Origin(SEED) - 2021 Q4 - Annual Report

Introduction Corporate Structure and Forward-Looking Information 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][7] - 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][9] - Forward-looking statements highlight expectations for business development in agricultural biotechnology (GM seeds) and e-commerce, alongside key risks[10][11][12] PART I Key Information 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 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][21] Risk Factors 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][114] - 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][33] - There is significant uncertainty regarding PRC government regulation and consumer acceptance of GMO products, which is critical for the company's growth[27][37] - 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][144][145] - As a foreign private issuer, the company is subject to risks under the Holding Foreign Companies Accountable Act, which could lead to delisting[114] Information on the Company 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 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] - In 2018, the company retained its commercial seed business under Beijing Origin and established six regional joint ventures for seed distribution[151][152] - 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] Business Overview 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] - 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] - In December 2021, the Ministry of Agriculture published GMO corn and soybean variety approval procedures, a positive step towards commercialization in China[162] - The company faces competition from large Chinese companies like DaBeiNong and Longping and multinational corporations such as Pioneer, Monsanto, and Syngenta[172][175][176] Organizational Structure 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] 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][203][204] Operating and Financial Review and Prospects The company's financial performance declined in FY2021, with liquidity concerns underscored by a "going concern" warning from its auditors Operating Activities and Results 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] - The company established a CRISPR gene editing technology platform in 2017 and is collaborating with China Agricultural University on new corn varieties[234] Liquidity and Capital Resources 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][278] 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] - 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] Directors, Senior Management, and Employees 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][288] - Aggregate cash compensation paid to directors and executive officers was nil for FY2021; compensation is primarily through equity and stock options[293][294][295][297] - As a foreign private issuer, the company follows its home country (BVI) practice in lieu of certain Nasdaq corporate governance rules[308][309] 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 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][319] - The company has agreements with Trimble Genetics International LLC, owned by director Michael W. Trimble, for testing and licensing of corn hybrids[320][321] Financial Information 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] - 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] Additional Information 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][330] - 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][335] - 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][358] - Under China's EIT Law, the company could be considered a "resident enterprise," subjecting it to a 25% tax on its global income[85][351] Market Risk Disclosures 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] - 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] - Inflation in China could adversely impact operational costs and demand for the company's products[378] PART II Controls and Procedures 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] - Material weaknesses in internal control were identified, including a lack of sufficient qualified financial reporting personnel and inadequate separation of duties[383] - Management plans to remediate these weaknesses by recruiting a new CFO and expanding its accounting staff[384] Corporate Governance and Accountability 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] 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] - As a foreign private issuer, the company is exempt from and does not follow certain Nasdaq corporate governance rules, instead following BVI law[395][398] PART III Financial Statements This part contains the company's audited consolidated financial statements, which include a "going concern" uncertainty from the auditor Auditor's Report 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] - The audit identified revenue recognition in relation to fraud as a critical audit matter, requiring significant audit effort[416][417] Notes to Consolidated Financial Statements 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][451] - 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][502] - 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][513] 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) |