Investor meeting update.
Not planning to post on IB given that I have other stuff that I am involved in that keeps me busy. This is info I understood from other SIAF investors and Solomon / Dan. Overall, I walked away optimistic. Solomon is indeed very impressive, engaging and a straight shooter. Just as impressed by Dan, Peter and Erik. Above all, the integrity and condor of all four contributed to my optimism. Of course, I would prefer a higher pps, instead of any of the above.
Business model - JV partner acquires land and makes it easy to acquire permits besides making it easy for Sino Agro to operate. Sino Agro is a foreign company and it would be difficult to operate without a local partner to influence and get basic stuff through the local authorities. JV partner is for ease of operations (feel free to interpret) and does not contribute any funds (MF is the only exception).
SIAF develops the project and the JV partner has 100% ownership. All the development work is billed to the JV partner as consulting revenue and results in AR. Important to note that the JV partner does not settle the AR in cash. All the AR is converted (100% of the investment on the project) is used to acquire only 75% equity of the project. Technically, 100% equity could be acquired but that would be unwise as the JV partner’s continuing involvement is what makes it easy for SIAF to scale up operations after Phase 1.
Effectively, instead of Construction-in-progress for work during the development stage, SIAF has consulting AR (revenue shown instead cost in the Income statement). The non-controlling interest on the balance sheet is the cost of doing business in China (40 mil so far and rose 20 mil in 2013). The JV model has found a model to legitimately pay for influence without bribing. Personally, I like this model and is SOX compliant.
Mega Farm is a slightly different model. The Chinese local partner has acquired prime land to develop the project. GODL has raised 60-70 mil to get started. SIAF has a longer track history and will help GODL to raise the rest of the funds, as SIAF has a longer operating history. Net-net, the development SIAF does will result in SIAF getting paid in cash, as opposed to AR. If it takes more time for SIAF / GODL to raise the remaining funds for the MF, the work will be slowed. No SIAF equity to fund this project. Sigh of relief!
GODL is a HK entity for SIAF to protect its technology secrets, as opposed to mainland China. So SIAF licensed its technology to GODL under HK law. The technology is not rocket science (Solomon’s words), but there is value to the knowledge acquired during the experience of implementing multiple times.
The MF had to start at this time or the competition could have won this project. Build demo farms and then prospective investors come along to implement large scale farms, and SIAF is forced to close the deal or lose the deal. The funds for the large scale (MF) farms are not from SIAF equity issuance and are project financed separately.
The scaling up of the existing demo farms have been slowed down, but it is not always SIAF’s decision. The respective JV partners always want to scale up operations, as they do not contribute any funds and their 25% equity grows as the farms are scaled up. Tough to displease the JV partner and hence it is a tight-rope act. Bottom line, equity is at the tail end (Do I sound like Solomon? – If you hang around Solomon long enough, so will you).
Easier to fund projects in China now, as the number of projects have slowed down. The SIAF funding options have increased, as there is more money chasing less number of projects. Nas listing makes it easier to close funding deals. The listing is progressing, and was slowed to accommodate Q1 and the K / Q updates to the app. I remain hopeful. The same is the case with the S1. No deal breaking issue but need to work through the questions to lend clarity. The JV model is tough to explain to the SEC and the Nas.
AR – From what I understood, there is no collection problem and it is getting better. Local wholesalers are large operators, but AR with the local wholesaler cannot be factored. Factoring is prevalent, but not AR with these local wholesalers. It is getting easier and faster to collect the AR. The AR is coming back to us and there are no collection issues!
Got to go. Hope that helps.