Origin Agritech Limited (NASDAQ:SEED) Q2 2022 Earnings Conference Call May 5, 2022 8:00 AM ET Company Participants Kirin Smith - PCG Advisory Gengchen Han - Chairman and CEO Wei Han - VP of Business Development Joe Ramelli - Director of IR Conference Call Participants Bill Stein - Celadon Financial Howard Yeager - Newbridge Securities Operator Hello and welcome to the Origin Agritech First Half 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today' ...

[Introduction](index=3&type=section&id=INTRODUCTION) [Corporate Structure and Forward-Looking Information](index=3&type=section&id=Corporate%20Structure%20and%20Forward-Looking%20Information) The company operates in China via a VIE structure due to foreign ownership restrictions and provides forward-looking statements on its GM seed business - The company is a BVI holding company, and its seed development operations in China are conducted through a **Variable Interest Entity (VIE)** structure, specifically Beijing Origin and its subsidiary Xinjiang Origin[6](index=6&type=chunk)[7](index=7&type=chunk) - The VIE structure is subject to **significant risks**, including potential PRC government findings of non-compliance, which could lead to severe penalties and render the company's shares worthless[8](index=8&type=chunk)[9](index=9&type=chunk) - Forward-looking statements highlight expectations for business development in agricultural biotechnology (GM seeds) and e-commerce, alongside key risks[10](index=10&type=chunk)[11](index=11&type=chunk)[12](index=12&type=chunk) PART I [Key Information](index=6&type=section&id=Item%203.%20Key%20Information) This section presents key financial data showing declining revenue and widening losses, alongside a detailed analysis of significant business and regulatory risks [Selected Financial Data](index=6&type=section&id=A.%20Selected%20financial%20data) Financial data for FY2021 shows declining revenues, widening net losses, and a significant working capital deficit compared to prior years Selected Consolidated Financial Data (in RMB '000) | Financial Metric | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | **Revenues** | 92,440 | 52,513 | 46,425 | | **Gross profit (loss)** | (12,830) | 3,513 | 12,814 | | **Loss from continuing operations** | (61,494) | (91,583) | (137,914) | | **Net loss attributable to Origin Agritech** | (62,120) | (85,261) | (91,529) | | **Net loss per share (Basic & Diluted)** | (14.85) | (16.95) | (16.29) | | **Total assets (at period end)** | 261,112 | 254,883 | 119,038 | | **Total liabilities (at period end)** | 276,587 | 340,345 | 304,636 | | **Current working capital (at period end)** | (178,580) | (112,542) | (228,224) | - The translation of RMB to USD for the fiscal year 2021 was made at an exchange rate of **RMB 6.4854 to US$1.00** as of September 30, 2021[19](index=19&type=chunk)[21](index=21&type=chunk) [Risk Factors](index=8&type=section&id=D.%20Risk%20factors) The company faces substantial risks from its VIE structure, going concern uncertainty, and dependence on China's uncertain GMO regulatory environment - A primary risk is the **VIE structure** for its seed development business, which means investors may not be deemed to own that part of the business if PRC authorities rule against the structure[25](index=25&type=chunk)[114](index=114&type=chunk) - The company's auditors have issued a **going concern qualification**, and the company needs to raise additional working capital but has no assured means of doing so[27](index=27&type=chunk)[33](index=33&type=chunk) - There is significant uncertainty regarding PRC government regulation and consumer acceptance of **GMO products**, which is critical for the company's growth[27](index=27&type=chunk)[37](index=37&type=chunk) - The company faces risks related to PRC regulations on offshore listings and data security, as authorities could require **approvals for continued listing** or offerings[140](index=140&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) - As a foreign private issuer, the company is subject to risks under the Holding Foreign Companies Accountable Act, which could lead to **delisting**[114](index=114&type=chunk) [Information on the Company](index=33&type=section&id=Item%204.%20Information%20on%20the%20Company) The company has shifted its focus to agricultural biotechnology and GM corn while navigating PRC foreign ownership restrictions through a VIE structure [History and Development of the Company](index=33&type=section&id=A.%20History%20and%20development%20of%20the%20Company) The company has strategically transitioned from a traditional seed business to a biotechnology-focused entity concentrating on GM seed technologies - In 2015, the company began a strategic transition from a traditional seed company to a **biotechnology seed company**, focusing on transgenic corn seed products[150](index=150&type=chunk) - In 2018, the company retained its commercial seed business under Beijing Origin and established **six regional joint ventures** for seed distribution[151](index=151&type=chunk)[152](index=152&type=chunk) - In 2019, the company entered a Cooperation Framework Agreement with BC-TID, a government-owned entity, to form a new joint venture for GM seed technologies, with **BC-TID investing RMB 137.7 million**[153](index=153&type=chunk) [Business Overview](index=34&type=section&id=B.%20Business%20Overview) The business focuses on agricultural biotechnology, specifically GM corn traits, and faces a competitive landscape despite positive regulatory signs - The company's business focuses on agricultural biotechnology and a planned **agricultural e-commerce platform** for farmers in China[155](index=155&type=chunk) - The company's genetically modified phytase corn received a **Bio-Safety Certificate** from China's Ministry of Agriculture and Rural Affairs (MARA) in 2009, the first for a GM corn product in China[156](index=156&type=chunk) - In December 2021, the Ministry of Agriculture published GMO corn and soybean variety approval procedures, a **positive step towards commercialization** in China[162](index=162&type=chunk) - The company faces competition from large Chinese companies like **DaBeiNong and Longping** and multinational corporations such as Pioneer, Monsanto, and Syngenta[172](index=172&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk) [Organizational Structure](index=45&type=section&id=C.%20Organizational%20structure) The company uses a VIE structure, controlled via stock consignment agreements, to operate its core seed business in compliance with PRC law - The company is a BVI holding company with operations in China conducted through PRC Operating Companies, with **Beijing Origin being a VIE**[199](index=199&type=chunk) Company Subsidiaries and Ownership (as of Sep 30, 2021) | Name | Place of incorporation | Percentage of ownership | | :--- | :--- | :--- | | State Harvest BVI | British Virgin Islands | 100% equity owned by Origin | | Origin Biotechnology | Haidian District, Beijing, PRC | 100% equity owned by State Harvest | | Beijing Origin | Haidian District, Beijing, PRC | 98.96% VIE owned and controlled by State Harvest | | Xinjiang Origin | Jinbo City, Xinjiang Province, PRC | 51% equity owned by Beijing Origin | | Henan Aoyu | Zhengzhou City, Henan Province, PRC | 51% equity owned by State Harvest | | Anhui Aoyu | Hefei, Anhui Province, PRC | 50% equity owned by State Harvest | | Hubei Aoyu | Wuhan, Hubei Province, PRC | 51% equity owned by State Harvest | | Xuzhou Aoyu | Xuzhou, Jiangsu Province, PRC | 51% equity owned by State Harvest | | Shandong Aoruixinong | Qingdao, Shandong Province, PRC | 51% equity owned by State Harvest | - To comply with PRC law restricting foreign ownership, the company uses **stock consignment agreements** to control its VIEs, transferring all rights of ownership except legal title[202](index=202&type=chunk)[203](index=203&type=chunk)[204](index=204&type=chunk) [Operating and Financial Review and Prospects](index=48&type=section&id=Item%205.%20Operating%20and%20Financial%20Review%20and%20Prospects) The company's financial performance declined in FY2021, with liquidity concerns underscored by a "going concern" warning from its auditors [Operating Activities and Results](index=49&type=section&id=A.%20Operating%20Activities%20and%20Results) FY2021 revenue declined while operating expenses rose due to a large asset write-down, though the company advanced its biotech pipeline FY 2021 vs. FY 2020 Performance (in RMB millions) | Metric | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Revenue | 46.4 | 52.5 | | Total Operating Expenses | 150.7 | 95.1 | | General & Administrative Expenses | 73.3 | 58.1 | | Research & Development Expenses | 2.0 | 4.1 | | Net Loss Attributable to Origin | 91.5 | 85.3 | | Net Loss Per Share (RMB) | 16.29 | 16.95 | - The company's **double stacked Bt and GT genes** are currently under review by MARA for biosafety certificates[221](index=221&type=chunk) - The company established a **CRISPR gene editing technology platform** in 2017 and is collaborating with China Agricultural University on new corn varieties[234](index=234&type=chunk) [Liquidity and Capital Resources](index=57&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) The company's precarious financial position and recurring losses raise substantial doubt about its ability to continue as a going concern - The company's financial statements include a **"substantial doubt about the ability to continue as a going concern"** qualification from its auditors[274](index=274&type=chunk)[278](index=278&type=chunk) Cash Flow Summary (in RMB '000) | Cash Flow Item | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (60,130) | (5,615) | (25,077) | | Net cash provided by (used in) investing activities | — | (42,243) | (1,209) | | Net cash provided by financing activities | 62,978 | 65,918 | 19,838 | - As of September 30, 2021, the company had total borrowings of **RMB 137.6 million**, an interest-free loan from BC-TID expected to be converted into equity[264](index=264&type=chunk) - During fiscal year 2021, the company raised **$2.62 million** from the sale of 219,440 ordinary shares through an "at the market" arrangement[265](index=265&type=chunk) [Directors, Senior Management, and Employees](index=61&type=section&id=Item%206.%20Directors,%20Senior%20Management,%20and%20Employees) The company's leadership relies on equity-based compensation and follows home country governance practices as a foreign private issuer - The board is chaired by **Dr. Gengchen Han**, who also serves as CEO, and includes three independent directors[287](index=287&type=chunk)[288](index=288&type=chunk) - Aggregate cash compensation paid to directors and executive officers was **nil for FY2021**; compensation is primarily through equity and stock options[293](index=293&type=chunk)[294](index=294&type=chunk)[295](index=295&type=chunk)[297](index=297&type=chunk) - As a foreign private issuer, the company follows its home country (BVI) practice in lieu of certain **Nasdaq corporate governance rules**[308](index=308&type=chunk)[309](index=309&type=chunk) Principal Share Ownership (as of Jan 25, 2021) | Shareholder | Shares Beneficially Owned | Percentage of Total | | :--- | :--- | :--- | | Gengchen Han (Chairman & CEO) | 860,383 | 14.85% | | Tiger Capital Fund SPC | 1,696,450 | 29.28% | [Major Shareholders and Related Party Transactions](index=67&type=section&id=Item%207.%20Major%20Shareholders%20and%20Related%20Party%20Transactions) The company's operations depend on related party agreements that enable its VIE structure and facilitate business with a director-owned entity - The company's operations rely on key related party agreements, including **stock consignment agreements** to control its VIE[318](index=318&type=chunk)[319](index=319&type=chunk) - The company has agreements with **Trimble Genetics International LLC**, owned by director Michael W. Trimble, for testing and licensing of corn hybrids[320](index=320&type=chunk)[321](index=321&type=chunk) [Financial Information](index=68&type=section&id=Item%208.%20Financial%20Information) The company has no history of paying dividends, has no plans to do so, and is not currently involved in any material legal proceedings - The company has **never declared or paid dividends** and does not plan to in the foreseeable future, intending to retain earnings for business expansion[325](index=325&type=chunk) - The company states it is not currently a party to any **legal proceeding, investigation, or claim** that is likely to materially and adversely affect its business[324](index=324&type=chunk) [Additional Information](index=69&type=section&id=Item%2010.%20Additional%20Information) This section details PRC exchange controls, tax considerations, and the risk of being classified as a Passive Foreign Investment Company - Operations in China are subject to PRC regulations, where the Renminbi is not freely convertible for **capital account items** without prior SAFE approval[329](index=329&type=chunk)[330](index=330&type=chunk) - PRC regulations, such as **SAFE's Circular 19 and Circular 16**, restrict the use of foreign capital converted into Renminbi, which may affect liquidity[334](index=334&type=chunk)[335](index=335&type=chunk) - The company may be classified as a **Passive Foreign Investment Company (PFIC)** for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. shareholders[101](index=101&type=chunk)[358](index=358&type=chunk) - Under China's EIT Law, the company could be considered a **"resident enterprise,"** subjecting it to a 25% tax on its global income[85](index=85&type=chunk)[351](index=351&type=chunk) [Market Risk Disclosures](index=82&type=section&id=Item%2011.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks include foreign currency fluctuations between the RMB and USD, as well as inflation in China - **Interest rate risk is currently minimal** because the company's primary debt is an interest-free loan from BC-TID[374](index=374&type=chunk) - The company is exposed to **foreign currency risk** as its revenues and expenses are denominated in Renminbi (RMB), while its shares are valued in U.S. dollars[376](index=376&type=chunk) - **Inflation in China** could adversely impact operational costs and demand for the company's products[378](index=378&type=chunk) PART II [Controls and Procedures](index=84&type=section&id=Item%2015.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective due to several material weaknesses in internal financial reporting - Management concluded that the company's disclosure controls and procedures were **ineffective** as of September 30, 2021[379](index=379&type=chunk) - **Material weaknesses** in internal control were identified, including a lack of sufficient qualified financial reporting personnel and inadequate separation of duties[383](index=383&type=chunk) - Management plans to remediate these weaknesses by **recruiting a new CFO** and expanding its accounting staff[384](index=384&type=chunk) [Corporate Governance and Accountability](index=85&type=section&id=Item%2016.%20Corporate%20Governance%20and%20Accountability) This section covers key governance matters, including the audit committee financial expert, auditor fees, and exemptions from Nasdaq rules - The board of directors has designated **Ms. Fei Wang** as the "audit committee financial expert"[386](index=386&type=chunk) Principal Accountant Fees (BF Borgers CPA PC) | Fee Type | FY 2020 | FY 2021 | | :--- | :--- | :--- | | Audit Fees | US$150,000 | US$175,000 | - On January 3, 2020, the company engaged **BF Borgers CPA PC** to replace BDO China Shu Lun Pan Certified Public Accountants as its independent auditor[397](index=397&type=chunk) - As a foreign private issuer, the company is exempt from and does not follow certain **Nasdaq corporate governance rules**, instead following BVI law[395](index=395&type=chunk)[398](index=398&type=chunk) PART III [Financial Statements](index=89&type=section&id=Item%2018.%20Financial%20Statements) This part contains the company's audited consolidated financial statements, which include a "going concern" uncertainty from the auditor [Auditor's Report](index=95&type=section&id=Reports%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The auditor's report expresses substantial doubt about the company's ability to continue as a going concern due to recurring losses - The auditor's report contains a **"going concern uncertainty"** paragraph, citing recurring losses, net current liabilities, and an accumulated deficit[411](index=411&type=chunk) - The audit identified **revenue recognition in relation to fraud** as a critical audit matter, requiring significant audit effort[416](index=416&type=chunk)[417](index=417&type=chunk) [Notes to Consolidated Financial Statements](index=102&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail the VIE structure, going concern issue, significant impairments, and reliance on related-party financing from BC-TID - The company's VIE (Beijing Origin) is consolidated based on contractual agreements and had **total liabilities of RMB 274.1 million** as of Sep 30, 2021[443](index=443&type=chunk)[451](index=451&type=chunk) - The company recorded significant impairment losses in FY2021, including **RMB 60.7 million** on plant and equipment and **RMB 7.6 million** on land use rights[500](index=500&type=chunk)[502](index=502&type=chunk) - As of Sep 30, 2021, the company's borrowings of **RMB 137.7 million** consist of an interest-free loan from BC-TID, expected to be converted to equity[455](index=455&type=chunk)[513](index=513&type=chunk) Parent Company Condensed Balance Sheet (as of Sep 30, 2021, in RMB '000) | Account | Amount | | :--- | :--- | | Cash and cash equivalents | 8,900 | | Due from inter-companies | 187,777 | | Total current assets (liabilities) | 197,667 | | Investment in unconsolidated subsidiaries | (338,339) | | **Total stockholders' equity (deficit)** | **(140,672)** |

Financial Performance - Revenues for the fiscal year ended September 30, 2020, were RMB 52,513,000, a decrease from RMB 92,440,000 in 2019, representing a decline of approximately 43%[19] - The net loss attributable to Origin Agritech Limited for the fiscal year ended September 30, 2020, was RMB 85,261,000, compared to a net loss of RMB 62,120,000 in 2019, indicating an increase in losses of about 37%[19] - Total operating expenses for the fiscal year 2020 were RMB 95.1 million (US$14.0 million), compared to RMB 48.7 million in fiscal year 2019, with general and administrative expenses increasing to RMB 58.1 million (US$8.5 million) from RMB 27.2 million[201] - Net loss from continuing operations for the fiscal year 2020 was RMB 102.4 million (US$15.0 million), compared to a net loss of RMB 65.1 million in fiscal year 2019[202] - For the fiscal year ended September 30, 2020, revenue was RMB52.5 million (US$7.7 million), a decline from RMB92.4 million in the previous fiscal year, primarily due to significant scrap sales in fiscal year 2019 and limited supply in fiscal year 2020[200] Assets and Liabilities - Total assets as of September 30, 2020, were RMB 254,883,000, down from RMB 261,112,000 in 2019, reflecting a decrease of approximately 2%[20] - The company reported total liabilities of RMB 340,345,000 as of September 30, 2020, an increase from RMB 276,587,000 in 2019, representing a rise of approximately 23%[20] - Cash and cash equivalents increased significantly to RMB 22,482,000 as of September 30, 2020, compared to RMB 3,198,000 in 2019, marking an increase of over 600%[20] - The company’s total borrowings as of September 30, 2020, were RMB137.7 million (US$20.2 million), an increase from RMB78.6 million in the previous year[203] Research and Development - Research and development expenses decreased to RMB 4,116,000 in 2020 from RMB 13,267,000 in 2019, a reduction of about 69%[19] - The company has established an extensive pipeline for GM corn seeds, including traits for glyphosate tolerance and insect resistance, and is actively pursuing commercialization of these products[205] - The company continues to advance its GMO product pipelines, with significant progress in double stacked traits of insect resistance and herbicide tolerance[193] - The company has established several plant genetic engineering technology platforms focusing on traits such as herbicide tolerance, insect resistance, and drought stress tolerance in corn[137] - The company has entered into commercial licensing agreements with DuPont Pioneer and KWS SAAT SE to jointly develop new seeds for Chinese farmers, enhancing its research and development capabilities[130][131] Joint Ventures and Collaborations - The company has formed a joint venture with BC-TID, which has invested RMB 137.7 million (approximately $20.2 million) to support seed biotechnology development[30] - The company entered into six regional joint ventures for seed distribution, with equity interests of 50% in Anhui Aoyu and 51% in the other five joint ventures, which are part of a long-term strategy to operate under an e-commerce platform[123] - The company has a strategic cooperation agreement with the China Academy of Agriculture Science to develop and sell GM crop varieties, subject to reimbursement of certain expenses[145] Market and Competition - The company faces significant competition in the seed development and e-commerce sectors, both domestically and internationally[55][56] - Major multinational companies dominate the GM corn seed market, holding approximately 70% of that market share in the U.S.[59] - The company faces challenges in maintaining its market advantage in GM seeds due to evolving resistance from weeds and insects, necessitating continuous investment in research and development[60] - The competitive landscape in the seed industry is marked by consolidation and changing government subsidies, which could adversely affect sales[64] - The company faces competition from large multinational companies and local seed producers, but believes it can compete effectively through product quality and intellectual property enforcement[146][149] Regulatory Environment - The independent auditors issued a going concern statement, indicating the need for substantial capital to continue operations as planned[29] - The Chinese government has only recently begun to issue GM crop safety certificates, impacting the commercialization of GM seeds[34] - The U.S. market requires rigorous testing and pre-approval for GM seeds, with the USDA and EPA involved in the regulatory process[37] - Obtaining necessary permits and approvals for GM seeds can be time-consuming and costly, with no guarantee of success[38] - The evolving regulatory environment in China regarding e-commerce and data privacy may impose additional compliance costs[52] - The company is subject to stringent regulations in the seed and e-commerce sectors, with potential fines for non-compliance that could adversely affect operations[80] Taxation and Financial Risks - The company’s preferential tax treatment as a "high and new technology enterprise" is subject to annual evaluation, and any loss of this status could significantly increase tax liabilities[82] - The company’s joint ventures may not receive the same tax benefits as its main operations, potentially leading to higher overall tax liabilities[83] - The classification as a "resident enterprise" under China's Enterprise Income Tax Law could lead to unfavorable tax consequences, including a 10% withholding tax on dividends paid to non-resident shareholders[85] - If classified as a "resident enterprise," the company may be subject to PRC enterprise income tax on worldwide taxable income and additional reporting obligations[86] - The applicable tax rate for Beijing Origin is 15% since January 1, 2008, due to its approval as a new technology enterprise, while other operating companies are subject to a uniform rate of 25%[172] Future Outlook - The company aims to lead in biotechnology and GM product commercialization in China, focusing on improving yields, product quality, and resistance traits[210] - Future growth will be influenced by strategic management of growth, ability to develop new products, and potential industry consolidations in China[214] - The company anticipates substantial capital input to launch its agribusiness e-commerce platform, with no assurance of profitability[39] - The success of the e-commerce platform will depend on partnerships with third parties for a wide range of product offerings[40] Legal and Compliance Issues - The company has limited business insurance coverage in China, increasing its exposure to operational risks and potential financial impacts from disruptions[75] - The PRC legal system presents uncertainties that could limit legal protections for non-PRC shareholders, affecting investment decisions[98] - The company must comply with various regulations regarding personal information protection and must obtain user consent for data collection[169] - The Company has established information security systems to protect user privacy in compliance with the Cyber Security Law[170] Stock Market and Trading - The company’s stock price is likely to be volatile, influenced by factors such as business plan execution, operating results, and external economic conditions[108] - The trading market for the company's ordinary shares has historically been characterized as "thinly traded," with potential for minimal trading activity impacting share price[107] - The company is governed by British Virgin Islands law and has opted out of certain Nasdaq corporate governance requirements, which may limit investor voting rights[106]