.
15
Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.
2020 | 2021 | 2022 | 2022 | |||||
| RMB’000 |
| RMB’000 |
| RMB’000 |
| US$’000 | |
Revenues |
| 52,513 |
| 46,425 |
| 52,580 |
| 7,406 |
Cost of revenues |
| (49,000) |
| (33,611) |
| (36,386) |
| (5,125) |
Gross profit |
| 3,513 |
| 12,814 |
| 16,194 |
| 2,281 |
Operating expenses |
|
|
|
| ||||
Selling and marketing |
| (4,820) |
| (5,564) |
| (7,335) |
| (1,033) |
General and administrative |
| (58,069) |
| (73,315) |
| (14,321) |
| (2,017) |
Research and development |
| (4,116) |
| (1,979) |
| (7,434) |
| (1,047) |
Impairment of assets |
| (28,091) |
| (69,870) |
| — |
| — |
Total operating expenses, net |
| (95,096) |
| (150,728) |
| (29,090) |
| (4,097) |
Loss from operations |
| (91,583) |
| (137,914) |
| (12,896) |
| (1,816) |
Interest expense, net |
| (5,796) |
| (8,558) |
| (8,228) |
| (1,159) |
Impairment of long-term investment |
| (5,994) |
| (5,958) |
| (2,906) |
| (409) |
Rental income |
| 7,643 |
| 10,603 |
| 10,603 |
| 1,493 |
Other non-operating income (expense), net |
| (6,687) |
| 14,924 |
| 15,738 |
| 2,217 |
Loss before income taxes |
| (102,417) |
| (126,903) |
| 2,311 |
| 326 |
Income tax (expense) benefits, Current |
| (425) |
| (178) |
| 14 |
| 2 |
Net loss |
| (102,842) |
| (127,081) |
| 2,325 |
| 328 |
Less: Net (loss) income attributable to non-controlling interests |
| (17,581) |
| (35,552) |
| 8,590 |
| 1,210 |
Net loss attributable to Origin Agritech Limited |
| (85,261) |
| (91,529) |
| (6,265) |
| (882) |
Other comprehensive loss |
|
|
|
| ||||
Net loss |
| (102,842) |
| (127,081) |
| 2,325 |
| 328 |
Foreign currency translation difference |
| 1,371 |
| (816) |
| 447 |
| 63 |
Comprehensive loss |
| (101,471) |
| (127,897) |
| 2,772 |
| 391 |
Less: Comprehensive (loss) income attributable to non-controlling interests |
| (17,581) |
| (35,552) |
| 8,590 |
| 1,210 |
Comprehensive loss attributable to Origin Agritech Limited |
| (83,890) |
| (92,345) |
| (5,818) |
| (819) |
Basic and diluted net income (loss) per share (note 21) | ||||||||
Continuing operations | (16.95) | (16.29) | (1.09) | (0.15) | ||||
Basic and diluted net loss per share attributable to Origin Agritech Limited (note 21) | (16.95) | (16.29) | (1.09) | (0.15) | ||||
Shares used in computing earnings per share: | ||||||||
Shares used in calculating basic and diluted net income (loss) per share* | 5,029,017 | 5,617,424 | 5,773,094 | 5,773,094 | ||||
Diluted* | 5,029,017 | 5,617,424 | 5,773,094 | 5,773,094 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 | |
| 2020 |
| 2021 |
| 2022 |
| 2022 | |
RMB’000 | RMB’000 | RMB’000 | USD’000(1) | |||||
Consolidated balance sheet data: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| 22,482 |
| 15,351 |
| 17,669 |
| 2,489 |
Restricted cash |
| 147 |
| 14 |
| — |
| — |
Current working capital (2) |
| (112,542) |
| (228,224) |
| (211,325) |
| (29,765) |
Total assets |
| 254,883 |
| 119,038 |
| 135,955 |
| 19,149 |
Total current liabilities |
| 176,940 |
| 286,367 |
| 292,865 |
| 41,250 |
Total liabilities |
| 340,345 |
| 304,636 |
| 308,597 |
| 43,465 |
Non-controlling interests |
| (8,272) |
| (44,926) |
| (38,770) |
| (5,461) |
Total Origin Agritech Limited shareholders’ equity |
| (85,462) |
| (185,598) |
| (172,642) |
| (24,317) |
| (1) | Translation of Renminbi amounts into United States dollar amounts has been made for the convenience of the reader for the year ended September 30, 2022, and has been made at the exchange rate quoted by the State Administration of Foreign Exchange in China on September 30, 2022, of RMB 7.0998 to US$1.00. Such translation amounts should not be construed as a representation that the Renminbi amounts could be readily converted into United States dollar amounts at that rate or any other rate. |
16
| (2) | Current working capital is the difference between total current assets and total current liabilities. |
Exchange Rate Information
The conversion of Renminbi into U.S. dollars in this Annual Report is based on the statistics of the State Administration of Foreign Exchange. The consolidated financial statements are presented in Renminbi, which is our reporting currency. The translation of Renminbi amounts into United States dollar amounts has been made for the convenience of the reader and has been made at the exchange rate quoted by the State Administration of Foreign Exchange in China on September 30, 2022, of RMB 7.0998 to US$1.00. Unless otherwise noted, for the years ended September 30, 2021 and 2022, all translations from Renminbi to U.S. dollars in this Annual Report were made at RMB 6.4854 and RMB 7.0998 per US $1.00, respectively, which were the prevailing year or period end closing rates for those periods. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.
The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are not necessarily the exchange rates that we used in this Annual Report or will use in the preparation of our periodic reports or any other information to be provided to you. The source of the rates is the State Administration of Foreign Exchange in China.
| Average (1) |
| High |
| Low |
| Period-end | |
2018 |
| 6.6185 |
| 6.967 |
| 6.2764 |
| 6.8632 |
2019 |
| 6.8694 |
| 7.0884 |
| 6.685 |
| 7.0729 |
2020 |
| 6.9969 |
| 7.1316 |
| 6.7591 |
| 6.8101 |
2021 |
| 6.5059 |
| 6.7796 |
| 6.3572 |
| 6.4854 |
2022 |
| 6.7324 |
| 6.7620 |
| 6.6863 |
| 6.7437 |
July 2022 |
| 6.7949 |
| 6.8906 |
| 6.7324 |
| 6.8906 |
August 2022 |
| 6.9621 |
| 7.1107 |
| 6.8821 |
| 7.0998 |
September 2022 |
| 7.1287 |
| 7.1768 |
| 7.0992 |
| 7.1768 |
October 2022 |
| 7.1628 |
| 7.2555 |
| 7.0363 |
| 7.1769 |
November 2022 |
| 6.9833 |
| 7.1225 |
| 6.9565 |
| 6.9646 |
December 2022 |
| 6.7324 |
| 6.7620 |
| 6.6863 |
| 6.7437 |
| (1) | Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the month. |
B. Capitalization and indebtedness.
Not Applicable
C. Reasons for the offer and use of proceeds.
Not Applicable.
D. Risk factors.
Summary of Risk Factors
Below is a summary of what the Company believes to be the primary risk factors that an investor should consider when judging an investment in the Company. Those risk factors identified below should not be to the exclusion of all the other risk factors discussed in this report.
| ● | We operate a portion of our seed business, the seed development business, through a VIE structure, which means investors ultimately may be found not to own a part of our business. There are many risks associated with a VIE structure, which are explained at length herein. |
17
| ● | Aspects of our business are conducted under technical service agreements and other contractual arrangements, which may not provide the business results and assurances we expect from our contract partners. |
| ● | Our auditor have issued their opinion with a going concern qualification. We expect to need working capital from time to time in the future; we have no assured means of raising capital. |
| ● | We need to continue to develop new seed traits to maintain our biotech pipeline of products. If we do not develop new products and keep up with industry trends, our business will experience setbacks. |
| ● | Although we believe there is a significant, encouraging change in the regulatory approach to GMO products in the PRC, these changes are recent, and there still is uncertainty about full government acceptance and consumer acceptance of GMO products. |
| ● | Development of aspects of our business is through joint ventures. Therefore we rely on others to help us develop our business; we may not be able to maintain these relationships or control our business partners cooperation. |
| ● | We face competition from many sources, including traditional seed products and international competition in the GM seed market. |
| ● | To maintain our product integrity, we must protect our intellectual property rights and the quality of our products in the market place. |
| ● | We operating in a regulated industry, therefore if we do not comply with the different applicable laws and regulations, our business may be impaired and we may suffer economic disruption and penalties. |
| ● | As a foreign private issuer, you may not be able to enforce rights common to investors in companies based in or founded in the United States. Also, under SEC and Nasdaq rules, we do not have to provide in our reports and corporate governance certain information and investor protections. |
| ● | The trading of our ordinary shares on Nasdaq is volatile and inconsistent. You may not be able to effect transactions in your shares at a posted price or in the quantity you desire. |
Risks relating to our business
We currently use regional joint venture companies for our seed distribution business; These companies may not be able to perform as we expected.
We have regional joint venture companies for our seed distribution business. The Company has stock positions of 51% or 50% in these joint ventures. Most of the joint venture partners were the Company’s regional distributors in the past. As this is a new business model for the Company and our joint venture partners are engaging with the Company differently than before, no assurance can be given that the joint ventures will perform as well as we expect, which could impact the overall performance of the Company. Because these are separate companies, we may not be able to control their distribution methods for our seed products, with the consequence that our sales may not be as expected.
If we do not manage our ongoing operations successfully, our growth and chances for profitability will be hindered or impeded.
Our Company engages in corn seed research and development, deploying our biotechnology assets. These activities are conducted through the VIE. We plan to continue our seed research and development activities, with a view to licensing our seed traits and seed germplasm characteristics and performing contract research and development services. Our business continues to require substantial investment, human resources and on our cash assets. Our current resources are not likely to be fully support our longer term planned operations and expansion.
18
Our independent auditors have issued their reports with a going concern statement.
The reports on our financial statements for the fiscal years ended September 30, 2020, 2021 and 2022, included in this Annual Report on Form 20-F, contain a going concern statement. During fiscal year 2021 and 2022, we raised capital through the sale of our ordinary shares under an at-the-market arrangement and a self-sell registered transaction. Notwithstanding this additional capital, based on our financial resources and our planned operations, we will need to obtain a capital to continue our business as planned, for which we do not have any long term arrangements, and/or generate increased revenue from operations to cover our expenses, of which we cannot be certain. If we are unable to fund our operations, we may have to curtail substantial parts of our business operations or cease our business operations. Investors should evaluate their investment in the Company based on these financial uncertainties.
Our seed biotechnology joint venture formed with BC-TID may not perform as well as we expected.
In 2019, the Company entered into a Cooperation Framework Agreement with Beijing Changping Technology Innodevelop Group (BC-TID), an entity owned by the government of Changping District of Beijing City. As of September 30, 2021, BC-TID has invested a total of RMB137.7 million ($20.2 million) as part of the agreement. The deal documents have been completed by both Origin and BC-TID and have been submitted to government officials for final approval, which approval is delayed due to the Covid19 pandemic and extended to a new completion date of before February 2024. While we believe the seed biotechnology joint venture formed with BC-TID could give the Company a new starting ground for potential growth when the Chinese authorities open up the genetically modified corn commercialization, the new joint venture to be formed may not perform as well as we expected and, as a result, could impact the Company’s financial performance. We may not profit from the joint venture as hoped for.
The successful development and commercialization of our biotech pipeline of products will be important for our growth.
We focus our seed business on biotechnology development in the seed industry. We conduct our own research and development efforts for genetically modified seeds, referred to as GM. We also collaborate with the Chinese Academy of Agricultural Sciences, the National Maize Improvement Center, China Agricultural University, and Zhejiang University in the PRC under various agreements for seed genetic modifications and other seed biotechnologies that give us the right to market the seeds and technologies they develop. We also seek other development and marketing arrangements with other entities in China and elsewhere. The length of time and the risk associated with seed breeding and biotech pipelines are similar and interlinked because both are required as a package for commercial success in markets where biotech traits are approved for growers. Regulatory requirements affect the development of our biotech products, including the GM crop testing of seeds containing the biotech traits. If we do not meet the regulatory requirements, our business and results of operations will be adversely affected. The testing procedures can be lengthy and costly, with no guarantee of success. It could have an adverse effect on our operations if our genetically modified products are unable to pass the safety evaluation for genetically modified agricultural organisms.
The potential uncertainty in the government regulation in China of genetic technology and genetically modified, or GM, agricultural products and the acceptance of these products by the public could have an adverse effect on our business.
Genetically modified seed products are controversial; thus genetic modification has not yet been accepted in many countries throughout the world. The Chinese government has only recently begun to issue GM crop safety certificates for eventual commercial cultivation of GM seeds. The Chinese government is encouraging food independence as a country, and we believe that it will increasingly favor GM food products as these products provide better yield and can accommodate changing climatic changes. Consumer reaction to GM products is also becoming a factor in the overall approval process and the ability of companies, such as ours, to sell or license our GM products. Food related GM products have had limited approvals in China, and Chinese consumers continue to be reluctant to embrace GM food products and food using GM products in production. The relative novelty and the potential uncertainty in the government regulation of genetic technology and ultimate consumer acceptance will have an effect on our business development strategy and research activities and may cause us to re-evaluate our development programs for developing new seeds.
19
The government may not approve or may limit commercialization of genetically modified corn products, which could have an adverse impact on the future of the company.
Even though we believe biotechnology is important in agricultural applications in China, and the Chinese government has supported and approved some uses of genetically modified seeds, we cannot predict whether or when the government will approve the full commercialization of GM seeds, including genetically modified corn such as we develop. We have received research grants in the past that are related to our GM research, which we believe demonstrates support for at least some GM seed use in the future. Notwithstanding expressions of government support, it is still possible that the government may not approve the full commercialization of GM seeds, including GM corn, and it may even ultimately conclude to limit or ban commercialization and/or research relating to genetically modified corn and other seed products. Local governments in China may also seek to evaluate GM seed products and issue their own interpretations and regulations. Any of these actions could have an adverse impact on our future development, and we would not be able to recover our research and development costs spent in developing biotechnology products.
Any sales or operations outside China will be subject to foreign regulatory and legislative requirements, and it will be costly to comply with those regulatory requirements. If we are unable to meet these requirements, we will not be able to distribute our products.
Foreign regulatory and legislative requirements will impact the development and distribution of our seed products in the global market. Certain markets require rigorous testing and pre-approval prior to a market release of the GM seeds. For example, prior to the entry into the United States market, importers of non-United States seeds will need to obtain regulatory approval from various federal and state governmental agencies. The United States Department of Agriculture has to determine if there are any “plant pest” issues with the specific crop and traits. Further, some products may have to be submitted to the US Environmental Protection Agency (the “EPA”) to determine if there are any pesticide-related traits that are subject to regulation. There may also have to be submitted a Microbial Commercial Activity Notice (MCAN) to the EPA, which includes detailed information describing the seed’s characteristics and genetic construction, health and environmental effects, and other data, before GM seeds can be used in the United States for commercial purposes. Finally, even if a seed product has the required certificates and permits, there will be continuous Food and Drug Administration (“FDA”) regulation compliance about food safety, which place responsibility on the seed producer to assure the safety of the GM seed in the food chain and proof that GM crop seeds are “substantially equivalent” to non-modified versions of the seed. In the United States, there is also substantive state regulations applying to seeds: for example, some states have required specific labeling, banned planting and cultivation, and imposed additional certification requirements for use of GM seeds. These types of central and local government regulation and restrictions exist in many other countries around the world.
Obtaining and maintaining permits and certificates for production and sales, and obtaining and maintaining testing, planting and import approvals for our GM seeds, can be time-consuming and costly, with no guarantee of success. In addition, regulatory and legislative requirements may change over time which may affect sales and profitability in those markets. The failure to receive necessary permits or approvals could have long-term effects on our ability to enter into foreign markets.
Joint ventures, partnerships, and companies with which we will engage for various aspects of our business present a number of challenges that could have a material adverse effect on our business and results of operations and cash flows.
We use joint ventures in China for our seed business and, as part of our business strategy, we may enter into other joint ventures or similar transactions. These transactions typically involve a number of risks and present financial, managerial and operational challenges, including the existence of unknown potential disputes, liabilities or contingencies that arise after entering into the joint venture related to the counterparties to such joint ventures We could experience financial or other setbacks if transactions encounter unanticipated problems due to challenges, including problems related to execution or integration. Any of these risks could reduce our revenues or increase our expenses, which could adversely affect our results of operations and cash flows.
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If we fail to keep up with industry trends or technological developments, our business, results of operations and financial condition may be materially and adversely affected.
The seed business and distribution channels are evolving and subject to continuous technological and market preference changes. Our success in this business area will depend on our ability to keep up with the changes in technology and user behavior, developing new products and creating innovations. Research, development and technological changes and innovations will require substantial capital expenditures in product development as well as in modification of products, services or infrastructure. We cannot assure that we can obtain financing to cover such expenditure. If we fail to adapt our products and services to such changes in an effective and timely manner, we may suffer from decreased user traffic and user base, which, in turn, could materially and adversely affect our business, financial condition and results of operations.
We operate in an evolving market.
Some aspects of our business and prospects depend on the continuing development and growth of e-commerce in China as well as the expansion of the communication network of rural China, and the continuing modernization of rural logistics system, which are affected by numerous factors and not within our control. Furthermore, product quality, user experience, technological innovations, development of internet and internet-based services, and the regulatory environment and macroeconomic environment are also important factors that have the potential to affect our business and prospects. The markets for our products, in particular our genetically modified seeds, are relatively new and rapidly developing and are subject to significant challenges. In addition, our continued growth depends, in part, on our ability to respond to constant changes in the e-commerce industry, particularly in the use e-commerce platforms in rural China, rapid technological evolution, continued shifts in customer demands, frequent introductions of new products and services and constant emergence of new industry standards and practices. Developing and integrating products, services or infrastructure could be expensive and time-consuming, and these efforts may not yield the benefits we expect to achieve. If we cannot successfully access e-commerce platforms to address markets in rural China or maintain and grow our customer base once platforms are available, our business, financial condition and results of operation may be materially and adversely affected.
The degree of public acceptance or perceived public acceptance of our biotechnology products can affect our operations.
Although all genetically modified products must go through rigorous testing, some opponents of the technology consistently attempt to raise public concern about the potential for adverse effects of genetically modified seed products on human or animal health, other plants and the environment. The potential for the adventitious presence of commercial biotechnology traits in conventional seed, or in the grain or products produced from conventional or organic crops, is another factor that could affect the public’s acceptance of these traits. Public concern can affect the timing of, and whether we are able to obtain, government approvals. Even after approvals are granted, public concern may lead to increased regulation or legislation, which could affect our business and operations, and may adversely affect sales of our products to farmers, due to their concerns about available markets for the sale of crops or other products derived from biotechnology.
The seed production business is competitive both in China and throughout the rest of the world.
All levels of the seed development, marketing and distribution business is competitive throughout the world, dominated by a limited number of companies. Increasingly, foreign seed producers are entering the China market with their seed products, which also include GM seeds. In addition to international competitors, we also face China based competition from many seed producers who deploy both traditional seed development methods and more advanced technologically oriented seed producers. Pricing of seed products, which favor the less expensive traditional seeds, is also an issue for those producers of technologically advanced seeds and GM seeds, such as us. To the extent we are uncompetitive, our business will be adversely affected and our financial results negatively impacted.
The global competition in biotechnology will affect our business.
We believe we are a leader in biotechnology in China since we have been conducting our proprietary biotechnology research program for many years and have an internal biotech research center. However, as multinational corporations engaged in the crop seed business expand into the agricultural market in China, we anticipate that they will have a greater portfolio of seed products and more advanced technologies than us. Major multinational competitors have a long history in the research and commercialization of their products, sophisticated marketing capabilities, and strong intellectual property estates, all of which may give them competitive advantage over us. Any of these competitive advantages could cause our existing or future products to become less competitive or outdated, and adversely affect our product acceptance in the market place and our results of operations.
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We face significant international competition in the GM seed market and the competition may affect our overall sales.
The GM seed market outside China is highly competitive, dominated by a limited number of major, multi-national companies. Compared to us, these companies have greater experience of the GM market and substantially greater resources in the research and development of plant biotechnology. These companies also have substantial production facilities for crop seeds. In addition, they have established market presence, have obtained patent protection in some instances for different seeds, and have built up their brand reputation and distribution networks globally. For example, in the United States Monsanto (Bayer) and Corteva Agriscience, dominate the GM corn seed market with approximately 70% of that market. These companies’ extensive GM portfolio of seeds and their success in developing new traits in the seeds could render our existing products less competitive, including within the China markets, resulting in reduced sales and licensing opportunities compared to our expectations.
A reversion in the Chinese government’s policy of favoring state owned enterprises, including seed companies, at the expanse of privately owned companies may disadvantage our competitive position in the industry.
In China, state owned enterprises including state owned seed companies typically enjoy preferential policy treatments such as more favorable access to capital, tax breaks and subsidies at various levels of governments. These treatments have created barriers of entry protecting state companies at the expense of private ones, both domestic and international. Despite the reform of the Chinese seed industry in 2008 and the anticipated market-driven industry consolidation going forward, any reversion in the Chinese government’s policy to protect state owned seed companies may again pose competitive challenges to non-state owned companies such as Origin.
We may not be able to maintain our market advantage by improving our GM seeds to fit the needs of the market.
GM seeds varieties need to be improved and altered over a relatively short time frame because the weeds and insects develop resistance to herbicides and pesticides, which often renders the benefits of a particular GM traits less effective. GM seeds need to be altered to tolerate higher doses and/or new varieties of herbicides and pesticides and other farming practices. Changing climatic conditions, such as changes in average rainfall and temperatures will require other modifications to GM seed so that they can be drought resistant. If our GM seed portfolio does not keep pace with these changes or goes in a direction that is not effective in the market, our position in the market would be adversely impacted. Alternatively, we believe that this characteristic of GM seeds gives us an opportunity to introduce our products into various seed markets needing new varieties. We will be required to continue to invest in new research to develop our portfolio of GM seeds so that our GM seeds can adapt to new herbicides and pesticides and differing soil, weather (drought) and growing conditions.
We have a comparatively short operating history in the field of biotechnology research when compared with international seed companies, and our business is subject to the risks of any evolving and developing enterprise, any one of which could limit our growth and our product and market development.
It continues to be difficult to predict how our continuing seed business will develop over the long term. Accordingly, we are still facing all of the risks and uncertainties encountered by companies in the earlier stages of development, such as:
| ● | uncertain and continued market acceptance for our product extensions and our services; |
| ● | evolving nature of the crop seed industry in the PRC, which is marked by seed company consolidation, changing aspects of government subsidies to farmers and becoming more limited, over production of crop seeds, and less adherence to the qualities of branded seeds, among other things; |
| ● | highly competitive conditions from both other branded seeds and unbranded seeds and changing customer preferences or needs that will harm sales of our products; |
| ● | the competitive landscape of e-commerce in the PRC and the evolving use of e-commerce by the Chinese population and their needs and preferences; |
| ● | maintaining our competitive position in the PRC and competing with Chinese and international companies, many of which have longer operating histories and greater resources than us; |
| ● | the aging technology of our seed products that do not reflect current agricultural and farmer needs and the continual need to develop new seed products; |
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| ● | the cost of our products compared to other sources of seeds for the same crop types; |
| ● | maintaining our current licensing arrangements and entering into new ones to expand our product offerings in both our domestic market and sought after international markets; |
| ● | using a joint venture model for our continuing business where we maintain only a simple majority stake; |
| ● | continuing to offer commercially successful products to attract and retain a larger base of direct customers and ultimate users; |
| ● | continuing our existing arrangements with farms that grow our crop seed products and entering into new arrangements with additional production farms; |
| ● | maintaining effective control of our costs and expenses; and |
| ● | retaining our management and skilled technical staff and recruiting additional key employees. |
If we are not able to meet the challenges of our businesses and managing our business plan, the likely result will be slowed growth, lower margins, additional operational costs and lower income, any of which will affect shareholder value.
Any diversion of management attention to matters related to corporate reorganization or any delays or difficulties encountered in connection with changing operations may have an adverse effect on our core business, results of operations, and/or financial condition.
Corporate reorganization and transformation activities present challenges, including geographical coordination, personnel integration and retention of key management personnel, system integration and the unification of corporate culture. These efforts generally divert management attention from our core business, cause a temporary interruption of or loss of momentum in our business and the loss of key personnel from the acquired companies. In addition, any proposed acquisitions and corporate reorganization activities will cause us to incur substantial costs, none of which are generally recoverable.
From time to time we must evaluate whether or not to discontinue a line of business or an expansion effort, which if discontinued could have an adverse impact on our financial position.
From time to time we evaluate whether or not to continue a particular line of business or an expansion effort. In the past we implemented restructuring programs to modify or eliminate our activities in agricultural chemicals and cotton seed development, sales centers, seed distribution and other unprofitable activities. Whenever a company undertakes to discontinue a line of business, there are expenses associated with the sale or closing of those related operations, which are reflected in the accounting for discontinued operations. The actual and accounting costs for discontinued operations may have an adverse effect on the financial position of the company in the period of discontinuance, which may result in an adverse market reaction and decline in our stock price.
We or our licensors may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us or our licensors, may materially disrupt our business.
We cannot be certain that our licensed or self-developed proprietary seed products and any other intellectual property that we develop or use do not or will not infringe the intellectual property rights held by third parties. We, or any of our licensors, may be subject to legal proceedings and claims from time to time related to the intellectual property of others. If we, or any of our licensors, are found to have violated the intellectual property rights of others, we may be required to pay damages and be enjoined from using such intellectual property, and we may incur new or additional licensing fees if we wish to continue using the infringing products, or be forced to develop or license alternative products. In addition, we may incur substantial expenses in defending against these third party infringement claims, regardless of their merit.
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Efforts to protect our intellectual property rights and to defend against claims can increase our costs and may not always succeed. Any failures could adversely affect our sales and results of operations or restrict our ability to conduct our business.
Intellectual property rights are important to our business, as our seeds depend on long and complicated development processes. In our experience, the seed markets in China have substantial counterfeiting, and we believe many other kinds of agricultural products also are subject to counterfeiting. Overall, we plan to obtain and protect our intellectual property rights and those to which we have intellectual property rights of use and distribution. However, we may be unable to obtain protection for our intellectual property. Even if protection is obtained, competitors, growers or others in the chain of commerce may raise legal challenges to our rights or illegally infringe our rights, including through means that may be difficult to prevent, detect or defend. In addition, because of the rapid pace of technological change and the confidentiality of patent applications in some jurisdictions, competitors may be issued patents from applications that were unknown to us prior to issuance. These patents could reduce the value of our commercial or pipeline products and services or, to the extent they cover key technologies on which we have unknowingly relied, require that we obtain licenses at a financial cost to us or cease using the technology, no matter how valuable the patents may be to our business. We cannot assure you that we would be able to obtain such licenses on acceptable terms. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. There is a risk that the outcome of such potential litigation may not be in our favor. Such litigation may be costly and may divert management attention as well as consume other resources which could otherwise be devoted to our business. An adverse determination in any such litigation will impair our intellectual property rights and harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs due to lack of this kind of insurance being available in China, and we would have to bear all the costs arising from such litigation to the extent we are unable to recover such costs from other parties. The occurrence of any of the foregoing may harm our business, results of operations and financial condition.
Although the seed law made significant improvements in plant variety protection and germplasm IP protection, intellectual property protection is still a developing legal sector in China. Implementation of PRC intellectual property-related laws has historically been lacking and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as they are in the United States or other countries, which increases the risk that we may not be able to adequately protect our intellectual property. The increase in counterfeiting seed products in the market, we believe, is also affecting the sales of our products.
Failure to develop and market new products could impact the Company’s competitive position and have an adverse effect on the Company’s financial results.
The Company’s operating results will depend on our ability to develop new seed products and to bring those products to the market. This ability could be adversely affected by difficulties or delays in product development such as the inability to identify viable new products, greater than anticipated development costs, technical difficulties, regulatory obstacles, competition, lack of demand, insufficient intellectual property protection, or lack of market acceptance of new products and services. Due to the lengthy development process, technological challenges and intense competition, there can be no assurance that any of the products the Company is currently developing, or could begin to develop in the future, will achieve substantial commercial success. Consequently, if we are not able to fund our research and development activities and deliver new products to the markets we serve on a timely basis, our growth and operations will be harmed. In addition, sales of the Company’s new products could cannibalize sales of some of its current products, offsetting the benefit of even a successful product introduction.
We may be exposed to product quality claims, which may cause us to incur substantial legal expenses and, if determined adversely against us, may cause us to pay significant damage awards.
The performance of our seeds depends on climate, geographical areas, cultivation method, farmers’ degree of knowledge and other factors in addition to genetic traits and the quality of our seeds. Natural disasters may also affect the performance of our seeds, particularly when farmers are not able to timely and effectively respond to those disasters. Furthermore, the cultivability of some farmland is deteriorating because of toxic and hazardous materials resulting from farmers’ overuse of chemical herbicides and pesticides and the fall-out from other sources of environmental pollution. These factors generally cause underproduction, but farmers may attribute underproduction to seed quality. We may be subject to legal proceedings and claims from time to time relating to our seed quality. The defense of these proceedings and claims can be both costly and time consuming and may significantly divert efforts and resources of our management personnel. An adverse determination in any such proceeding could subject us to significant liability and damage our market reputation and prevent us from achieving increased sales and market share. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase of our products.
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We have limited business insurance coverage in China.
PRC insurance companies do not offer extensive business insurance products. As a result, we have very limited business liability insurance, business disruption insurance, or product liability coverage for our operations in China. We have determined that the difficulties associated with acquiring such insurance on commercially acceptable terms make it impractical for us to obtain such coverage. Most likely we would bear the effects of any business disruption, litigation or natural disaster resulting in our incurring substantial costs and the diversion of our resources, and could adversely affect our operations and financial condition.
Risks relating to doing business in China
The effect of the continuing Coronavirus pandemic on our company cannot fully be determined at this time, and the effects of the PRC government response cannot be gauged at this time.
To date, because of the Chinese government steps taken in combating the spread of the Coronavirus, the impact of the Coronavirus on the Company and on our ability to produce and distribute products has been insignificant. As government policies change, however, our business may be adversely impacted. At this time we cannot guage the effect on our business of the Coronavirus or how the government will respond to its effects. As the medical situation changes relative to the continuing aspects of world-wide pandemic and government policies change in China, we could face adverse consequences to our ability to perform research, generate products and effect distribution of products and otherwise pursue our business. Therefore, investors should monitor aspects of the pandemic and its overall effect on the Chinese economy and trade as well as the world economic situation.
If we do not comply with PRC regulations, we may not be able to operate our business or we may be fined, both of which would adversely affect our business, operations and revenues.
The PRC has many regulations relating to the seed business and internet sales business. These laws and regulations are undergoing substantial changes in recent years, resulting in substantially greater regulation and rules that we must adapt to and follow. Seed products must be licensed and undergo a stringent review process before they may be sold in the PRC. Environmental regulation in the future may be potentially concerned with the development, growing and use of GM seed products. Seed development companies also have requirements for their facilities, personnel and investment. The internet sales business has evolving operating, consumer protection and privacy regulations. We believe we currently have all the necessary licenses for our businesses, and that we are in compliance with the other applicable laws and regulations. If we are not in compliance, we may be fined or lose the ability to sell a particular seed or operate our business altogether. If the fines are substantial or if our ability to sell or operate is withdrawn, this will result in additional costs or the loss of revenues and could prevent us from continuing as an operating business.
The technical services agreements between Origin Biotechnology and the other operating subsidiaries, including the VIE arrangement, may be subject to scrutiny by the PRC tax authorities for transfer pricing adjustments.
We could face adverse tax consequences if the PRC tax authorities determine that our technical service agreements between Origin Biotechnology and the other PRC operating subsidiaries (and possibly our former subsidiaries), were not entered into based on arm’s length negotiations. If the PRC tax authorities make that determination, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of deductions recorded by the operating subsidiaries, which could adversely affect us by:
| ● | increasing the PRC operating subsidiaries’ tax liability without reducing Origin Biotechnology’s tax liability, which could further result in late payment fees and other penalties to our PRC operating subsidiaries for under-paid taxes; or |
| ● | limiting Origin Biotechnology’s ability to maintain preferential tax treatment and government financial incentives, which, if the transfer pricing adjustment is significant, could result in Origin Biotechnology failing to qualify for those preferential tax treatments and government financial incentives. |
As a result, any transfer pricing adjustment could have an adverse impact on our financial condition.
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The discontinuation of any of the preferential tax treatments currently available to our PRC subsidiaries could materially increase our tax liabilities.
Beijing Origin is entitled to a preferential enterprise income tax rate of 15% as a result of having the qualification of a “high and new technology enterprise”. This qualification is subject to an annual evaluation by the relevant government authorities in China.
The termination of any of our preferential tax treatments could materially increase our tax obligations.
Tax treatment for the subsidiaries in China may change from past tax treatment, which could increase our tax liabilities in future fiscal years.
Origin has several joint venture subsidiaries and directly owned subsidiaries and VIE arrangements through which it operates its business. These differing kinds of ownerships and arrangements may not provide preferential tax rates as had been applicable in the past. Therefore, our overall tax liabilities could be greater than in the past when the Company had the benefit of reduced corporate tax rates.
Under China’s Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders
Under the current Enterprise Income Tax Law, or the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. In April 2009, the SAT issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
However, it is unclear how tax authorities will determine tax residency based on the facts of each case. If the PRC tax authorities determine that our British Virgin Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. We may be subject to enterprise income tax on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. We may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition to the uncertainty in how the “resident enterprise” classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect.
Adverse changes in political and economic policies of the PRC, including its policy of reforming its economic system, could have an adverse effect on the growth of private businesses in the PRC such as ours.
Although the PRC has been reforming its economic system to rely more on market forces to influence the deployment of economic resources, it still has strong elements of a planned economy based on governmental dictates and priorities that determine or at least influence business endeavors. There continues to be a focus on large and state owned enterprises as well as a general economic evolutionary shift to these types of companies. We cannot predict whether or not the government will continue to encourage economic liberalization as it had in past decades and adjust its levels of control over the economy. We also cannot predict the timing or extent of future economic policy that may be proposed. Any imposition of planned economy regulation or similar kinds of restrictions could reduce the freedom of private businesses to operate in a profitable manner, restrict inflows of capital or stifle investor willingness to participate in the PRC economy. To the extent we need additional capital; any restrictions on foreign ownership, foreign investment and repatriation of profits will hamper our ability to find capital outside of the PRC.
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A return to profit repatriation controls may limit our ability to pay dividends and expand our business, and may reduce the attractiveness of investing in PRC business opportunities.
PRC law allows enterprises owned by foreign investors to remit to other countries their current account items, such as profits, dividends and bonuses earned in the PRC, and the remittance does not require prior approval by the State Administration of Foreign Exchange, or SAFE, upon the proper production of qualified commercial vouchers or legal documents as required by the regulations. However, dividend payments are subject to prior satisfaction of corporate and withholding tax obligations, corporate reserve requirements and board determined social benefit allocations. SAFE regulations generally require extensive documentation and reporting about other kinds of payments to be transmitted outside of China, some of which is burdensome and slows payments. The availability of foreign exchange assets in the banking system will also affect the ability to repatriate profits as well as provide funding for foreign operations. If there is a return to payment restrictions and reporting, the ability of a PRC company to attract investors will be reduced.
Also, our investors may not be able to obtain the benefits of the profits of the business generated in the PRC for other reasons. Relevant PRC laws and regulations permit payment of dividends only from accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our subsidiaries and our affiliated entities in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital, and to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the shareholders’ meeting or the board. These reserves are not distributable as cash dividends. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our subsidiary’s ability to pay dividends and other distributions to us. Any limitation on the ability of our subsidiary and our affiliated entity to distribute dividends or other payments to us could materially limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses or otherwise fund and conduct our business.
Pursuant to PRC enterprise income tax law, dividends payable by a foreign-invested enterprise, or FIE, including Origin Biotechnology, from sources in the PRC to its foreign investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. No such treaty currently exists with the British Virgin Islands. Prior to 2008, dividend payments to foreign investors made by FIEs were exempt from PRC withholding tax.
Any fluctuations in exchange rates may adversely affect your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Because our earnings and cash from operations are denominated in Renminbi, as the reporting currency, fluctuations in exchange rates between U.S. dollars and Renminbi will affect our balance sheet and earnings per share when stated in U.S. dollars. The translation of Renminbi amounts into United States dollar amounts has been made for the convenience of the reader. Such translation amounts should not be construed as representations that the Renminbi amounts could be readily converted into United States dollar amounts at that rate or any other rate. The appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results when reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will affect the relative value of any dividend we issue which will be exchanged into U.S. dollars, the value of any U.S. dollar denominated investments we make in the future and any earnings on such investments.
PRC regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activity. Failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits, if any, and could expose us and our PRC resident shareholders to liability under PRC law.
SAFE promulgated regulations that require registration with local SAFE offices in connection with direct or indirect offshore investment by PRC residents, including PRC individual residents and PRC corporate entities. These regulations apply to our shareholders who are PRC residents and also apply to our prior and future offshore acquisitions. In particular, the SAFE regulations require PRC residents to file with competent SAFE offices information about offshore companies in which they have directly or indirectly invested and to make follow-up filings in connection with certain material transactions involving such offshore companies, such as increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, or external guarantees or other material events that do not involve return investment.
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The SAFE regulations required prior registration of direct or indirect investments previously made by PRC residents in offshore companies. If a PRC resident with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.
We believe our major shareholders who are PRC residents, or whose shares are beneficially owned by PRC residents, have completed foreign exchange registration with the local foreign exchange bureau according to these SAFE regulations. However, with these regulations there is uncertainty concerning the reconciliation of the new regulations with other approval requirements, it is unclear how the regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot assure you that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or approvals required by the regulations or other related legislation. The failure or inability of our PRC resident shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary to make distributions or pay dividends or affect our ownership structure. As a result, our business operations and our ability to distribute a dividend to you could be adversely affected.
The PRC legal system has inherent uncertainties that could limit the legal protections available to you.
All of our assets and all of our operations are in the PRC. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited precedential value. Since 1979, the PRC legislative bodies have promulgated laws and regulations dealing with such economic matters as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. The laws in the PRC differ from the laws in the United States and may afford less protection to our non-PRC shareholders. Investors in our securities should consider the uncertainties of the legal system within China as part of their evaluation of whether or not to invest or retain their investment in the Company.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC based on United States judgments against us, our subsidiaries, officers and directors.
We are incorporated in the British Virgin Islands and our PRC operating subsidiaries are formed under PRC law. Substantially all of our assets are located in the PRC. In addition, many of our directors and executive officers reside within the PRC, and substantially all of the assets of these persons are located within the PRC. It may not be possible to affect service of process within the United States or elsewhere outside the PRC upon our directors, or executive officers and experts, including effecting service of process with respect to matters arising under United States federal securities laws or applicable state securities laws. The PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States and many other countries. As a result, recognition and enforcement in the PRC of judgments of a court in the United States or many other jurisdictions in relation to any matter, including securities laws, may be difficult or impossible. Furthermore, an original action may be brought in the PRC against our assets and our subsidiaries, our directors and executive officers and experts only if the actions are not required to be arbitrated by PRC law and only if the facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC court may award civil liability, including monetary damages. Notwithstanding the foregoing, for a non-resident person of China to bring such an action may be difficult and expensive, with no or little chance of being able to pursue an action to conclusion. Investors should consider the foregoing limitations when making a decision to invest or retain an investment in the Company.
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We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. holders.
Depending upon the value of our shares and the composition of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, by the IRS, for U.S. federal income tax purposes. If we were classified as a PFIC in any taxable year in which you hold our shares and you are a U.S. investor, you would generally be taxed at higher ordinary income rates, rather than lower capital gain rates, when we dispose of those shares at a gain in a later year, even if we are not a PFIC in that year. In addition, a portion of the tax imposed on your gain would be increased by an interest charge. Moreover, if we were classified as a PFIC in any taxable year, you would not be able to benefit from any preferential tax rate with respect to any dividend distribution that you may receive from us in that year or any later year. Finally, you would also be subject to special U.S. tax reporting requirements.
Based on our understanding and current assessment, we believe that we were not a PFIC for the taxable year 2022. However, there can be no assurance that we will not be a PFIC for the taxable year and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year. For example, we would be a PFIC for a taxable year if the sum of our average market capitalization, which is our share price multiplied by the total number of our outstanding shares, and our liabilities over that taxable year is not more than twice the value of our cash, cash equivalents, and other assets that produce, or are held for the production of, passive income. We could also be a PFIC for any taxable year if the gross income that we and our subsidiaries earn from passive investments is substantial in comparison with the gross income from our business operations. While we will continue to examine our PFIC status, we cannot assure you that we will not be a PFIC for any future taxable year.
Risks relating to our shares
Certain provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.
Our memorandum and articles of association include provisions that could limit the ability of others to acquire control of us. Under those provisions, our board of directors has the power to issue preferred shares with such rights attaching to them as they decide and this power could be used in a manner that would delay, defer or prevent a change of control of us. These provisions could have the effect of depriving you of the opportunity to sell your shares at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transactions.
We qualify as a foreign private issuer and, as a result, are subject to reduced requirements with respect to the reporting of financial statements and other material events to our shareholders and the SEC.
As a foreign private issuer, we are obligated to file an Annual Report with audited financial statements and Form 6-K reports with the United States Securities and Exchange Commission, or the SEC, at such times as we release information to the public either voluntarily or pursuant to the laws of the British Virgin Islands or the PRC. As a listed Nasdaq company, we also only file a Form 6-K with unaudited six month condensed financial statements. Therefore, the regularity of financial and other information may be less than would be applicable to a domestic United States registered company under the rules and regulations of the SEC. Investors may not receive information on a timely basis, which could increase their risk of investment in us.
Because we are a foreign private issuer, we have elected to follow British Virgin Islands law in connection with compliance under the Nasdaq Marketplace Rules, which restrict the application of the Nasdaq corporate governance requirements.
The Nasdaq Marketplace Rules permit foreign private issuers to elect not to be governed by all the corporate governance rules. We have elected to avail ourselves of the exemption provided by Nasdaq, and we have elected to be governed by only the British Virgin Island laws and the terms of our memorandum and articles, which for example do not require us to hold an annual meeting each year. Consequently, investors may not have the ability to express their opinion on our business and the actions of directors through the voting process for directors. In other respects, we do follow the Nasdaq Marketplace Rules, such as having a nominations and compensation committee, but these are voluntary and may be eliminated at any time.
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A consistently active trading market for shares of our ordinary shares may not be sustained.
Historically, trading in our ordinary shares has been volatile. Generally, the market for our ordinary shares is characterized as “thinly-traded.” There have been, and may in the future be, extended periods when trading activity in our shares is minimal, as compared to a seasoned issuer with a large and steady volume of trading activity. The trading volume at a point in time, combined with the availability of stock, generally will impact the price at which our ordinary shares trade. Trading of a relatively small quantity of ordinary shares may disproportionately influence the market price of our ordinary shares. A consistently active and liquid trading market in our securities may never develop or be sustained.
Our stock price may be volatile.
The market price of our ordinary shares is likely to be volatile and could fluctuate in response to various factors, many of which are beyond our control, including the following: our ability to execute our business plan; operating results that fall below expectations; industry or regulatory developments; investor perception of our industry or our prospects; economic and other external factors; and the other risk factors as discussed below.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ordinary shares.
Although our independent registered public accounting firm is located in and operates from the United States, investors should be aware that public accounting firms operating only in the China market are not permitted to be subject to inspection by the Public Company Accounting Oversight Board of the United States, and as such, investors in companies with only a China based accounting firm may be deprived of the benefits of such inspection.
Independent registered public accounting firms, such as Borgers, the firm we use, that issue the audit reports included in annual reports filed with the SEC are required by the laws of the United States to undergo regular inspections by the Public Company Accounting Oversight Board (“PCAOB”) to assess compliance with the laws of the United States and professional standards.
Article 177 of the PRC Securities Law, which became effective in March 2020, states that no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to overseas parties. The United States Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states that if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such ordinary shares from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. The SEC has adopted rules to implement the HFCA Act and, pursuant to the HFCA Act, the PCAOB has issued a report notifying the Securities and Exchange Commission of its determination that it is currently unable to inspect or investigation completely accounting firms headquartered in mainland China or Hong Kong. Further, the United States Senate has passed the Accelerating Holding Foreign Companies Accountable Act, or the AHFCA Act, which, if enacted, would decrease the number of “non-inspection years” from three years to two years, and thus, would reduce the time before our securities may be prohibited from trading or be delisted.
On January 3, 2020, the Company engaged Borgers as its independent registered public accounting firm. The firm is registered with the PCAOB and operates in Lakewood, Colorado, USA, and is subject to PCAOB rules regarding periodic inspection.
Although the Company does not believe that it is subject to any delisting because of the laws discussed above by reason of having a US accounting firm that is PCAOB registered as its auditor of its financial statements, it is possible that in the future the laws of the United States and PRC could be changed to make our current auditor arrangement inadequate. In that event we might face delisting of our securities from NASDAQ and the value of our ordinary shares in the market would decline in valuable.
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Risks relating to our corporate structure
Below are risk factors that relate to our business structure, which should be carefully reviewed before making an investment in the securities that may be offered by the company or in the public market. Of particular note, investors should understand the following:
Part of our PRC operations is conducted through contractually controlled subsidiaries rather than by direct ownership of 100% of their equity, the terms of which may have to be enforced, which would require us to incur extra costs, create uncertainty as to ownership of the operating businesses involved, and risk the possible loss of rights.
Under PRC law, foreign entities are not currently permitted to own more than 49% of seed production companies. As a result, 71.76% of Beijing Origin is owned through stock consignment agreements. In order to address those restrictions, Origin the holding company, a non-Chinese entity that cannot directly own all the shares of our PRC operating subsidiary, believes it holds the right to control such shares in all respects, including voting, dividends, nomination of directors, and corporate management, through stock consignment agreements executed by the owners of that portion of the stock of these companies. In addition, if we engage in the research, production and sale of genetically modified seed products, then foreign entities are not currently permitted to own any portion of the seed production company, therefore we have to carefully structure our company.
There is the risk, however, that a consigning shareholder will not fulfill its obligations under the stock consignment agreement. In that event, we may need to resort to the PRC courts to have our rights under the applicable agreement enforced. Such enforcement will cause us to incur legal expenses. In addition, while a case is pending there will be uncertainty regarding our rights as to Beijing Origin, the PRC operating subsidiary involved as a VIE. A PRC court may decide not to enforce the agreements in whole or in part. To the extent these agreements are neither observed nor enforced as intended, the PRC operating subsidiaries will not be controlled by us as intended, which will affect our enterprise value and restrict our ability to obtain the income and other rights of ownership associated with the consigned stock. It may also prevent the consolidation of our financial statements with the PRC operating subsidiaries, which would reduce the reported earnings of the consolidated companies. The uncertainty of ownership may also adversely affect the market value of our ordinary shares.
Our consignment agreements and VIE arrangements have not been tested in the courts for their legality or enforceability. Therefore, there is no assurance that the rights that we believe we have are in fact substantiated. If these agreements and VIE arrangements are tested, we may be found to not own or control all of our business as reported in the financial statements of the Company. In such a case, our business would be impaired, and the value of the Company and the ordinary shares would decrease in value, and may in fact be deemed worthless.
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Whether or not a stock consignment agreement is terminated depends on the consensus of our Board and the consignees. Any such termination could result in a possible loss of certain rights or assets held by us without receiving fair value in return.
The stock consignment agreements relating to our control of the stock of two of our PRC operating subsidiaries, Origin Beijing and Xinjiang Origin, may be terminated after three years upon mutual agreement between us and the consignees. One of the PRC consignees, Mr. Han, also serves as an officer and director of the Company.
There are corporate protections in place designed to protect our interests, such as an independent Board of Directors, an audit committee comprised of independent directors that must approve insider transactions, a code of conduct requiring fair dealing with the Company, and the British Virgin Islands statutory provision that a disposition of more than 50% of the assets of a company must be approved by a majority of the shareholders. Moreover, if consigned stock is transferred to us as provided in the stock consignment agreements when the restrictions under PRC law are lifted, that stock will no longer be subject to the stock consignment agreements, and the termination of the stock consignment agreements would then have no effect on the ownership of that stock. However, if the stock consignment agreements are terminated, then we would lose our rights with respect to the consigned stock and the profits from the issuing corporation. Such a loss would impair the value of the Company, impair the value of any interest in our ordinary shares, and would reduce our ability to generate revenues.
If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign ownership in entities that directly and indirectly provide food and agricultural products is subject to restrictions under current PRC laws and regulations. Specifically, foreign ownership may not exceed 49%.
We are a British Virgin Islands company and our PRC subsidiaries are considered to be a foreign-invested enterprise. To ensure compliance with the PRC laws and regulations, we conduct part of our foreign investment-restricted business, generally the seed development aspects of the business in China, through a variable interest enterprise, or a VIE and part of our business through wholly owned and partly owned subsidiaries for the businesses that are not restricted. The VIE currently holds the seed development business license and other licenses necessary for the operation of the agricultural restricted business, based on a series of contractual arrangements with the shareholders of that entity. These contractual agreements enable us, we believe, to (i) exercise contractual control over the VIE, (ii) receive the economic benefits of the VIE, and (iii) have an exclusive call option to purchase all or part of the equity interests in the VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we exert control over the VIE and consolidate financial results of the VIE in our financial statements under U.S. GAAP.
In the opinion of our PRC legal counsel, when the overall structure was developed in 2004, (i) the ownership structures of the VIE in China were not then in violation of mandatory provisions of applicable PRC laws and regulations; and (ii) the agreements under the contractual arrangements among the VIE and its shareholders governed by PRC law are valid and binding upon each party to such agreements and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect. However, we understand that that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations that may be applicable to the VIE. Thus, the PRC government may ultimately find that we are in violation of any existing or future PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:
| ● | revoking the business licenses and/or operating licenses of our PRC entities; |
| ● | imposing fines on us; |
| ● | confiscating any of our income that they deem to be obtained through illegal operations, or imposing other requirements with which we or the VIE may not be able to comply; |
| ● | discontinuing or placing restrictions or onerous conditions on our operations; |
| ● | placing restrictions on our right to collect revenues; |
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| ● | requiring us to restructure the ownership structure or operations of the Company, including terminating the contractual arrangements with the VIE and deregistering the equity rights of the VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert contractual control over the VIE and its subsidiary; |
| ● | restricting or prohibiting our use of the proceeds from any securities offering we may make or other of our financing activities to finance the business and operations of the VIE and the other of our subsidiaries and joint ventures; or |
| ● | taking other regulatory or enforcement actions that could be harmful to our business. |
Any of these events could cause significant disruption to our overall business operations and severely damage our reputation, which would in turn have a material adverse effect on our overall business, financial condition, prospects and results of operations. If occurrences of any of these events results in our inability to direct the activities of the VIE and the other subsidiaries and joint ventures that most significantly impact their economic performance, and/or our failure to receive the economic benefits and residual returns from the VIE and the other subsidiaries and joint ventures, and we are not able to restructure our ownership structure and operations in a satisfactory manner, we may not be able to consolidate the financial results of the VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. As a result, our ordinary shares would likely decline in value or become valueless.
The contractual arrangements with the VIE and its shareholders may not be as effective as direct ownership in providing operational control.
We have to rely on the contractual arrangements with the VIE and its shareholders to operate the business in areas where foreign ownership is restricted. Currently, this is the seed development operations of the business. These contractual arrangements, however, may not be as effective as direct ownership in providing us with control over the VIE. For example, the VIE and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct the operations of the VIE in an acceptable manner, or taking other actions that are detrimental to our interests, notwithstanding their contractual obligations.
If we had direct ownership of the VIE in China, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of the VIE, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational levels. However, under the current contractual arrangements, we rely on the performance by the VIE and its shareholders of their obligations under the contracts to allow the Company to exercise control over the VIE. The shareholders of the VIE may not act in the best interests of the Company or may not perform their obligations under these contracts. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system.
Any failure by the VIE or its shareholders to perform their obligations under the contractual arrangements with them would have a material and adverse effect on our business.
If the VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. For example, if the shareholders of the VIE were to refuse to transfer their equity interests in the VIE to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations. In addition, if any third parties claim any interest in such shareholders’ equity interests in the VIE, our ability to exercise shareholders’ rights according to the contractual arrangements may be impaired. If these or other disputes between the shareholders of the VIE and third parties were to impair our control over the VIE, our ability to consolidate the financial results of the VIE would be affected, which would in turn result in a material adverse effect on our business, operations and financial condition.
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All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through the courts in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert contractual control over the VIE, and our ability to conduct our business may be negatively affected.
The shareholders of the VIE may have actual or potential conflicts of interest with us.
The shareholders of the VIE may have actual or potential conflicts of interest with us. The shareholders may breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIE, which would have a material and adverse effect on our ability to effectively control the VIE and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with the VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of the Company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and the Company, except that we could exercise our purchase rights under the agreements with these shareholders to request them to transfer all of their equity interests in the VIE to a PRC entity or individual designated by us, to the extent permitted by PRC law. We cannot assure you that such method, or any other methods that we may explore, will be effective in resolving the potential conflicts of interest between these shareholders and the Company. In addition, we rely on the laws of the British Virgin Islands, which provide that directors and officers owe a fiduciary duty to the Company that requires them to act in good faith and in what they believe to be the best interests of a company and not to use their position for personal gains. The shareholders of the VIE have executed powers of attorney to appoint the Company to vote on their behalf and exercise voting rights as shareholders of the VIE. If we cannot resolve any conflict of interest or dispute between us and the shareholders of the VIE, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
The shareholders of the VIE may be involved in personal disputes with third parties or other incidents that may have an adverse effect on their respective equity interests in the VIE and the validity or enforceability of our contractual arrangements with the VIE and its shareholders. For example, a spouse of a VIE shareholder may claim that the equity interest of the VIE held by such shareholder is part of their community property in China and should be divided between such shareholder and the spouse. If such claim is supported by the court, the relevant equity interest may be obtained by the shareholder’s spouse or another third party who may be found not to be subject to obligations under our contractual arrangements, which could result in a loss of the contractual control over the VIE by us. Similarly, if any of the equity interests of the VIE is inherited by a third party with whom the current contractual arrangements are not binding, we could lose our control over the VIE or have to maintain such control by incurring unpredictable costs, which could cause significant disruption to our business and operations and harm our financial condition and results of operations.
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Our use of a VIE structure within our overall corporate organization exposes the Company to potential loss of that portion of the business. Our involvement in food seed development, an industry that has limits on foreign ownership, could encourage the PRC government to intervene in our operations.
Our corporate structure is subject to risks associated with the contractual arrangements with the VIE and the parties to those contractual arrangements. Investors in the BVI holding company may never have a direct ownership interest in the part of the business that is conducted by the VIE. If the PRC government finds that the agreements that establish the structure for operating our business in China do not comply with PRC laws and regulations, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we and the VIE could be subject to severe penalties or be forced to relinquish our interests in those parts of the operations. This would result in the VIE being deconsolidated for financial statement purposes. The seed development assets, including certain licenses to conduct that part of the business in China, are held by the VIE. A part of our revenues are generated by the VIE. An event that results in the deconsolidation of the VIE would have a material effect on our operations and result in the value of the ordinary shares being diminished or even becoming worthless. Our holding company, our PRC subsidiaries and the VIE, and investors of our ordinary shares face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the VIE and, consequently, significantly affect the financial performance of the VIE and our company as a whole.
Because of our operations in the development of genetically modified seeds and involvement in the production of seeds as well as for other reasons, the PRC government may intervene or act to influence our operations, or may exert more control over offerings conducted overseas and/or foreign investment in us Such intervention or influence over the manner we operate could result in a material change in our operations or the value of our ordinary shares. Any actions by the PRC government to exert more oversight and control over offerings that are conducted overseas or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities and our other outstanding securities to significantly decline or be worthless.
Contractual arrangements in relation to the VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or the VIE owes additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements in relation to the VIE were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the taxable income of the VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by the VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on the VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if the VIE’s tax liabilities increase or if it is required to pay late payment fees and other penalties.
Our current corporate structure and business operations may be substantially affected by the newly enacted Foreign Investment Law.
On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, substantially uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law does not explicitly classify whether VIEs that are controlled through contractual arrangements would be deemed as foreign invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment, at which time it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC and if yes, how our contractual arrangements should be dealt with.
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The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in the Special Administrative Measures (Negative List) for Foreign Investment Access jointly promulgated by the Ministry of Commerce and the National Development and Reform Commission, or the NDRC, and took effect in July 2020. The Foreign Investment Law provides that (i) foreign-invested entities operating in “restricted” industries are required to obtain market entry clearance and other approvals from relevant PRC government authorities;(ii) foreign investors shall not invest in any industries that are “prohibited” under the Negative List. If our control over the VIE through contractual arrangements are deemed as foreign investment in the future, and any business of the VIE is “restricted” or “prohibited” from foreign investment under the Negative List effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over the VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.
Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.
We may lose the ability to use and enjoy assets held by the VIE that are critical to the operation of our business, if the VIE declares bankruptcy or become subject to a dissolution or liquidation proceeding.
The Company holds certain assets, notably the seed development business, which are critical to the operation of our business, under a VIE arrangement. If the shareholders of the VIE entity breach the contractual arrangements and successfully liquidate the VIE, or if the VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. In addition, if the VIE undergoes an involuntary liquidation proceeding, third-party creditors may claim rights to some or all of its assets, thereby hindering our ability to operate our business, which could materially or adversely affect our business, financial condition and results of operations.
Apart from our capital funding, we may rely on dividends and other distributions from our wholly and partly owned subsidiaries and the VIE to upstream legally available funds for operational costs and any distributions that might be made by the BVI holding company to investors.
We are a BVI holding company with wholly and partly owned subsidiaries and a VIE in the PRC. To the extent that the PRC located companies are profitable and have legally distributable funds, we could ultimately receive those funds in the BVI holding company, which then would be available for distribution to investors. Subject to being profitable and statutory reserves that must be maintained and social payment funding, if the operating companies in the PRC incur debt on their own behalf, they may be limited by these debt obligations in their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements our PRC operating companies and the VIE currently have in place in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us.
Under PRC laws and regulations, our PRC based companies, may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, these companies are required to set aside at least 10% of its accumulated after-tax profits after making up the previous year’s accumulated losses each year, if any, to fund statutory reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital. It may allocate a portion of its after-tax profits based on PRC accounting standards to discretionary reserve funds according to its shareholders’ decision. These statutory reserve funds and discretionary reserve funds are not distributable as cash dividends.
In addition, the PRC Enterprise Income Tax Law and its implementation rules provide that withholding tax rate of 10% will be applicable to dividends payable by PRC companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.
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Any limitation on the ability of our PRC located companies and VIE to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
The oversight of the China Securities Regulatory Commission, Cyberspace Administration of China or other governmental authorities may adversely affect our business and their approval may be required in connection with this offering, and, if required, we cannot predict whether we will be able to obtain such approval.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, require an overseas vehicles formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. It should be noted that the regulations are unclear and our ordinary shares were listed on Nasdaq in 2004.
At this time, we believe that no permission is required from any Chinese authorities (including the CSRC and the CAC) for or continued listing or any offering that may be made under a current or future registration statement and the listing of the ordinary shares on NASDAQ given that: (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether any offering contemplated by the Company is subject to the M&A Rules; (ii) the date of our original listing, and (iii) our PRC subsidiaries were either incorporated as wholly foreign-owned enterprises by means of direct investment or by merger or acquisition of equity interest or assets of a PRC domestic company not subject to the M&A Rules. There can be no assurance that the relevant PRC government agencies, including the CSRC, would reach the same conclusion.
The recently issued Opinions on Strictly Cracking Down on Illegal Securities Activities call for strengthened regulation over illegal securities activities and supervision on overseas listings by China-based companies and propose to take effective measures, such as promoting the development of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. There are still uncertainties regarding the interpretation and implementation of these opinions, and further explanations or detailed rules and regulations with respect to these opinions may be issued in the future. There is still substantial uncertainty as to whether or not these opinions will impose additional requirements on us.
In addition, the Data Security Law was promulgated on June 10, 2021, and became effective in September 2021. The Personal Information Protection Law was promulgated on August 20, 2021, and officially implemented on November 1, 2021. The Data Security Law, among other things, provides for security review procedures for data activities that may affect national security. The Personal Information Protection Law stipulates that critical information infrastructure operators and personal information processors that process personal information up to the number prescribed by the national cyberspace administration must store personal information and important data collected and generated within the territory of the PRC. If it is necessary to provide it overseas, the organization is required to pass the security assessment organized by the national cybersecurity and information department. Furthermore, Measures for Cybersecurity Review, which became effective on June 1, 2020, set forth the cybersecurity review mechanism for critical information infrastructure operators, and provide that critical information infrastructure operators who intend to purchase internet products and services that affect or may affect national security will be subject to a cybersecurity review. Although we do not believe we are a critical information infrastructure provider, the PRC authorities could interpret such term broadly. If our company is deemed to be a critical information infrastructure operator under such rules, we could be subject to cybersecurity review by the CAC and other relevant PRC regulatory authorities and be required to change our existing practices in data privacy and cybersecurity matters at substantial costs. During such cybersecurity review, we may be required to stop providing services to our customers, and such review could also result in negative publicity to us and diversion of our managerial and financial resources.
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In addition, the draft amendment to the Measures for Cyber Security Review, or draft measures, published by the Cyberspace Administration of China in July 2021 provides that an application for cyber security review should be made by an issuer who is a “critical information infrastructure operator (CIIO)” or a “data processing operator” as defined therein when an issuer’s securities are listed in a foreign country if the issuer possesses personal information of more than one million users, and that the relevant governmental authorities in the PRC may initiate cyber security review if such governmental authorities determine an operator’s cyber products or services, data processing or potential listing in a foreign country affect or may affect national security. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for any offering we may make or our continued listing on NASDAQ or if the CSRC or any other PRC government authorities promulgates any interpretation or implements rules that would require us to obtain CSRC or other governmental approvals, we may not be able to proceed with any offering and other overseas offerings, continued listing overseas of our ordinary shares, or face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds of any offering into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as our ability to complete this offering.
As of the date of this prospectus, the scope of CIIOs and important data under the current laws, regulations and regulatory regime are being developed, and the authorities may have wide discretion in the interpretation and enforcement of the related laws and regulations. To date, given the current nature of our business in China, we do not believe we are either a “CIIO” or a “data processing operator” holding personal information of more than one million users who is required to file for a cybersecurity review pursuant to the draft measures. However, we cannot guarantee that the relevant PRC regulatory authority will take a view that is not contrary to or otherwise from the opinion stated above. Currently, the measures have not materially affected our business and operations. If we are deemed as a CIIO, or as an operator who collects, uses and processes important data according to the Data Security Law, Personal Information Protection Law and other relevant laws and regulations, we may need to perform or be subject to certain prescribed obligations. If we were found to be in violation of these applicable laws and regulations, we may be subject to administrative penalties, including fines and service suspension.
To date, we have not been involved in any investigations on cybersecurity review initiated by the CAC, and we have not received any inquiry, notice, warning, sanctions in such respect or any regulatory objections to this offering. As there are still uncertainties regarding the further enactment of new laws and regulations as well as the revision, interpretation and implementation of those existing laws and regulations, we cannot assure you that we will be able to comply with such regulations in all respects, and we may be ordered to rectify, suspend or terminate any actions or services that are deemed illegal or incompliant by the regulatory authorities and become subject to fines and/or other penalties. If we are unable to address such issue in a timely manner, or at all, we may be required to suspend or terminate our related businesses or face other penalties, our business, financial condition, results of operations, and prospects could be materially harmed.
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ITEM 4. INFORMATION ON THE COMPANY
A. History and development of the Company.
Origin was first incorporated in the British Virgin Islands on February 10, 2005, and is governed by the BVI Business Companies Act, 2004, or BCA, by re-registration on July 10, 2006.
Chardan China Acquisition Corp. (“Chardan”), the predecessor of Origin, was a blank check company (SPAC) organized as a corporation under the laws of the State of Delaware on December 5, 2003, formed for the purpose of effecting a business combination with companies having operations based in China.
On December 20, 2004, Chardan entered into a stock purchase agreement, referred to as the Stock Purchase Agreement, with State Harvest Holdings Limited, a company incorporated in the British Virgin Islands (“State Harvest BVI”) on October 6, 2004, and all the shareholders of State Harvest (BVI). On February 10, 2005, Chardan formed a wholly-owned subsidiary under the laws of the British Virgin Islands, under the name “Origin Agritech Limited,” referred to as Origin, to complete the stock acquisition of State Harvest (BVI). Chardan merged into Origin to re-domesticate out of the United States, and immediately thereafter, Origin acquired all of the issued and outstanding stock of State Harvest (BVI).
Our ordinary shares, have traded on the Nasdaq Capital Market since June 5, 2019. Prior to trading on that market, our ordinary shares were traded on the Nasdaq Global Market from November 8, 2005 to June 25, 2007, and the Nasdaq Global Select Market from June 26, 2007 to June 4, 2019.
Our business focus is primarily on the corn seed development and distribution business and research focused on genetically enhanced breeding technologies in agricultural crops.
We were founded as a private sector traditional seed development, marketing, and distribution company. Our development activities include creating genetically modified seeds. In 2015, we began our corporate strategic transition from a traditional seed company to a biotechnology seed company. We developed transgenic corn seed products, including our first generation biotech product phytase traits, second generation biotech product glyphosate tolerance traits and our new technologies of stacked traits of Bt and glyphosate tolerance genes. In 2016, we completed the laboratory and field production trials for our first generation pest/weed trait.
In September 2016, as part of our corporate re-focusing, we entered into a Master Transaction Agreement, along with our controlled companies Beijing Origin Seed Limited (“Beijing Origin”), Denong Zhengcheng Seed Limited (“Denong”), Changchun Origin Seed Technology Development Limited, (“Changchun Origin”), Linze Origin Seed Limited (“Linze Origin”), with Beijing Shihui Agricultural Development Co. Ltd., a company incorporated under the Laws of the PRC (“Shihui”), to sell our commercial seed production and distribution assets and certain other assets in the PRC to Shihui (the “Sale”). In 2018, we closed the first phase of the Master Transaction Agreement and sold the subsidiaries Denong, Changchun Origin and Linze Origin. We terminated the second phase of the Master Transaction Agreement and retained our commercial seed business under Beijing Origin along with the headquarters building in Beijing.
During 2018 and 2019, we entered into regional joint ventures for the seed distribution. This is also part of our long-term strategy to operate these distribution businesses under an e-commerce platform. These joint ventures include: Hubei Aoyu, Anhui Aoyu in Anhui province, Xuzhou Aoyu in Jiangsu province, Shandong Aoruixinong in Shandong province and Henan Aoyu in Henan province. Origin indirectly holds 50% of the equity in Anhui Aoyu and 51% of equity in the other joint ventures. The remaining equity interests in those joint ventures are held by local distributors. Origin owns these joint ventures through Origin Biotechnology.
In 2019, the Company entered into a Cooperation Framework Agreement with Beijing Changping Technology Innodevelop Group (BC-TID), an entity owned by the government of Changping District of Beijing City. Under this agreement, BC-TID and the Company formed a new entity, of which 51% and 49% of equity interests would be owned by BC-TID and the Company, respectively. Beijing Origin contributed the headquarters building in Beijing and certain of its seed technology assets related to genetically modified seeds to the new entity. As of September 30, 2021, BC-TID has invested a total of RMB137.7 million ($20.2 million) as part of the agreement. The deal documents have been completed by both Origin and BC-TID and have been submitted to government officials for final approval, which continues to be pending due to the Covid-19 pandemic and BC-TID’s internal process. Both sides have agreed to extend the closing deadline to be before February2024.The cash amount was used to repay the bank loan of the Company on the headquarters building and provide working capital. As part of the agreement, the Company transferred its seed
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business of Beijing Origin to Beijing Origin State Harvest Biotechnology Limited (Origin Biotechnology), which is the Company’s wholly owned entity in China.
In 2022, we registered Hainan Aoyu in Hainan province which is located in the tropical region of China. Having a subsidiary and operations in Hainan will allow us to conduct research during the winter period. Origin Biotechnolgy holds 49% of Hainan Aoyu and Origin State Harvest holds the 51% balance of ownership through a VIE arrangement. Also in 2022 we founded a US subsidiary OAL SMY Limited in New Jersey, which has conducted limited operations.
Our principal executive offices are located at No. 21 Sheng Ming Yuan Road, Changping District, Beijing 102206, China, and our telephone number is (86-10) 5890-7588.
B. Business Overview.
Overview
Origin Agritech Limited, along with its subsidiaries, is focused on agricultural biotechnology, operating in the PRC. Our seed research and development activities specialize in crop seed breeding and genetic improvement. Origin believes that it has built a solid capacity for seed breeding technologies, including marker-assisted breeding and doubled haploids technologies, which it believes, along with its rich germplasm resources, will allow it to become a significant seed technology company in China.
We built an agricultural biotechnology research center in 2005 and have been leading the development of biotechnology among crop seed companies in China since then. We have established plant genetic engineering technology platforms, including transforming herbicide tolerance, insect resistance, nitrogen utilization efficiency, and drought stress tolerance traits into corn inbred lines. Of note, we made significant strides in developing our exclusive herbicide tolerance, insect resistance and phytase products, and recently drought resistant products. In November 2009, our genetically modified phytase corn received the Bio-Safety Certificate from China’s Ministry of Agriculture and Rural Affairs (“MARA”). This was the world’s first genetically modified phytase corn and also the first genetically modified corn seed product in China. The certificate was renewed by MARA in January 2015. We also are pursuing the approval of other GM seed products in China, including glyphosate tolerant corn and insect resistant corn. We believe we have established a substantial seed product and germplasm pipeline.
Through the subsidiary Xinjiang Origin, the Company maintains its “Green Pass” status, providing the Company with the competitive advantage of introducing new hybrid varieties to the Chinese market under an expedited government approval process.
We seek to utilize China’s emerging technology base for our future development. In particular, from time to time we enter and further develop cooperative agreements with publicly funded research institutes in China. In exchange for providing funding to these institutes, we receive rights, which are frequently exclusive rights, to market any seeds developed by these institutes. When a seed is ready to be marketed, we negotiate with the institute to establish an arrangement by which we are permitted to sell the newly developed seeds in exchange for the payment of certain fees to the institute. We believe that these cooperative agreements allow us to access new products without expending substantial costs for our own research and development.
In April 2016, we entered into a commercial licensing agreement with DuPont Pioneer, the advanced seed and genetic business of DuPont. Pursuant to the license, the Company and DuPont would jointly develop new seeds for Chinese farmers. This arrangement is now terminated.
In September 2017, Origin entered into a commercial license and collaboration agreement with KWS SAAT SE (“KWS”). KWS is a global seed company, active in the business of maize, sugar beet and cereal seed production and marketing, as well as research and development in plant breeding. The agreement is the continuation of a collaborative effort dating back to 2011 when the two companies formed an arrangement under which Origin granted rights to certain of its transgenic traits in maize to KWS and performed services on behalf of KWS relating to those traits and accompanying technologies. The 2017 agreement provides for the prolongation and extension of the collaboration between the companies covering the rights of KWS to use the traits for commercial purposes, including marketing seeds with improved performance. This arrangement is now terminated.
In December, 2019, the Chinese Ministry of Agriculture and Rural Affairs, MARA, announced a list of GMO traits, including two corn traits, that were awarded biosafety certificates. This signifies the potential commercialization of GMO corn technologies in China. Our double stacked Bt and GT genes are currently in the process to be reviewed by the MARA for biosafety certificates. In September, 2020, the Standard Testing Method and Procedures of the Company’s two GMO corn seed traits were approved in a newly
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published National Standards Catalog by MARA. The traits that received the National Testing Standard approval are GH5112E-117C, the Company’s double stack of insect resistance and herbicide tolerance corn and G1105E-823, the Company’s herbicide tolerance corn. As part of the approval process, the traits were tested and reviewed by third-party institutes appointed by the MARA. This method will be the national standard for testing procedures for these traits in future variety development and commercialization.
During the third fiscal quarter of 2020, the Company was awarded an RMB6.5 million (US$0.95 million) grant from MARA for the successful evaluation of the effects of two of its GMO corn traits, GH5112E-117C and G1105E-823. The MARA’s grant program was established to award achievement in agricultural technology innovation and to speed up the technology’s applications in agriculture production. The grant award of Origin’s two GMO traits not only validates the success of our past research efforts but also shows the government’s strong support of GMO research and product development in China.
Recently, the Ministry of Agriculture has taken a number of steps to encourage the GMO industry. Of primary importance is that passage of a new law with regard to hybrid seed approvals. As a result of the law change, three new corn traits have received biosafety certificate approvals in December of 2021. Overall, the renewed government activity with regards to GM biosafety certificate approvals is very positive after a decades-long pause in biosafety certificates approvals. Also, in December 2021, the Ministry of Agriculture published GMO corn and soybean variety approval procedures and standards which cleared the last regulatory obstruction in China. These indicators are generally seen as the country preparing to allow GM enhanced corn to be commercialized in China. However, the exact timing and nature of the future GM corn regulation is still uncertain. So, there continues to be regulatory uncertainty.
Seed Research and Development
Developments in the science of genetics have allowed seed producers to create entirely new products. Compared with conventional varieties, the obvious advantages of these new products, known as GM products, are higher yield, better quality and increased insect-resistance and herbicide tolerance. We are also working on drought resistant traits for corn and next generation quadruple stacked traits. Farmers plant GM varieties to save time and cost, while also reducing field labor. GM corn, soybeans and cotton, among other crops, have been widely used in the United States and many other countries to guard against insect damage and to increase yield. Since receiving the Chinese government approval in 1997, cotton that has been genetically modified to guard against damage from borer insects, is now widely planted and accepted in China. MARA has approved other crops, including GM traits in corn, rice and soybeans in biosafety evaluations. We believe that the Chinese government also is encouraging of GM crops, generally, although it is moving cautiously. China permits the importation of certain corn and soy products that are GM varieties. Notwithstanding, the government approvals, GM food products continue to face a low level of public acceptance. We believe that GM food crop seeds in time will be approved by MARA for production and sale and will be accepted in the Chinese market over time.
It is a fundamental fact that to get the highest yield of production with the least input on the land from fertilizers and pesticides, the seed industry will need to breed super varieties that are pest and disease resistant as well as drought and salt tolerant. All this means the seed industry will need to find the key genes and to work with them and gain government approvals and ultimately consumer acceptance.
Utilizing our existing hybrid seed product line, the Company seeks to further increase crop yield and produce higher quality seeds with the addition of GM traits. We commenced our own biotechnology research program in the early 2000’s with a goal of having technology in place to produce GM products when demand for these products is sufficiently high. In 2005, we built an internal research and development center in China for GM crop seeds. Our key focus is biotechnology for GM varieties of corn. We currently employ people who are primarily engaged in genetic transformation, molecular biomarker testing and genetic mapping activities. Our development efforts go beyond our internal biotechnology center, as this unit serves as a central hub to connect with other research facilities in other parts of China. We are collaborating with the China Agricultural University, Zhejiang University, National Maize Improvement Center, and China Academy of Agriculture Science in the field of biotechnology. These cooperative arrangements help enhance our research capabilities and will help enable us to develop and commercialize our products. We have established several plant genetic engineering technology platforms, which incorporate increased herbicide tolerance, insect resistance, nitrogen efficiency, and drought stress tolerance traits into corn inbred lines. The GM traits and products we are working on now include increased herbicide tolerance, insect resistance, nitrogen efficiency, and drought stress tolerance in corn. We developed phytase GM corn, the first genetically modified corn seed product in China. We have applied for biosafety certificates for our drought resistance traits. Notwithstanding our obtaining the Bio-Safety Certificate from the Chinese government and our applications, there can be no assurance that GM products generally will be approved in China, and we expect that the introduction and acceptance of GM products will be cautious.
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Intellectual Property
Our intellectual property includes trademarks and patents relating to our seed products. Substantially all of the intellectual property has been registered for IP protection in China (or is the subject of a pending application). We believe that our Chinese intellectual property is important to our seed and other businesses, and impacts our ability to generate revenues. Other international intellectual property rights that we may have are not significant to our business at this time.
We currently have twenty Chinese patents registered with the State Intellectual Property Office (“SIPO”) and with similar government offices in various countries related to our seed products. Among these twenty patents, seventeen patents are registered in China, and one in each in the United States, Brazil and Argentina.
In addition, we currently have thirty-one Chinese trademarks registered with the Trademark Office of China’s State Administration for Industry and Commerce (“SAIC”).
Licensed Seed Products
We signed research agreements with domestic seed companies to incorporate certain Origin Beijing biotech traits into their leading seed varieties in a similar relationship as we have developed with the multinational seed companies. The process is generally planned in two steps: first to introgress the traits into partners parental lines and conduct field tests to confirm efficacy; once the results are confirmed and meet the expectations, then we enter into the second step which involves negotiation of a commercial agreement to define rights and benefit sharing.
With regards to the licensed GM varieties, we have entered into a strategic cooperation agreement with the China Academy of Agriculture Science, or CAAS, to work on biotechnology research and development. That agreement gives us the right to produce and sell the GM crop varieties that are developed in connection with this arrangement, subject to our obligation to reimburse certain of CAAS’ expenses.
Competition
We face competition at three primary levels in respect of our seed products, including large Chinese companies, small local seed companies, and large multinational hybrid and GM seed producers. Currently, we believe that we can compete effectively with each of these competitors and that we can continue to do so in the future. We also face competition from the counterfeiting of corn seeds, which has become an increasing problem in China.
We believe we possess a competitive technology base, including the capability to develop genetically modified seeds. However, there is little public information in this regard and, as a result, other companies’ internal research pipelines remain largely unknown. Much of the genetically-modified product research remains at the academic level. The majority of the largest crop seed companies have been in existence for considerably longer periods of time than we have, and though they have breeding techniques, they are somewhat entrenched in their ways. Some of these larger entities are evolved state owned enterprises and some stayed as state-owned entities.
We compete within this group on the basis of our consistent product quality, brand identity, customer and technical support, enforcement of our intellectual property rights and a pipeline of proprietary products.
The local seed companies in China, in many respects, are the legacy of a centrally planned agricultural economy. Most of these companies were affiliated with county governments, which played a role in determining what crops would be grown and by whom. As was often the case with planned economies, these extensions of the bureaucracy had no profit motive, and no incentive to improve efficiencies, increase sales or innovate with new products. Market expansion was limited by the tight geographic boundaries within which they were designed to operate.
The majority of these local companies continue to lack the scale and the resources to compete with us in a number of ways. Principally, they lack access to the improved, proprietary hybrids. Also, for the most part they do not have research and development programs for new seeds, effective marketing, advertising, technical support or customer service operations.
Two local companies, Beijing DaBeiNong Biotechnology Co. Ltd. and Yuan LongPing High-Tech agriculture Co., Ltd. have received biosafety certificates for their corn traits, which may become competitors in the future. The Company, however, has entered into an
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agreement with DaBeiNong to explore the combining of their traits with our germplasm for an enhanced GM corn product. The Company also sees this as a validation of the germplasm (seed bank) of owned by the Company and its research capabilities.
We also face competition from the large multinational companies, including Pioneer (DuPont), Monsanto and Syngenta. These companies present a formidable competitive threat because of their financial resources, the high quality of their seed products, and biotechnological capabilities. These companies will present significant competition in the international market context and increasingly will present a competitive position within the China market. These companies are investing in research within China and development of seeds that can be planted in China using GM traits and are engaged in many joint venture projects.
The multinational seed companies rely heavily on GM seed products in the non-PRC markets. GM seed products have only begun to be accepted in China. The extent of future acceptance of GM products is not yet determinable, although there are positive regulatory signs. To date, five corn traits have been approved, including phytase corn, and Bt Rice, but they have yet to obtain approval for commercial seed sales in China. The limited GM technology approval therefore currently limits their competitive advantage. Should GM seed products become more widely approved by the government and begin to gain broader acceptance in the market, as we expect they will in the future, the large biotech companies will become more serious competitors.
PRC Government Regulation on Operations
PRC Seed Law and Other Relevant Regulations
Participation in the crop seed business is a highly regulated activity in the PRC. In July 2000, China enacted its Seed Law, which became effective on December 1, 2000 (the “Seed Law”). The Seed Law was amended in August 2004, September 2011 and November 2015 and January 2016. The latest revision to the Seed Law amendment became effective on March 1, 2022 (the “Revised Law”). The Seed Law sets forth provisions concerning the development, approval, production and distribution of crop seeds and the protection of legal rights and interests of owners of new plant varieties. The law is expected to boost the commercialization and standardization of genetically modified (GM) germplasm. Initial emphasis is expected to be for soybeans and corn used as raw materials for biomass.
In addition to the Seed Law, China regulates the seed and plants through a series of other laws, including the Plant Quarantine Law, Administrative License Law, Administrative Penalties Law, Plant Varieties Law (PVP) and Genetically Modified Organisms Safety Law. Local provincial laws may also apply but these vary from province to province. Rules are also made by government departments responsible for administering the laws covering administrative arrangements, procedures and standards including labelling of seed containers.
Seed Production and Operation License
The Revised Law combines the seed production license and distribution license regimes into one Seed Production and Operation License (“SP&O License”) and greater intellectual property protection. An SP&O License can be obtained at either the provincial level or the national level. Depending on the variety of seeds that the licensee is seeking to produce, the license application requires minimum facility size with respect to office space, laboratory space, breeding space, and storage space; minimum equipment and machinery specifications; minimum number of technical personnel on-site; and minimum number of registered seed breed being produced.
Seed Registration Process
In September 2012, the Ministry of Agriculture (now referred to as the Ministry of Agriculture and Rural Affairs) issued the first group of Breed-Produce-Distribute Vertically-Integrated Crop Seed Distribution Licenses (BPDVI License) based on new administrative measures. Beijing Origin was included as a licensee among the first 32 crop seed companies that received the BPDVI License.
Many types of seeds must undergo a stringent regulatory review before they may be sold in China. Prior to 2016, 28 types of seeds were subject to approval requirements before being sold in China. The Revised Law has reduced the seed types that need pre-sale approval from 28 to 5 major seeds that now are rice, corn, wheat, soybean and cotton seeds. The reduction is intended to incentivize seed research innovation and guarantee China’s food security. Producers for seeds other than the abovementioned five major ones will only need to register their products with the regulators under the Revised Law.
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Seed approval can be applied at the provincial level and/or the national level. Under the Revised Law, seeds that have been approved in one province can be distributed in other provinces that share a similar ecological region, as long as the approved seeds register with the relevant agricultural department in those provinces. An approval at the national level means the approved seed can be distributed nationwide.
The approval process requires the applicant to submit the application to the provincial variety authorization committee and/or the national variety authorization committee. The seed must have undergone two growing seasons of monitored growth in at least five different locations in a province (depending on the type of seed, some seeds may require monitored growth in up to 20 different locations in the province). These tests are conducted and administered by the government designated institutes, the number of products one Company may submit for testing is usually limited to a small number due to testing capacity limitation. Seeds submitted for testing are planted together with control seeds that are typically the most popular seeds with farmers in the testing locations. Only seeds that have an increased yield of 8% or higher versus the control seeds and that rank among the top six seeds then being tested are cleared to proceed to the second year of testing, during which the results of the initial test season must be confirmed.
The most significant development in the hybrid corn seed approval process in China is the introduction of the Corn Seed Green Pass Test System. Origin is now one of a few major seed companies in China able to use the national level Corn Seed Green Pass Test System. Under this system, Origin can introduce to the market our new hybrid varieties with the field tests conducted by us at our own test sites following a protocol developed by the government. This is an important step to accelerate new product introduction to the market.
Seeds developed outside of China must also follow the above procedures before they can be distributed in China.
The ability to process an application for approval is an important element of success, especially in view of the long timeframe associated with obtaining approval after the seed has been developed. Failures and delays in getting the approvals on a timely basis can seriously disrupt the production company’s seed production plan. A minimum of six years – three years to obtain approval and three years to develop the first crop of seed for commercial distribution – generally is required to bring a seed to the market after it has been developed. Because of our extensive network of seed-producing farmers, we have consistently been able to bring new products to the market within a short period of time. Other seed companies often take an additional season or more to bring an approved product to the market, which can be a significant disadvantage for other companies.
Seed GMO Safety Regulations
The Chinese government published Regulations on Administration of Agricultural Genetically Modified Organisms Safety in December 2011 and the regulations were updated in October 2017 (the “GMO Regulations”). On July 22, 2022, MARA published a revised “Guideline for Safety Assessment of Genetically Modified (GM) Plants” (the “Guideline”) for public comments. The Guideline aligns MARA’s technical guidance with recently updated “Administrative Measures for the Safety Assessment of Agricultural GMOs,” which came into force originally on June 30, 2023. The Guideline applies to bio-safety certificate application for both domestic production (cultivation) and importation as processing materials.
The GMO Regulations govern the research, experiment, production, processing, marketing, import and export of agricultural genetically modified organisms (“GMO”) in China. The GMO Regulations classified agricultural genetically modified organisms, or GMO, into Classes I, II, III and IV according to the extent of their risks to human beings, animals, plants, microorganisms and the ecological environment. The principal difference among the classes is the reporting obligation to the relevant agricultural administration. The testing of agricultural GMO will normally go through three stages; restricted field testing, enlarged field testing and productive testing. Depending on the classification of the GMO, the GMO research entity will have differing levels of reporting obligation to the Ministry of Agriculture and Rural Affairs (“MARA”) prior to the commencement of the testing and when the GMO advances from one testing stage to the next testing stage. After the completion of productive testing, the GMO research entity may make an application to the MARA for a safety certificate of the tested GMO. Our products are generally classified as Class I. As of September 30, 2019, the Company has received safety certificate for its phytase corn products.
A production license from MARA is required for the production of GMO seeds (the “GMO License”). To obtain a GMO License, the business must obtain a bio-safety certificate of agricultural GMO and passed variety examination, plant and breed in the designated areas, adopt appropriate safety administration and precautionary measures and comply with other conditions provided for by MARA. We are in the process of applying for GMO Biosafety certificate and actively discussing with related authorities to meet the requirements for the biosafety certificate.
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Foreign Ownership Restrictions of Chinese Seed Companies
Currently, China restricts foreign ownership of businesses in the seed industry. A foreign invested enterprise, or FIE that is engaged in the production, marketing, distribution and sale of food crop seeds is limited to 49% foreign ownership pursuant to the Regulation on the Approval and Registration of Foreign Investment Enterprises in Agricultural Seed Industry (effective on September 8, 1997) and the Foreign Investment Industrial Guidance Catalogue (effective on December 1, 2007).
In addition to restrictions in the conventional seed business, China limits FIEs from engaging in the development, production and distribution of genetically modified corn seeds pursuant to the Foreign Investment Industrial Guidance Catalogue distributed by the Ministry of Commence of China in 2007. Furthermore, FIEs need to obtain government approvals to engage in the breeding of GM research and testing pursuant to the Agricultural Genetically Modified Organisms Safety Regulation.
Based on the foregoing, we conducted our seed development activities under Beijing Origin, a VIE, which is considered a domestic company and not a FIE. Recently, we have restructured our business and formed seed distribution businesses under Beijing Biotechnology, which is the Company’s wholly owned entity in China.
Tax
Origin and State Harvest (BVI) are both tax-exempted companies organized in the British Virgin Islands.
Our PRC Operating Companies are organized in the PRC and governed by PRC laws. PRC enterprise income tax, or EIT, is calculated based on taxable income determined under PRC accounting principles. Under the New EIT law, effective January 1, 2008, FIEs and domestic companies are now subject to a uniform EIT rate of 25% and the tax exemption, reduction and preferential treatments which were applicable only to FIEs were ended. However, any enterprises established before the promulgation of the New EIT law in 2008 that were entitled to preferential tax treatments for a fixed period continued to be entitled to such preferential tax treatment until the expiration of those periods.
The applicable tax rate under the new EIT law to Beijing Origin is 15% since January 1, 2008, because Beijing Origin has been approved as new technology enterprises and enjoys the reduced New EIT rate of 15%. Our other operating companies are subject to the New EIT at a uniform rate of 25%. The preferential treatment of high and new technology enterprise or HNTE, is subject to a reapplication every three-year period. The financial position of the Company after the sale of our corn related production and distribution assets may cause the termination of the HNTE qualification or restrict reapplication for that status, in which event there would be an adverse impact on our tax obligations and tax rate.
Pursuant to the Provisional Regulation of China on Value Added Tax, or VAT, and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 13% of the gross sales proceeds received since April 1, 2019, less any deductible VAT already paid or borne by the taxpayer. Pursuant to the Notice of the Ministry of Finance and the State Taxation Administration on Exempting the Value Added Tax for Agricultural Material, self-produced agricultural products sold by agricultural producers shall be exempt from VAT. Pursuant to an approval document received from Beijing Haidian District State Tax Bureau, Beijing Origin has been entitled to exemption from VAT since August 1, 2001.
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C. Organizational structure.
Origin Agritech Limited is a holding company, formed in the British Virgin Islands, with no operations of its own. Investors hold ordinary shares in the holding company. We conduct our operations in China primarily through our PRC Operating Companies, of which Beijing Origin (and its subsidiary, Xinjiang Origin) is a VIE arrangement, and the other companies are either full equity or part equity owned by State Harvest, which is full equity owned by the holding company. The following diagram illustrates our current organizational structure as of September 30, 2022.
| (1) | We are in the process of restructuring Beijing Origin Seed Limited based on the joint venture agreement with BC-TID. Currently, we have direct ownership interest of 27.36% in Beijing Origin Seed Limited through State Harvest Holdings Limited, and we have an additional interest of 71.16% in Beijing Origin Seed Limited through State Harvest Holdings Limited under a series of stock consignment agreements with the respective shareholders of Beijing Origin Seed Limited. Our total financial interest in Beijing Origin is 98.52%. Xinjiang Origin is a subsidiary of Beijing Origin with 51% ownership, and the Company is in the process of transferring this ownership from Beijing Origin to Hainan Aoyu. |
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The table below lists each of our group companies, their place of incorporation and their percentage of ownership interest as of September 30, 2022:
| Place of incorporation |
| Percentage | |
Name |
| (or establishment)/operation |
| of ownership |
State Harvest BVI |
| British Virgin Islands |
| 100% equity owned by Origin |
OAL SMY Limited |
| New Jersey, United States |
| 100% equity owned by Origin |
Origin Biotechnology |
| Haidian District, Beijing, PRC |
| 100% equity owned by State Harvest BVI |
Beijing Origin |
| Haidian District, Beijing, PRC |
| 98.52% VIE owned and controlled by State HarvestBVI |
Hainan Aoyu |
| Sanya, Hainan Province, PRC |
| 100% VIE owned and controlled by State Harvest BVI |
Xinjiang Origin |
| Jinbo City, Xinjiang Province, PRC |
| 51% equity owned by Beijing Origin |
Henan Aoyu |
| Zhengzhou City, Henan Province, PRC |
| 51% equity owned by Origin Biotechnology |
Anhui Aoyu |
| Hefei, Anhui Province, PRC |
| 50% equity owned by Origin Biotechnology |
Hubei Aoyu |
| Wuhan, Hubei Province, PRC |
| 51% equity owned by Origin Biotechnology |
Xuzhou Aoyu |
| Xuzhou, Jiangsu Province, PRC |
| 51% equity owned by Origin Biotechnology |
Shandong Aoruixinong |
| Qingdao, Shandong Province, PRC |
|