Beijing, China
September 30, 2007
Origin Agritech Limited
(NASDAQ:SEED - News) ("Origin" or the "Company"), a
technology-focused supplier of crop seeds in China, today
announced financial results for the year ended September 30,
2007. These fiscal year results reflect the Company"s financial
results during the period from October 1, 2006 to September 30,
2007. Origin prepares its financial statements in accordance
with generally accepted accounting principles (GAAP) of the
United States.
FINANCIAL RESULTS OVERVIEW
For the year ended September 30, 2007, we generated revenues of
RMB489 million (US$65.2 million), a decrease of 6.23% from RMB
521.9 million (US$66.0 million) in revenues generated in the
twelve months ended September 30,2006.
Our results of operations were materially impacted this year by
certain industry factors. These factors included (1) Circular
(Guo Ban Fa [2006] No 40) issued by the State Council which
required separate local, provincial seed authorities from
existing commercial sales affiliates by June 30, 2007. As a
result of these regulations, many local seed producers ceased
operations and a significant amount of seed was sold at lower
than expected price levels as these businesses needed to
liquidate their remaining inventory; (2) an over-production of
crop seed supply in the marketplace. These aforementioned
factors were pervasive throughout the entire Chinese crop seed
industry this year.
Revenues
The industry environment this year caused us to liquate a
portion of our crop seeds as scrap sales. While these sales only
amounted to 2.12% of our total revenues for the year ended 2007,
they materially impacted our overall gross margin by 8.25%.
During fiscal year 2007 we also wrote off a significant portion
of our seed inventory of RMB77.24 million (US$ 10.31 million),
which was recorded as cost of revenues. Excluding these
temporary scrap sales and the impairment of inventory, our gross
margins for the period were 30.09% as compared to our 30.73%
gross margins for the twelve months ended September 30, 2006.
With regards to our fiscal year 2007 normal product line
results, exclusive of scrap sales, normal corn seed products
remains our strongest product, producing 74.36% of our sales, as
compared to 65.03% in the twelve month ended September 30, 2006
period and 64.79% for the nine months ended September 30, 2006.
The total revenue from corn seed grew 4.94% to RMB356.17 million
in fiscal year 2007 from RMB 339.39 million in the 12 months
ended September 2006. Margins decreased 5.42% from 37.38 % in
the 12 months ended September 2006 to 31.96% in fiscal year
2007, mostly as a result of the increased industry pressure due
to the change in government regulations. Cotton margins
increased 0.69% to 28.43% in fiscal year 2007 from 27.74% in the
twelve month period ending September 30, 2006. Volume decreased
slightly from 57.9 million kg in the twelve months ended
September 30, 2006 to 54.5 million kg in fiscal year 2007. Our
first year of canola sales showed 454,521 kg with 53.3% margins.
Our rice product sales in fiscal year 2007 suffered the greatest
losses this year. Our revenues for the rice unit, exclusive of
scrap sales, for the year ended September 30, 2007 decreased
approximately 50.52% to RMB 71.90 million from RMB 145.32
million in the twelve months ended September 30, 2006. The
margin decreased from 19.03% in the twelve months ended
September 30, 2006 to 15.95% in fiscal year 2007. The unexpected
price reduction in the market this year caused us to write-off a
large amount of inherited (Feb 2006) inventory from the acquired
Denong entity, amounting to RMB75.24 million (US$10.04 million).
These rice products were produced prior to 2005, and thus would
no longer be viable for the commercial marketplace in 2008.
Total Expenses
Total expenses for the year ended September 30, 2007 were RMB
178.68 million (US$23.85 million), representing an increase of
46.39% from RMB122.06 million (US$15.44 million) for the twelve
months ended September 30, 2006.
Selling and marketing expenses for the year ended September 30,
2007 were RMB57.99 million (US$7.74 million), representing an
increase of 0.51 % from RMB57.70 million (US$7.30 million) for
the year ended September 30, 2006.
General and administrative expenses for the year ended September
30, 2007 were RMB92.25 million (US$12.31 million), representing
an increase of 83.74% from RMB 50.20 million (US$6.35 million)
for the twelve months ended September 30, 2006.
Research and development expenses for the year ended September
30, 2007 were RMB28.44million (US$3.80 million), representing an
increase of 100.88 % from RMB14.16 million (US$1.79 million) for
the twelve months ended September 30, 2006. This doubling of
expenses amounted to 5.8% of our total revenues, which is
roughly in-line with our research and development strategy.
Causes for the increase in G&A expenses this year include the
following: (1) additional six months of Jilin Changrong
acquisition and additional four months of expenses from Denong
Zhengcheng acquisition. Denong was consolidated in February
2006. Changrong was consolidated in April 2007, (2) Salaries and
severance fees as a result of the reorganization, increase in
welfare benefit expense, salary increase due to new 13th month
bonus, (3) increase in professional fees dues to first year of
SOX-404 implementation and convertible debt capital raise. Our
average headcount and associated salaries during 2007 was 1047.
Our current headcount as at December 31, 2007 is 930, as some of
the payroll elimination has already taken place at the end of
fiscal year 2007.
Net Income
We recorded a net loss applicable to ordinary shareholders of
RMB 163.20 million (US$21.78 million) for the year ended
September 30, 2007, as compared to the net income of RMB57.82
million (US$7.32 million) for the twelve months ended September
30, 2006.
Balance Sheet
Origin's balance sheet at September 30, 2007 included cash and
cash equivalents of RMB162.31 million (US$21.66 million) as of
September 30, 2007, working capital of RMB294.98 million
(US$39.37 million), shareholders' equity of RMB296.92 million,
($39.63 million) and long-term debt of 265.94 million (US$35.94
million). Origin also extended its share repurchase program for
up to US$10 million through December 2008.
Fiscal 2008 Guidance
Looking into 2008, we continue to see further industry
consolidation. As a result, the overall capacity will gradually
return to a rational range and the decline of average selling
price will likely slow down. However, we still see the overall
inventory remains high throughout the industry and total seed
supply still outstrips the demand.
Based on its current outlook, with existing and anticipated
business conditions, Origin expects to report revenues range
from US$75 million to US$80 million and bottom line range from a
net income of US$0.5 million to US$2 million, for the fiscal
year ending September 30, 2008. This net income figure is
inclusive of roughly US$2.7 million dollars in expected non-cash
interest expense from our convertible debt offering. Exclusive
of this non-cash expense, we expect a net income range of US$3.0
to US$4.5 million.
INDUSTRY UPDATE
With the rapid growth of the economy in China, demands for
higher food production have increased dramatically, most
noticeably a major shortage of pork meat. These demands include
significant domestic price inflation of food products, the
rising consumer desire for higher quality food products, the
increased need for fuel including the usage of bio-fuels, and
the growing constraints on land. Due to the high demand for corn
feed products, China is becoming a net corn importer. The
shortage of produced commodity corn and oversupply of corn seed
clearly shows the low productivity of the corn acreage in China.
Coupled with the already shrinking arable land in China, under
the pressure of industrial encroachment and environmental
changes, the advantages of GM transgenic varieties of high
yield, high quality are obvious. Farmers plant transgenic
varieties to both save time and cost, while reducing fieldwork.
The Chinese authorities are beginning to promote genetically
modified (GM) crop seed research and commercialization to meet
the increasing demand of agricultural products.
GMO AND PIPELINE UPDATE
We recognize that genetically modified crop seeds will gain
acceptance in China, and we have begun biotech seed development
focused on genetic modifications to improve the yields, product
quality, as well as herbicide tolerance, insect resistance,
nitrogen efficiency, and drought stress tolerance for corn and
other corps. We have already been successful in marketing
genetically modified BT cotton varieties in China and continue
to develop other new seed varieties. Upon introduction, the BT
cotton gene was able to increase yield and production value.
Farmers paid more for genetically modified seeds and prices
increased roughly four-fold for GM cotton seeds. Today, almost
all planted acreage in China utilizes GM cotton seed, exclusive
of Xinjiang province. We believe that other crop seeds can
follow similar product adoption patterns.
Origin's GMO Phytase corn is expected to be the one of the first
transgenic maize approved and sold commercially into the
domestic marketplace. Transgenic phytase maize is expected to be
commercially launched in 2009. Phytase is currently used as an
additive in animal feed to breakdown phytic acid in maize,
increasing phosphorus absorption in animals by 60%. Phosphorus
is an essential element for the growth and development of all
animals, and plays key roles in skeletal structure and in vital
metabolic pathways. Phytase, mandatory in several countries for
environmental purposes, has a worldwide potential market size of
US$500 million, including US$200 million for China alone,
according to the China Feed Industry Study. The corn seed market
in China is estimated at US$1 billion.
Phytase transgenic maize will allow animal feed producers the
ability to eliminate purchasing phytase and maize separately,
eliminate the need for mixing the two ingredients together,
saving time, machinery, and labor. While currently microbiology
is universally used to produce phytase, Origin plans to be the
first to introduce transgenic phytase maize. Origin's GMO
Phytase corn is expected to be one of the first transgenic maize
approved and sold commercially into the domestic marketplace.
"Development of these biotechnology attributes remains a
cornerstone of our business strategy and significant management
resources and attention are dedicated to building these
capabilities. Our agronomists also become a trusted source to
educate farmers on the benefits of genetically modified
products. Our high-end processing, production, and quality
control will continue to ensure high-quality seed production. We
remain optimistic on Chinese government's forthcoming decision
on GM seeds in corn and plan to become the leader in
biotechnology and GMO product commercialization in China," Dr
Han commented.
Turning to the competitive landscape, large biotech
multinational companies will face obstacles as currently
foreign-funded companies are prohibited from the development or
production of genetically modified plant seeds, breeding
livestock and poultry, and aquatic seeds. We possess exclusive
rights in China to five genetic traits in various stages of
testing and development. As a domestic company, we can proceed
through all five phases of GMO approval, while international
entities are restricted to phase one currently. We already have
several products in phase 2 to phase 4, and one product in phase
5.
In 2007, we implemented a data mining infrastructure to search
for stable, high yielding hybrids. Conventional breeding and
biotechnology complement one another. We will build our current
hybrid base where we have some of the highest quality germplasms
optimized to local environments. We have roughly 100 total
products in the market and as of December 2007, we have 12
proprietary corn seed products, 12 proprietary rice seed
products and 2 proprietary canola seed products that are in
commercial production and distribution. Currently, we have 9
breeding stations and employ 142 full time research personnel.
GUANGXI FORTUNELAND UPDATE
After a thorough due diligence process and evaluation, the
Company has decided to withdraw the Guangxi Fortuneland
acquisition project. The company believed that the large
fertilizer company presented a significant amount of integration
risk to our base crop seed business and presented significant
working capital requirements. As a result, the company has
chosen to invest both time and capital towards development of
additional high end products.
2007 OVERVIEW
During the 2007 year, Origin made progress towards achieving its
long-term goals and fulfilling its business plan, as follows
As a part of a company-wide restructuring, the company
reorganized into 3 distinct business units: 1) Corn, 2) Rice and
Canola, and 3) Cotton and Agricultural Chemicals. Each business
unit will be able to focus on its specific strengths and
challenges to meet its long-term goals.
The Company received approval to begin marketing hybrid rice in
neighboring Vietnam.
Also, Origin's subsidiary, Biocentury Transgene (China) Co. Ltd.
was approved to market 3 insect-resistant GMO hybrid cotton
seeds in India in 2008.
During 2007 Origin acquired another 9.18% ownership in Jilin
Changrong Seed Company. This acquisition brought the Company
into a 51.7% ownership position and enabled the Company to gain
access to over 40 proprietary hybrid crop seeds.
US$40 million investment through 5-year notes from Citadel
Investment Group, LLC. |
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