WINHA COMMERCE AND TRADE
Winha Commerce and Trade International Ltd Trade and International Commerce Winha INTERNATIONAL LTD
REPLACEMENT PROSPECTUS PROSPECTUS ACN 605 884 848
By this replacement Prospectus, WINHA Commerce and Trade International Ltd (‘the Company’) invites investors to apply for a total of 28,571,428 Shares at an issue price of $0.35 per Share to raise up to $10,000,000. The Offer has a minimum subscription of $7,000,000. The Offer made by this replacement prospectus (‘Prospectus’) is conditional upon ASX confirming that it will admit the Company to Official Quotation, subject to the satisfaction of such terms and conditions prescribed by the ASX Listing Rules, as well as other conditions detailed in this Prospectus. The Offer is scheduled to close at 5.00pm (AEST) on 12 December 2016 unless extended or withdrawn. Applications must be received before that time to be valid.
IMPORTANT NOTICE Applicants should read this Prospectus in its entirety before deciding to apply for Shares. If, after reading this Prospectus, you have any questions about the Offer, you should contact your professional advisers. There are risks associated with an investment in the Company and the Shares offered under this Prospectus are to be regarded as a speculative investment. Please refer to Section 6 for Risk Factors. Lead Manager: *
*Beer & Co’s wholly owned subsidiary company, Melbourne Venture Securities Pty Ltd (ACN 102 538 394) holds Australian Financial Services Licence No. 224313 and shall provide the services of the Lead Manager in connection with the Offer. IMPORTANT NOTICES
GENERAL Any person may obtain a hard copy of this Prospectus The Company and the Share Registry may disclose This replacement Prospectus (‘Prospectus’) is free of charge by contacting the Company Secretary your personal information to its agents and service dated 30 November 2016 and it replaces the Original of the Company via email at [email protected]. providers as authorised by the Privacy Act (1988) (Cth) Prospectus dated 16 November 2016 relating to the A copy of this Prospectus can be downloaded from or for purposes required by the Listing Rules or Shares of the Company. A copy of this Prospectus the website of the Company at www.auwinha.com. Corporations Act. You may access your personal was lodged with ASIC on 30 November 2016. Neither If you are accessing the electronic version of this information by contacting the Share Registry and ASIC or ASX takes any responsibility for the contents Prospectus for the purpose of marking an investment may request corrections to such personal information. of this Prospectus. in the Company, you must be an Australian resident The Company will apply to ASX within seven (7) days and must only access this Prospectus from within FORWARD LOOKING STATEMENTS Australia. Please note that no document or information following the date of issue of this Prospectus for Various statements in this Prospectus constitute official quotation by ASX of the Shares offered included on our website is incorporated by reference into this Prospectus. statements relating to intentions, future acts and events. by this Prospectus. Such statements are generally classified as forward It is important that you read this Prospectus carefully looking statements and involve known and unknown and in full before deciding to subscribe for Shares RESTRICTIONS ON OFFER risks, uncertainties and other important factors that in the Company. This Prospectus does not, and is not intended to, could cause those future acts, events and circumstances constitute an offer in any place or jurisdiction in which, to differ from the way implicitly portrayed within this or to any person to whom, it would not be lawful Prospectus. These risks, uncertainties and other OVERVIEW OF THE MATERIAL CHANGES FROM factors include, but are not limited to, the matters THE ORIGINAL PROSPECTUS to make such an offer or to issue this Prospectus. The distribution of this Prospectus in jurisdictions described in Section 6 (‘Risk Factors’). The Company This Prospectus has been issued to provide disclosure outside Australia may be restricted by law and persons gives no assurance that the anticipated results, in relation to the following matters, which are the who come into possession of this Prospectus should performance or achievements expressed or implied material changes from the Original Prospectus: seek advice on and observe any such restrictions. in those forward looking statements will be achieved. >>insertion of footnotes into Section 4 of the Prospectus; Any failure to comply with such restrictions may Except to the extent required by law, the Company has no intention to update or review forward-looking > constitute a violation of applicable securities laws. >inclusion of further information about how Zhongshan statements or to publish prospective financial WINHA’s agricultural assets are managed, and No action has been taken to register or qualify information in the future, regardless of whether new how the leases of vegetable farms and orchards the Shares, or otherwise to permit a public offering information, future events or any other factors affect by Zhongshan WINHA contributes to the Company’s of the Shares, in any jurisdiction outside Australia the information contained in this Prospectus. business model (please refer to Section 1.3 of and the Offer is not an offer or invitation in any the Prospectus); jurisdiction where, or to any person whom, such >>further information about regional agricultural an offer or invitation would be unlawful. DEFINITIONS risks associated with cultivation of fruit and Please refer to the Glossary in Section 13 of this vegetables in China (please refer to Section 6.1 APPLICATION FORMS Prospectus for terms and abbreviations used in parts of the Prospectus); of this Prospectus. Applications for Shares can only be made pursuant >>clarification of the accounting policy used in to the Application Form attached to and forming relation to the Company’s investment in Flavours part of this Prospectus. The Corporations Act MISCELLANEOUS Fruit & Veg Pty Ltd (please refer to Section 7.7(k) prohibits any person from passing the Application of the Prospectus); and The financial amounts in this Prospectus are Form to any other person unless it is attached to, expressed in Australian dollars unless stated >>inclusion of financial information for the C&V Group or accompanied by, a complete and unaltered version otherwise. Items displayed in photographs in this for the period ended 31 March 2014 (please refer of the Prospectus. Prospectus are not necessarily assets owned by the to Section 7.3 of the Prospectus). The Application Form contained in this Prospectus Company. The inclusion of photographs supplied by contains a declaration that the Applicant has personally persons or entities other than the Company does not CONDITIONAL OFFER received the complete and unaltered Prospectus prior constitute an endorsement or recommendation by to completing the Application Form. those persons or entities of Shares offered under The Offer is subject to and conditional upon approval this Prospectus. of the admission of the Company’s Shares to Official Quotation on the ASX. EXPOSURE PERIOD In accordance with Chapter 6D of the Corporations LEAD MANAGER EXPIRY DATE Act, the Original Prospectus was subject to an exposure Beer & Co’s wholly owned subsidiary company, period of seven (7) days from the date of lodgement Melbourne Venture Securities Pty Ltd (ACN 102 538 394) No securities will be issued on the basis of this of the Original Prospectus with ASIC. The exposure holds Australian Financial Services Licence No. Prospectus later than 13 months after the date period was extended by ASIC for a further period of 224313 and shall provide the services of the Lead of this Prospectus. seven (7) days, being to 30 November 20116. If this Manager in connection with the Offer. Prospectus is found to be deficient, Applications Beer & Co has acted as Lead Manager to the Offer. INVESTMENT ADVICE received during the Exposure Period will be dealt with The Lead Manager has not authorised, permitted or in accordance with section 724 of the Corporation Act. This Prospectus does not take into account your caused the issue or lodgement, submission, despatch Applications received during the Exposure Period will financial circumstances, financial objectives or or provision of this Prospectus and there is no not be processed until after the expiry of the Exposure particular needs (including your financial or taxation statement in this Prospectus that is based on any Period and receive no preference. issues). Therefore, this Prospectus does not constitute statement made by it or by any of its affiliates, investment advice. You should obtain professional officers or employees. To the maximum extent investment advice before subscribing for Shares PRIVACY permitted by law, the Lead Manager and its affiliates, under this Prospectus. officers, employees and advisers expressly disclaim If you apply for Shares you will provide personal all liabilities in respect of, and make no representations information to the Company and the Share Registry. regarding, and take no responsibility for, any part ADDITIONAL COPIES OF PROSPECTUS This enables your Application to be assessed, of this Prospectus other than references to its name you to be registered as the holder of Shares, to enter Additional copies of this Prospectus are available and make no representation or warranty as to the you in the Company’s register of members and to at the registered office of the Company. currency, accuracy, reliability or completeness of enable the Company to contact you. The Company this Prospectus. The Corporations Act 2001 prohibits any person from may from time to time be required to disclose your passing onto another person an Application Form personal information to the Australian Taxation Office, unless it is attached to or accompanied by the other government agencies or as required by law. complete and unaltered version of this Prospectus.
LETTER FROM THE CHAIRMAN 02
01 INVESTMENT OVERVIEW 04
02 COMPANY STRUCTURE AND BUSINESS OVERVIEW 23
03 DETAILS OF THE OFFER 36
04 MARKET OVERVIEW 47
05 BOARD AND CORPORATE GOVERNANCE 52
06 RISK FACTORS 63
07 FINANCIAL INFORMATION 78
08 INVESTIGATING ACCOUNTANT’S REPORT 106
09 MATERIAL CONTRACTS 112
10 CHINA LEGAL OVERVIEW 127
11 ADDITIONAL INFORMATION 131
12 DIRECTORS’ AUTHORISATION 136
13 GLOSSARY OF TERMS 138
APPLICATION FORMS 143
CORPORATE DIRECTORY IBC LETTER FROM THE CHAIRMAN
Dear Investor, Welcome to the Prospectus of WINHA Commerce and Trade International Ltd. On behalf of the Board of the Company, it is my pleasure to offer you the opportunity to become a shareholder in this exciting business. The Company is seeking to raise up to $10,000,000 through the issue of 28,571,428 shares at an issue price of $0.35 per share (Maximum Subscription), with a minimum subscription of $7,000,000. Through its subsidiaries, the Company owns the WINHA Business in China. As part of its expansion to the Australian market, the Company has also acquired an interest in Flavours Fruit & Veg Pty Ltd (ACN 166 549 435) (Flavours), which owns the ‘Flavours’ wholesale fruit and vegetable business in Victoria.
THE WINHA BUSINESS (CHINA): The WINHA Business comprises an innovative business model centred around the retailing of local specialty food and beverage products (WINHA Products) from different regions across China. The WINHA Business aims to offer high quality food and beverage products to China’s middle class consumers. The WINHA Products are currently sold to China consumers via forty four (44) franchise stores located in Guangdong Province, China (Franchise Stores), six (6) retail stores located in Guangdong Province (Retail Stores) and one (1) supermarket located in Guangdong Province (WINHA Supermarket). The Retail Stores are owned by a subsidiary of the Company, Zhongshan WINHA Electronic Commerce Company Ltd (Zhongshan WINHA). Zhongshan WINHA has entered into management contracts with third parties, who manage the Retail Stores and purchase the WINHA Products from Zhongshan WINHA on a wholesale basis for re-sale in the Retail Stores. The WINHA Supermarket is operated by Zhongshan WINHA Supermarket Co Ltd (Zhongshan Supermarket), which is a direct subsidiary of Zhongshan WINHA. The WINHA Business also operates two (2) flagship restaurants, known as ‘Experience Halls,’ where customers are able to consume speciality food and beverage products retailed by the WINHA Business (Experience Halls). The Experience Halls are managed by a wholly owned subsidiary of the Company, being Zhongshan WINHA Catering Management Co Ltd (WINHA Catering). Franchisees own and manage each Franchise Store, which retail the WINHA Products. The Franchise Stores, Retail Stores and WINHA Supermarket provide customers with access to a variety of local regional products that are generally found in local regional stores and marketplaces in China. In addition to selling the WINHA Products to individual consumers, Zhongshan WINHA has also entered into long-term supply contracts with various Chinese hotels and restaurants. To facilitate supply of products to the WINHA Business, Zhongshan WINHA has ongoing supply agreements with suppliers, producers and farmers throughout China. In July 2016, Zhongshan WINHA also entered into 41 leases of orchards and 10 leases of vegetable farms, and it is anticipated that this move towards vertical integration may assist the WINHA Business to optimise produce quality, ensure efficient supply to Franchise Stores, Retail Stores, Experience Halls and the WINHA Supermarket and control distribution costs. The WINHA Business is primarily focused on healthy foods and the supply of fresh, unprocessed ingredients. Many of WINHA’s products are certified as “green food” by the China Green Food Development Centre under the Ministry of Agriculture, and some products are certified as organic food by international certification authorities. The Company seeks to target China’s growing base of middle-class consumers or consumers with relatively high disposable income, who can afford to pay higher retail prices for certified “green food” or organic food.
02 Winha Commerce and Trade International Ltd PROSPECTUS LETTER FROM THE CHAIRMAN / CONTINUED
THE WINHA BUSINESS (AUSTRALIA): Flavours is a company incorporated in Australia and based in Melbourne, Victoria which wholesales fresh fruit and vegetables to high-end restaurants, hoteliers , caterers and other purchasers. Flavours sells a range of produce, including organic, heirloom and specialty fruit, vegetable and herb varieties, which are sourced from growers, suppliers and markets around Australia. The Company has the right to acquire 49% of Flavours, and such acquisition will complete upon the Company being admitted to the ASX. The acquisition is structured as follows: >> the Company has subscribed for 1,000,000 secured convertible notes in Flavours with a face value of $1 per note (being a total of $1,000,000), such notes convertible to shares constituting 16.3% of Flavours’ issued share capital (Flavours Convertible Notes); and >> upon gaining in-principle approval for Admission from the ASX, the Company will also subscribe for and purchase shares in Flavours constituting a further 32.7% of Flavours’ issued share capital (Flavours Acquisition). The Company also has an option to acquire the balance of 51% of Flavours’ share capital, this option being exercisable during 2019 (Acquisition Option). For details about the Flavours Acquisition and Acquisition Option, please refer to section 2 of the Prospectus. The Flavours Acquisition will also facilitate the expansion of the Company’s business into Australia by assisting: >> the sale of the WINHA Products into Australia; and >> utilization of Flavours’ network of farmers and produce suppliers to import Australian food products into China for retail by WINHA’s China business.
LISTING ON THE ASX: The Company is seeking to list on the ASX for the following key reasons: >> to provide the Company with further funding to pursue its commercial objectives, including the development of further Retail Stores, Franchise Stores and Experience Halls in China; >> to provide the Company with further capital to pursue its expansion into Australia, including completion of the acquisition of 49% of Flavours’ share capital and exporting Australian products to China; >> to provide the Company with greater access to a liquid capital market which will enable the Company to pursue the growth and expansion of the WINHA Business; and >> to be part of an internationally recognised stock exchange with a strong corporate governance environment that the Company believes will enhance and facilitate greater commercial opportunities for the WINHA Business in China and provide a platform for growth. This Prospectus contains detailed information about the Company, the WINHA Business and the risks of participating in an investment of this nature. The Board recommends that investors read this Prospectus carefully and in its entirety. The Offer is conditional on the Minimum Subscription being raised and the Company gaining approval from the ASX for the Admission. On behalf of the Board, I look forward to welcoming you as a shareholder of the Company. Yours faithfully,
Mr Zhuowei Zhong Chairman
Winha Commerce and Trade International Ltd PROSPECTUS 03
01 INVESTMENT OVERVIEW 01 INIVnESTMENTvestment O VOvERerVIEWview
1.1 PURPOSE OF THE PROSPECTUS The purpose of this Prospectus is to: (a) facilitate the Company’s admission to the Official List of the ASX; and to (b) raise up to $10,000,000 pursuant to the Offer, in order to assist the Company in meeting its commercial and development objectives, which include: >> the acquisition of 49% of Flavours; >> selling the WINHA Products into Australia through Flavours and importing Australian food products into China for sale at the Franchise Stores, Retail Stores and the WINHA Supermarket; >> pursuing further joint venture and acquisition opportunities with additional Australian food distribution companies, to jointly source and export Australian food and beverage products to China; >> cultivating the orchards and vegetable farms which Zhongshan WINHA has leased and paying the costs and expenses associated with employment of agronomists and farm managers; >> expanding the Company’s network of Franchise Stores, Retail Stores and Experience Hall restaurants in China; >> expanding Zhongshan WINHA’s sales of WINHA Products to purchasers in the hospitality industry in China, such as hotels and restaurants; >> facilitating the listing of the Company’s Shares on the ASX and the listing of the Shares offered under this Prospectus; >> providing funds for general working capital purposes; and >> paying the costs and expenses associated with the Offer.
1.2 KEY DATES
Original Prospectus lodged with ASIC 16 November 2016
Prospectus lodged with ASIC* 30 November 2016
Prospectus released to market 30 November 2016
Prospectus offer closes 12 December 2016
Expected Allotment Date of Shares 16 December 2016
Admission of Company to ASX 22 December 2016
* Please note that the dates set out in the above timetable may be varied in accordance with the Corporations Act, and, where required, in consultation with ASX. These dates are indicative only and subject to change. The Company reserves the right to vary the dates without prior notice.
Winha Commerce and Trade International Ltd PROSPECTUS 05 01 Investment Overview / CONTINUED
1.3 INVESTMENT OVERVIEW The following is a summary only and is not intended to be comprehensive. Prospective investors should read the full text of this Prospectus and if you are uncertain about any matter you should consult your investment adviser before making an investment decision.
FURTHER ITEM SUMMARY INFORMATION
1. COMPANY
Who is the issuer WINHA Commerce and Trade International Ltd. Section 2 of this Prospectus?
What does the WINHA Commerce and Trade International Ltd is an unlisted Australian Section 2 Company do? company founded in 2015. China Business: The Company owns, indirectly through its wholly owned subsidiaries, the WINHA Business, which is focused on the sale of Chinese regional consumer products through China-based Franchise Stores, Retail Stores and a WINHA Supermarket. The Franchise Stores are operated by Franchisees. The Retail Stores are owned by Zhongshan WINHA, a subsidiary of the Company, but operated by third party managers. Consumers can also purchase the WINHA Products through the WINHA Supermarket, which is operated by Zhongshan Supermarket, a subsidiary of Zhongshan WINHA. Customers purchase the WINHA Products at the Franchise Stores and Retail Stores, and can pre-order products by telephone for collection at the Franchise Stores and Retail Stores. A subsidiary of Zhongshan WINHA, being Zhongshan WINHA Catering Management Co Ltd (WINHA Catering) operates the Experience Halls, which are restaurants where customers can eat food products and dishes prepared from ingredients that are retailed by the Franchise Stores, Retail Stores and the WINHA Supermarket. The WINHA Products include foods certified as “green foods” by the China Green Food Development Centre (CGFDC) under the Ministry of Agriculture, and certain food products certified to be organic in accordance with the Japanese Agricultural Standards or by the German certification body BCS Öko-Garantie GmbH, although these foods are not retailed as organic in China. From July 2016, Zhongshan WINHA has leased 41 plots of agricultural land in a range of provinces, each lease for a 10 year term, and has also purchased the fruit trees planted on this land. Zhongshan WINHA has also leased 10 plots of agricultural land in a range of provinces, each lease for a 1 year term, to be used for the cultivation of vegetables. Zhongshan WINHA employs technical specialists and farm managers to manage these farms.
06 Winha Commerce and Trade International Ltd PROSPECTUS 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
What does the While the crops and seedlings are still immature, Zhongshan WINHA is Company do? / continued cultivating 20 types of vegetable and 40 types of fruit, with a particular focus on Chinese varieties of fruit and vegetables. It is anticipated that once these farms enter production, the fruit and vegetables will be sold by Zhongshan WINHA in the WINHA Supermarket and Experience Halls, and wholesaled by Zhongshan WINHA to the Retail Store managers and Franchisees for sale in the Retail Stores and Franchise Stores. The fruit and vegetables cultivated by Zhongshan WINHA will not be certified as organic or “green foods”. Australian Business: Flavours is a company incorporated in Australia which wholesales fresh fruit and vegetables to high-end restaurants, hoteliers and other purchasers. Upon Admission, the Company will hold 49% of Flavours. The Company also has an option to acquire the balance of 51% of the issued capital in Flavours from the Flavours Vendors (Acquisition Option). By acquiring an interest in Flavours, the Company is acquiring an interest in an established business in the fruit and vegetable distribution industry in Victoria. The Company will work together with the existing Flavours shareholders and management to grow the Flavours business and expand it into other Australian states and territories. The Company also intends to focus on its expansion of the WINHA Business in Australia by procuring Flavours to purchase fruit, vegetables and herbs from Australian suppliers and exporting those Australian products to China for distribution through the WINHA Supermarket, Retail Stores and Franchise Stores. Flavours shall also import WINHA Products into Australia and shall distribute and sell the WINHA Products to Flavours’ clients. The Company has entered into binding Heads of Agreement with Flavours to facilitate the sales and distribution of products between the companies. For more information on these Heads of Agreement, please refer to Section 9 (‘Material Contracts’).
What is the Prior to the Flavours Acquisition, Flavours was owned by World of Flavours Section 9 Flavours Acquisition? Pty Ltd (ACN 159 309 305) and Select Providor Pty Ltd (ACN 124 200 353) (Flavours Vendors). On Admission, the Company will have acquired 49% of the share capital of Flavours for a total purchase price of $3 million (Initial Consideration), apportioned as follows: (a) $1,000,000 of the Initial Consideration has been applied towards a subscription for secured convertible notes in Flavours by the Company, these Flavours Convertible Notes convertible into 16.3% of Flavours’ issued share capital (on a fully diluted basis) upon conversion, each note having a face value of $1.00 and accruing 10% interest per annum. The Company has subscribed for the Flavours Convertible Notes in October 2016. Conditions precedent to the conversion of the Flavours Convertible Notes by the Company are in-principle approval for the Admission from the ASX and satisfaction of any conditions imposed by the ASX in relation to such Admission;
Winha Commerce and Trade International Ltd PROSPECTUS 07 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
What is the Flavours (b) $600,000 of the Initial Consideration will be applied towards purchasing Acquisition? / continued shares constituting 9.8% of Flavours’ issued share capital (on a fully diluted basis) from the Flavours Vendors on a pro rata basis, completion of such purchase to occur upon in-principle approval for the Admission from the ASX (Flavours Share Purchase); and (c) $1,400,000 of the Initial Consideration has been applied towards the issue of new shares to the Company, the shares constituting 22.9% of Flavours’ issued share capital (on a fully diluted basis, and completion of such issue to occur upon in-principle approval for the Admission from the ASX (Flavours Share Issue). Therefore, as at the date of this Prospectus (being prior to the conversion of the Flavours Convertible Notes, and completion of the Flavours Share Purchase and Flavours Share Issue), the Company does not hold any shares in Flavours. However, upon Admission, and following the conversion of the Flavours Convertible Notes and completion of the Flavours Share Purchase and Flavours Share Issue, the Company will hold 49% of Flavours’ issued share capital. The Company has also been granted the Acquisition Option, entitling the Company to acquire from the Flavours Vendors a further 51% of the issued share capital in Flavours, calculated on a fully diluted basis. Such Acquisition Option is exercisable from the period 1 April 2019 to 30 June 2019. The Acquisition Option may be exercised by the Company paying the Flavours Vendors a purchase price calculated at a multiple of 8 x Flavours’ net profit after tax, calculated on the financial year ending 31 March 2019
Where are the Company’s The WINHA Group’s existing Experience Halls, WINHA Supermarket, Retail Section 2 operations located? Stores and Franchise Stores are located in Guangdong Province, China. However, the orchards and farms leased by Zhongshan WINHA are located throughout China. Flavours is a company incorporated in Australia and its business premises and operations are based in Melbourne, Australia.
08 Winha Commerce and Trade International Ltd PROSPECTUS 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
What are the As at the date of this Prospectus, the WINHA Business retails over seven Section 2 WINHA Products? hundred (700) different products. The WINHA Franchise Stores, Retail Stores and WINHA Supermarket offer customers a wide range of food and beverages, including fresh and preserved fruit and vegetables, fresh and preserved meat and seafood products, herbs and spices, speciality and regional plant foods, legumes, grains, nuts, seeds, rice and noodles, oils, wine, liquors, cakes and confectionery. Zhongshan WINHA is cultivating a range of fruit, including citrus fruit, stone fruit, berries, grapes, quinces, pears and apples. Zhongshan WINHA also cultivates a wide variety of vegetables, including bamboo shoots, green vegetables such as spinach and beans, root vegetables including carrots and sweet potato, and herbs such as mugwort and fennel.
WINHA Retail Stores The six (6) Retail Stores currently owned by Zhongshan WINHA and operated Section 2 by third party managers are all located within the Guangdong Province of China. Zhongshan WINHA owns the Retail Stores, but has entered into Outsourcing Contracts with managers, who purchase the WINHA Products from Zhongshan WINHA at wholesale prices and sell WINHA Products directly to consumers, receiving all profits generated by the Retail Stores. The Retail Store locations and sizes are as follows: 1. Fanyu District, Guangzhou City – 118.39 m2 2. Chancheng District, Foshan City – 123.97 m2 3. Sanshui District, Foshan City – 118 m2 4. Shunde District, Foshan City – 229.4 m2 5. Dongcheng District, Dongguan City – 277.02 m2 6. Zhongshan, Xiaolan Town – 106.47 m2
WINHA Franchise Stores The forty four (44) Franchise Stores currently operated by Franchisees are all Section 2, 9 located within the Guangdong Province of China. The Franchise Store locations and sizes are set out on page 115 of the Prospectus. As the Franchise Fees are calculated on the “tier” (or size) of city in which the Franchise Store is located and the area of the Franchise Store, the Franchise Stores have been grouped based on the tier of the city in which they are located. For more information about city tiers and how they are calculated, please refer to page 115 of this Prospectus. As at the date of this Prospectus, no Franchisee operates more than one (1) Franchise Store.
Winha Commerce and Trade International Ltd PROSPECTUS 09 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
WINHA Supermarket The WINHA Supermarket is located in Shiqui District, Zhongshan, Guangdong Section 2 Province, and has an area of 197.97m2.
Why is Zhongshan Zhongshan WINHA has elected to lease orchards and vegetable farms, WINHA leasing orchards and cultivate fruit and vegetables, for the following key reasons: and vegetable farms? >> to ensure a consistent supply of high-quality produce to the Franchise Stores, Retail Stores, WINHA Supermarket and Experience Halls; >> to assist with controlling short term variations in prices and sale volumes and ensuring consistent product quality; >> to reduce dependence on third party growers; >> to potentially increase the WINHA Group’s profit margins and reducing distribution costs; and >> to enable Zhongshan WINHA to supply fruit and vegetable products to the Franchise Stores, Retail Stores, WINHA Supermarket and Experience Halls which may not otherwise be readily available from growers.
Business ownership As set out in the diagram below, the Company controls the WINHA Business Section 2 structure by wholly owning C&V International Holding Company Ltd, a company incorporated in the Cayman Islands (C&V International). C&V International wholly owns WINHA International Investment Holdings Company Ltd (WINHA HK), a company incorporated in Hong Kong. In turn, WINHA HK wholly owns Shenzhen WANHA Information Technology Company Ltd (Shenzhen WANHA), a company incorporated in China which holds all issued share capital in Zhongshan WINHA Electronic Commerce Company Ltd (Zhongshan WINHA). Zhongshan WINHA is a company incorporated in China which operates the WINHA Business. Franchisees currently own and operate forty four (44) Franchise Stores in Guangdong Province, China. The Company does not own the Franchise Stores but, rather, receives fees from the Franchisees. The Franchisees purchase WINHA Products from suppliers introduced by Zhongshan WINHA.
10 Winha Commerce and Trade International Ltd PROSPECTUS 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
Business ownership Zhongshan WINHA owns the Retail Stores, but outsources the operation structure / continued of the Retail Stores to third party managers. Zhongshan WINHA wholesales WINHA Products to the Retail Store managers, and the managers then retail the WINHA Products to the public. The Franchise Stores, Retail Stores and WINHA Supermarket sell the WINHA Products, which are regional speciality food and beverage products from China. WINHA Catering operates the Experience Halls, located in Zhongshan, and Zhongshan Supermarket operates the WINHA Supermarket and cultivates fruit and vegetables at leased farms. Pursuant to the Flavours Acquisition, the Company will also hold 32.70% of Flavours’ share capital at Admission, and will hold 49% of issued share capital in Flavours if the Flavours Convertible Notes are converted into shares. For further information about the Company’s structure, please refer to Section 2.1 of this Prospectus. A diagram of the WINHA Group’s structure as at the date of Admission (and assuming conversion of all Flavours Convertible Notes) is set out below.
WINHA International Group Ltd 100%
Sanmei International Other Shareholders Investment Co. Ltd 60% 40%
WINHA Commerce and Trade International Ltd
100% 49% C&V International Flavours Fruit & Veg Holding Company Ltd Pty Ltd 100%
WINHA International Investment Holding Company Ltd Offshore 100% PRC Shenzhen WANHA Information Technology Company Ltd
Zhongshan WINHA Electronic Commerce Company Ltd
100% 100% Zhongshan WINHA Zhongshan WINHA Supermarket Co Catering Management Co Ltd
Winha Commerce and Trade International Ltd PROSPECTUS 11 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
Changes in Share The Company was incorporated with 10 ordinary Shares at an issue price Capital Structure of $1 per Share, issued to C&V International. since Incorporation These 10 Shares were subsequently transferred from C&V International to Sanmei and Sanmei was issued additional share capital in the Company at an issue price of $0.00001 per Share, and the other Existing Shareholders were issued Shares at the same issue price. To effect the inclusion of the Company into the WINHA Group corporate structure and to provide the Company with ownership and control of the WINHA Business, all issued share capital in C&V International was transferred to the Company by Sanmei. Prior to the transfer of the share capital of C&V International to the Company, the Company had no assets. Therefore, the transfer of the C&V International shares to the Company increased the Company’s value, as it provided the Company with ownership of the WINHA Business. Transfer of the C&V International shares was undertaken as part of the WINHA Group restructure in preparation for the listing of the WINHA business on the ASX, and was effected by way of the C&V Share Sale Agreement between the Company and Sanmei, dated 23 March 2016, under which completion occurred on 11 April 2016.
Capital structure Existing Shareholders: Section 3 of the Company As at the date of this Prospectus, the Existing Shareholders hold as at the date of 72,000,000 Shares. this Prospectus The Existing Shareholders’ shareholdings are as follows: (a) Sanmei International – 43,200,000 Shares, constituting 60% of the Company’s share capital prior to the Offer; (b) Zhuowei Zhong (an executive director of the Company) – 5,040,000 Shares, constituting 7% of the Company’s share capital prior to the Offer; (c) Xinxi Zhong (the daughter of Zhuowei Zhong) – 3,600,000 Shares, constituting 5% of the Company’s share capital prior to the Offer; (d) Black Swan Equity Partners Ltd – 2,160,000 Shares, constituting 3% of the Company’s share capital prior to the Offer; (e) Beijing Ruihua Future Investment Management Co Ltd – 3,600,000 Shares, constituting 5% of the Company’s share capital prior to the Offer; (f) Zhifei Huang, an executive director of the Company – 2,880,000 Shares, constituting 4% of the Company’s share capital prior to the Offer; (g) Chun Yan Winne Lam – 2,160,000 Shares, constituting 3% of the Company’s share capital prior to the Offer; (h) the Existing Minority Shareholders, being a further thirteen individuals, each hold 720,000 Shares, equating to an individual shareholding of 1% (and total shareholding of 13%) of the Company’s share capital prior to the Offer.
12 Winha Commerce and Trade International Ltd PROSPECTUS 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
Who is WINHA Sanmei International is a company incorporated in Anguilla and which is wholly International Group and owned by WINHA International Group. Sanmei International? WINHA International Group is a company incorporated in Nevada, United States, and which is listed on the NASDAQ OTC. The Shares held by Sanmei International in the Company will constitute 42.95% of issued Shares in the Company, in the event that the Offer is fully subscribed. As at the date of this Prospectus, other than their shareholding in the Company, Winha International and Sanmei International have no other business activities.
2. PURPOSE OF THIS PROSPECTUS
Purpose of Prospectus The purpose of this Prospectus is to: Section 2 (a) facilitate the Company’s application for admission to the Official List of the ASX; and (b) to raise up to $10,000,000 pursuant to the Offer.
3. BUSINESS MODEL
What will be the Following the successful Admission, the Company shall focus on: Section 2 Company’s principal (a) continuing to generate revenues from the Franchise Stores, Retail Stores, activities after WINHA Supermarket and Experience Halls; Admission? (b) cultivating fruit and vegetables on farms leased in China by Zhongshan WINHA; (c) importing food products from Australia into China, with the assistance of Flavours as required, and retailing such products through the Franchise Stores and WINHA Supermarket, and wholesaling such products to the Retail Stores; (d) participating in the conduct and operations of the Flavours business in Australia; (e) selling WINHA Products into Australia through Flavours; (f) establishing and opening new Franchise Stores in Guangdong Province, and also other regions of China, including Hubei Province and Shanghai; (g) opening further Experience Halls; and (h) increasing wholesale sales of WINHA Products to regional distributors in China.
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How will the Company The Company’s income will be derived from its ownership of the WINHA Section 2 generate income? Business and interest in Flavours, and therefore its income shall be derived from: (a) its entitlement to franchise fees from Franchisees, as outlined in section 9 of this Prospectus; (b) its entitlement to profits generated by wholesaling WINHA Products to the Retail Store managers; (c) its entitlement to profits generated by the Experience Halls; and (d) its entitlement to profits generated by the WINHA Supermarket. In the event that further Experience Hall restaurants are developed and opened, the Company will hold the Experience Halls through WINHA Catering and shall be entitled to, through its ownership of the China Subsidiaries, profits generated from the Experience Halls. Through the Flavours Acquisition, the Company will also be entitled to dividends from profits generated by the Flavours business (if any). The Company will also generate income through importing WINHA Products into Australia and retailing such products to customers of Flavours. The Company will also generate income by sourcing Australian food and beverage products through Flavours and procuring their sale in the Franchise Stores, Retail Stores and WINHA Supermarket. The Company will receive dividends from C&V International in the event that the WINHA Business is profitable and C&V International has sufficient profits to pay dividends to the Company.
What is the Company’s It is currently anticipated that a minimum of 8% of the NPAT per annum shall Section 3 current dividend policy? be paid as dividends to the Company’s shareholders. Please refer to section 3.12 for further information in relation to the Company’s dividend policy. It is the current intention of the Board to pay unfranked dividends in respect of full financial years for the Company ending 31 March each year. The Company has adopted a dividend policy pursuant to which it intends to distribute a minimum of 8% of NPAT to shareholders by way of dividends. The intended maximum amount of NPAT to be distributed by way of a dividend in any given financial year shall be 10% of NPAT. The Company intends to commence payment of dividends to the Company’s shareholders on an annual basis at or around June/July of each year commencing from 2017. Despite the intentions set out in this Section, no guarantee can be given about the level or payment of dividends, the level of imputation or franking of such dividends or the payout ratios as these matters depend upon the future profits of the WINHA Business and the Company, its financial and taxation position and the Directors’ views of the most appropriate payout ratio at that time. Please refer to Section 3.12 for further information in relation to the Company’s dividend policy.
14 Winha Commerce and Trade International Ltd PROSPECTUS 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
How does Zhongshan Zhongshan WINHA has hired farm managers to manage the vegetable farms WINHA manage the leased by Zhongshan WINHA, and to undertake planting, cultivation, maintenance, farms and orchards? greenhouse construction, tilling and application of pesticides and fertilisers. Technical specialists have also been hired to provide agronomical expertise to Zhongshan WINHA. These specialists are responsible for overseeing the farm managers, providing technical guidance and support, and monitoring crop growth and development. The anticipated fees and costs incurred by Zhongshan WINHA in relation to management of agricultural assets per annum are as follows*:
COST P/ANNUM CLASSIFICATION (AUD)
Labour costs $1,041,582
Greenhouse construction $141,153
Pesticides, fertilisers, water, electricity $1,946,419
Rental costs $28,261
Miscellaneous fees** $831,638
Total: $3,989,053
* Such fees are indicative only and may be subject to change. In the event of an act of God, such as an adverse climatic event, the costs incurred by Zhongshan WINHA may be significantly higher. ** Miscellaneous fees include staff training fees and travel expenses, purchasing seeds and seedlings and commercial insurance costs in relation to fruit trees
Winha Commerce and Trade International Ltd PROSPECTUS 15 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
What are the key Key dependencies of the business model outlined above include: Section 2 dependencies of >> financial performance of the Franchise Stores, Retail Stores, and the Company’s Experience Halls; business model? >> financial performance of the new Franchise Stores, Retail Stores, Experience Halls and Supermarkets that may be established following the Admission; >> financial performance of the Flavours business; >> the successful cultivation, production and harvest of fruit and vegetables on the farms leased by Zhongshan WINHA; >> counterparty performance under the contractual arrangements between Zhongshan WINHA and Franchisees; >> counterparty performance under the contractual arrangements between the Company, Flavours and the Flavours Vendors; >> any necessary regulatory approvals being secured and maintained; >> market demand for the WINHA Products remaining stable; >> ability to generate Australian consumer demand for WINHA Products to be imported into Australia and sold by Flavours; >> ability to generate Chinese consumer demand for Australian food products to be sourced by Flavours and exported into China to be retailed in the Franchise Stores, Retail Stores and WINHA Supermarket; >> changes in China regional or national consumer confidence, consumer preferences and spending patterns, including regional or local economic conditions; >> ability to retain and develop relationships with suppliers and wholesalers of the WINHA Products, and the ability to ensure continuity and reliability of supply from such suppliers; >> foreign exchange fluctuations; and >> exposure to political and legal risks through the Company’s China Subsidiaries.
16 Winha Commerce and Trade International Ltd PROSPECTUS 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
4. KEY RISKS
Key risks of an The income able to be achieved by the Company, the value of its assets Section 6 investment in and the market price of its securities on the ASX may be adversely affected the Company by a number of factors, including risks outside the control of management. These risks include: >> Unproven Business Model in China: Very few companies in China specialise in retailing locally-produced specialty foods and beverages via retail stores, franchise stores and a supermarket, in conjunction with operating restaurants where consumers can sample such products. The Company’s underlying business model is therefore relatively unproven, and the profitability and sustainability of the business model is uncertain. >> Investment in Flavours Business: there is no guarantee that the Company’s investment in Flavours will be profitable, and even if the Flavours business is profitable, there is no guarantee that Flavours will pay dividends to the Company. As Flavours is a proprietary company, the market for Flavours’ shares is illiquid. In the future, the Company may be unable to sell its shares in Flavours on favourable terms or at all. The Flavours business is subject to the risks ordinarily associated with operating a food wholesale business in Australia. Such risks include competition risk from other wholesale suppliers, contractual counterparty risks and changeable levels of demand from Flavours’ clients in the hospitality industry. The Flavours business may be adversely affected by fluctuations of the wholesale price for fruit and vegetables and varying levels of product availability depending on agricultural production, which may be affected by weather, disease, interruption in water supply, vermin infestation, global warming or other circumstances. >> PRC Land Tenure System: As all land in the PRC is either collectively owned or state owned, Zhongshan WINHA has entered into agricultural leases with 51 landowners , such leases having a term of one year (for vegetable farms) and ten years (for orchards). There is a risk that these leases may not be renewed upon expiry, that contractual breaches may lead to termination or that the land may be compulsorily acquired by the PRC government. For further information, please refer to Section 10 (‘China Legal Overview’). >> Consumer demand for WINHA Products in Australia: the WINHA Products are speciality products, sourced from specific regions in China and reflecting Chinese consumer preferences. Therefore, the level of consumer demand for the WINHA Products in Australia is uncertain, and the profitability of the proposed importation of the WINHA Products and their sale through Flavours is unproven. >> Consumer Demand for Australian food products in China: if the Australian food products sourced and imported by Flavours for retail at the Franchise Stores, Retail Stores and WINHA Supermarket do not reflect Chinese consumer preferences, there may be little consumer demand for such products, which may adversely affect the Company’s profitability;
Winha Commerce and Trade International Ltd PROSPECTUS 17 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
Key risks of an >> Food Safety: the WINHA Products are food and beverage products, investment in the and may therefore be subject to contamination risks. If one or more Company / continued of the WINHA Products are found to be unsafe, or a product recall is issued for a WINHA Product, consumer confidence in the WINHA Business is likely to be adversely affected, which may lead to an adverse effect on the Company’s financial performance; >> Risks of Retailing Food and Beverage Products: the retail and distribution of food and beverage products is subject to various risks, including the possibility that the WINHA Products may be found to be unsafe, attract insufficient consumer demand, be subject to manufacturing, supply, storage or distribution problems, be subject to problems with spoilage or perishability or be unable to compete effectively with other retailers in the Chinese and Australian markets, which may adversely affect the performance of the WINHA Business. >> Agricultural Risk: as the WINHA Products include unprocessed fruits and vegetable products, suppliers’ ability to supply the WINHA Products to Zhongshan WINHA or the Franchisees in China, and Flavours in Australia, may be adversely affected by agricultural risks, including outbreaks of agricultural disease, extreme weather events, global warming, interruption in water supply and insect or vermin infestation, causing disruption to Zhongshan WINHA and the Franchisees’ activities in China and Flavours’ ability to retail the WINHA Products in Australia. Zhongshan WINHA has leased 51 plots of land in various Chinese provinces to plant and cultivate fruit and vegetables, and such production may also be adversely affected by agricultural risks, including diseases, infestation or climatic events unique to the area in which the crops are being cultivated. >> Key Personnel: The Company is heavily reliant on key personnel. Loss of key personnel could cause significant disruption to the Company’s activities and development. While the directors of Flavours have entered into executive employment agreements with Flavours, each contract with a three (3) year term, such contracts may be insufficient to ensure their continued employment with Flavours. >> Supplier Risk: Whilst the Company sources the WINHA Products from a range of suppliers, a large proportion of the WINHA Products are currently sourced from a single supplier in China, Lijiang Deyi Food Co Ltd (LDF) pursuant to a supply contract between Zhongshan WINHA and LDF (as outlined in Section 9 of this Prospectus, ‘Material Contracts.’) If LDF or its distribution agents are unable or unwilling to continue to supply Zhongshan WINHA with such WINHA Products or to fulfil their contractual obligations to Zhongshan WINHA, the supply of certain WINHA Products to Franchise Stores, Retail Stores, WINHA Supermarket and Experience Halls is likely to be disrupted, adversely affecting the WINHA Business.
18 Winha Commerce and Trade International Ltd PROSPECTUS 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
Key risks of an >> Changes in China Economic Conditions: The Company’s entitlement investment in the to revenues may be negatively influenced by changes in regional or local Company / continued economic variables and consumer confidence in China. Unemployment rates, levels of personal disposable income and regional or local economic conditions may adversely affect consumer spending, decreasing demand for the WINHA Products. >> Access to Capital Markets: the Company maintaining access to capital markets in order to fund unforeseen expenditure or to undertake the expansion of the WINHA Business model. >> Political and Legal Risk: due to uncertainties in China’s political and legal environment, the Company’s subsidiaries in China may be exposed to political and legal risks, adversely affecting the viability of their operations in China and the purchase and on-sale of the WINHA Products.
5. DIRECTORS AND MANAGEMENT PERSONNEL
Directors The directors of the Company will be: Section 5 >> Zhuowei Zhong (Executive Director); >> Zhifei Huang (Executive Director); >> Huiwen Huang (Non-Executive Director); >> Nelson Lay (Non-Executive Director); >> Andrew Thomson (Non-Executive Director); and >> Peter Beer (Non-Executive Director). Please refer to Section 5 for profiles of each director. Details of the security holdings of each director are set out in Section 5.3.
6. FINANCIAL INFORMATION
Are there any forecasts Given the inherent uncertainties around forecasting financial information, Section 7 of future earnings? the Board has elected not to include forecast financial information in this Prospectus.
Winha Commerce and Trade International Ltd PROSPECTUS 19 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
Will the Company The Company generates revenue through the WINHA Business and is profitable. Section 7, 9 have sufficient funds From funds raised pursuant to this Offer, existing cash holdings and ongoing for its activities? revenues from the WINHA Business, the Company will have sufficient funds for its activities.
What is the The Board considers the financial outlook of the Company to be positive, Section 6, 7 financial outlook having regard to the growth prospects for the WINHA Business and potential for the Company? benefits from the Flavours investment. The Company intends to use funds raised under the Offer to procure expansion of its existing Franchise Stores, WINHA Supermarket, Retail Stores and Experience Hall networks, and to develop and cultivate the farms leased by Zhongshan WINHA. Following Admission, the Company also intends to use funds raised under the Offer for importing WINHA Products to Australia for distribution and sale by Flavours, and exporting Australian food products to China for sale in the WINHA Supermarket, Franchise Stores and Retail Stores. However, investors should note that there is no guarantee that the opening of further Franchise Stores, WINHA Supermarkets, Retail Stores and Experience Halls will be profitable for the Company or result in growth of profits for the WINHA Group. Likewise, there is no assurance that Flavours’ importation and sale of WINHA Products, or the sale of Australian products through the WINHA Group’s retail outlets, will prove profitable for the Company or the WINHA Group.
What are the key As depicted in Figure 1.1 in Section 2, the Company forms part of the WINHA Section 7 financial figures Group. The WINHA Group reported a net income after tax for the three months for the Winha Group ended 30 June 2016 of USD $4,875,539 or AUD $6,539,959 (translated at the as at 30 June 2016? average rate of 0.7455 as outlined in section 7.1.) The net income after tax of the WINHA Business for the year ended 31 March 2016 was USD $7,599,870 or AUD $10,320,301 (translated at the average rate of 0.7364 as outlined in section 7.1).
7. OFFER
What is being offered? This Prospectus invites investors to apply for a total of up to 28,571,428 Shares Section 3 at an issue price of $0.350 per Share to raise up to $10,000,000. The Minimum Subscription condition under the Offer is $7,000,000. The Offer will be open to investors with registered addresses in Australia and other investors to whom it is lawful to make an offer to pursuant to this Prospectus. The Offer is not underwritten.
20 Winha Commerce and Trade International Ltd PROSPECTUS 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
What will the Company’s As at the date of this Prospectus, the Company has 72,000,000 Shares Section 2 capital structure look (and no options on issue). and 3. like after the Offer? Assuming that the Maximum Subscription is met, the Existing Shareholders will hold 71.59% of the Company, of which Sanmei International will hold 42.95% of the Company (43,200,000 Shares) and the remaining Existing Shareholders will hold 28.36% of the Company (28,800,000 Shares). The balance of 28.40% of the Company’s share capital will be held by investors who subscribe for Shares under the Offer. Following completion of the Offer, the Company is expected to have a maximum of 100,571,428 Shares on issue (assuming that $10,000,000 is raised to issue 28,571,428 Shares under the Offer.)
Terms of Shares issued A summary of the material rights and liabilities attaching to the Shares issued Section 3 under the Offer. under the Offer is set out in Section 3.
Are there any No Shares issued under the Offer will be subject to escrow. Section 3 restrictions on securities?
Quotation The Company will apply to the ASX for quotation of all Shares issued under Section 2 the Offer as required under the Corporations Act.
Key dates of the Offer Please refer to the indicative timetable in Section 1 for key dates of the Offer. Section 1
Is there a minimum Applications for Shares under this Offer must be for a minimum of 5,715 Shares. Section 3 investment amount under the Offer?
Are there any conditions The Offer is conditional on: Section 2 to the Offers? >> The Company being granted in principle approval to list on the ASX; and >> The Company raising the Minimum Subscription under the Offer. If any of these conditions are not met, the Offer will not proceed and investors’ Application monies will be returned.
Winha Commerce and Trade International Ltd PROSPECTUS 21 01 Investment Overview / CONTINUED
FURTHER ITEM SUMMARY INFORMATION
8. USE OF PROCEEDS
How will the proceeds The Offer proceeds will be used for: Section 3 of the Offer be used? >> Funding the Flavours Acquisition; >> Funding the development and expansion of the WINHA Business via the opening of additional Franchise Stores, WINHA Supermarkets, Retail Stores and Experience Halls; >> Funding the importation of WINHA Products into Australia to be sold by Flavours, and the export of Australian food and beverage products from Australia by Flavours to be retailed in the WINHA Supermarket and Franchise Stores, and wholesaled to the managers of the Retail Stores; >> Funding the cultivation, management and harvesting of crops on the farms leased by Zhongshan WINHA, and the distribution of any fruit and vegetables produced on those farms; >> Fees associated with the listing of the Company and listing of the Shares offered under this Prospectus; >> Working capital purposes for the WINHA Business and if required, the Flavours business; and >> Expenses associated with the Offer.
9. ADDITIONAL INFORMATION
What are the tax Section 3 provides a general summary of the potential Australian tax Section 3 implications of implications of participating in the Offer. However, the tax consequences purchasing Shares of participation will depend on the individual investor’s circumstances, under this Offer? and, as such, Applicants should obtain their own tax advice before subscribing for Shares pursuant to this Offer.
Where can I find You can obtain further information from: additional information? >> Your accountant, solicitor, stockbroker or other independent professional financial adviser. >> From the Company’s share registry, Computershare Investor Services Limited, on 1300 648 187 (within Australia) or +61 3 9415 4197 (outside Australia). >> From the Company by contacting the Company Secretary, Mr Justyn Stedwell on 0424 222 122. >> From the Lead Manager on +61 (3) 9600 3599.
22 Winha Commerce and Trade International Ltd PROSPECTUS
02 COMPANY STRUCTURE AND BUSINESS OVERVIEW 02 Company Structure and Business Overview
2.1 COMPANY BACKGROUND AND STRUCTURE As previously noted, the Company is an unlisted Australian company incorporated in 2015. The Company’s business model in China utilizes a dual-track wholesale and franchise model whereby the Company, through Zhongshan WINHA and Zhongshan Supermarket and the Franchisees, sell locally-produced food and beverages. Zhongshan WINHA has also leased farms throughout China to grow fruit and vegetables for sale in the Franchise Stores, Retail Stores and WINHA Supermarket. Pursuant to the Flavours Acquisition, the Company will acquire a 49% shareholding in Flavours, a company incorporated in Australia and headquartered in Tullamarine, Victoria. Flavours wholesales fruit and vegetables to clients in the hospitality industry, such as restaurants, hotels and airline caterers. Prior to the issue of Shares under the Offer, Sanmei International holds 60% of the Company’s issued share capital and 40% of the Company’s issued share capital is held by the other Existing Shareholders.
WINHA INTERNATIONAL GROUP Sanmei International is wholly owned by WINHA International Group, a company incorporated in Nevada and listed on the NASDAQ OTC exchange. A majority of 70.4% of shares in WINHA International Group are held by Ms Zening Lai through Pilot International Investment Company Ltd (Pilot), a company which is incorporated in Anguilla and which Ms Lai wholly owns. Ms Lai is the wife of an Executive Director of the Company, Mr Zhuowei Zhong. The remaining 29.6% of share capital of WINHA International Group is held by minority shareholders, including 2% held by Mr Zhuowei Zhong, and 3% held by Mr Zhifei Huang, a director of the Company. Through the C&V Share Sale Agreement with Sanmei International, entered into in March 2016, the Company wholly owns C&V International, a company incorporated in the Cayman Islands, which in turn wholly owns WINHA HK, a company incorporated in Hong Kong. In turn, WINHA HK wholly owns Shenzhen WANHA, a wholly owned foreign entity incorporated in China, which owns all issued share capital in Zhongshan WINHA. Zhongshan WINHA wholly owns Zhongshan Supermarket and Zhongshan Restaurant. The Share Sale Agreement was entered into in order to introduce the Company into the existing corporate group structure in order to facilitate a listing of the WINHA Business on the ASX via an Australian public company. Please refer to Figure 1.1 for an overview of the corporate group.
24 Winha Commerce and Trade International Ltd PROSPECTUS 02 Company Structure and Business Overview / CONTINUED
As at the date of Admission (following conversion of the Flavours Convertible Notes and completion of the Flavours Share Purchase and Flavours Share Issue), the WINHA Group structure is as follows:
(FIGURE 1.1): STRUCTURE
WINHA International Group Ltd (a Nevada company)
100%
Investors Sanmei International Existing under Prospectus Investment Co. Ltd Minority capital raising (an Anguillan company) Shareholders
WINHA Commerce and Trade International Ltd (an Australian company)
100% 49%
C&V International Flavours Fruit Holding Company Ltd & Veg Pty Ltd (a Cayman company) (an Australian company)
100%
WINHA International Investment Holdings Company Ltd (a Hong Kong company)
Offshore 100% Onshore
Shenzhen WANHA Information Technology Company Ltd (a wholly foreign owned enterprise in China)
100%
Zhongshan WINHA Electronic Commerce Company Ltd (a China limited liability company)
100% 100%
Zhongshan WINHA Zhongshan WINHA Catering Supermarket Co Ltd Management Co Ltd (a China limited (a China limited liability company) liability company)
The WINHA Business comprises of Retail Stores, Franchise Stores, Experience Hall restaurants and a WINHA Supermarket, selling food and beverage products in Guangdong Province, China. Zhongshan WINHA also leases 51 farms throughout China to grow fruit and vegetables, and employs technical specialists and farm managers to operate these farms. WINHA Catering operates the two Experience Halls and managers who have contracted with Zhongshan WINHA operate six Retail Stores. The WINHA Supermarket is operated by Zhongshan Supermarket, a subsidiary of Zhongshan WINHA. The Experience Halls are operated by WINHA Catering.
Winha Commerce and Trade International Ltd PROSPECTUS 25 02 Company Structure and Business Overview / CONTINUED
The first Retail Store was established in 2013 in Zhongshan city in China, prior to the WINHA Business establishing its franchise model in 2015. While Zhongshan WINHA has historically operated the Retail Stores itself, from June 2016 it has outsourced the operation of the Retail Stores to third party managers. However, ownership of the Retail Stores has not been transferred by Zhongshan WINHA to the managers. As at the date of this Prospectus, Zhongshan WINHA has entered into Franchise Agreements with forty four (44) Franchisees to operate Franchise Stores in Guangdong Province, China. For more information about the contracts between Zhongshan WINHA and the operators of the Retail Stores, and the contracts between Zhongshan WINHA and the Franchisees, please refer to Section 9 of this Prospectus (‘Material Contracts’). The WINHA Products, being local specialty food and beverage products from different regions across China, are retailed through the Franchise Stores, Retail Stores and WINHA Supermarket. The WINHA Business also retails a small amount of speciality arts and crafts and jewellery products. However, the core product offering is food and beverage products.
2.2 BUSINESS MODEL AFTER COMPLETION OF THE OFFER Following the successful Completion of the Offer, the Company proposes to focus on the following principal activities: >> Opening new Franchise Stores, Retail Stores and Experience Hall restaurants: The Company (through wholly-owned subsidiaries of Zhongshan WINHA) proposes to expand through the opening of new Franchise Stores, Retail Stores and Experience Halls in other regions of China; >> Developing relationships with suppliers: Through Zhongshan WINHA, the Company will focus on developing long-term relationships with suppliers in China, to ensure a stable supply of high-quality WINHA Products to the Franchise Stores, the Retail Stores and the WINHA Supermarket; >> Developing the Flavours business in Australia: The Company will assist Flavours to develop its relationship with suppliers, producers and wholesalers, and to potentially expand the Flavours business into other areas of Australia; >> Refining logistics systems: The Company and its subsidiaries are seeking to further refine Zhongshan WINHA’s logistics systems to further integrate delivery and inventory control, and to ensure that sales orders are automatically filled and delivered from the most cost-effective location; >> Developing and cultivating fruit and vegetables: Through Zhongshan WINHA, the Company will concentrate on planting, cultivating and harvesting fruit and vegetables on the farms leased by Zhongshan WINHA, which will be retailed in the Franchise Stores, Retail Stores and WINHA Supermarket; >> Retailing Australian food products: The Company has also entered into binding Heads of Agreement with Flavours, whereby Flavours will source Australian food products to export into China for sale in the Franchise Stores, Retail Stores and WINHA Supermarket, and, conversely, the Company will procure that its subsidiaries provide WINHA Products to Flavours for sale through Flavours’ existing wholesale distribution channels.
2.3 OVERVIEW OF THE WINHA GROUP’S OPERATIONS Zhongshan WINHA enters into supply contracts for WINHA Products and supervises suppliers’ agricultural production, cooperating with local farmers. Pursuant to procurement agreements with farmers and other agricultural suppliers, suppliers warrant that produce sold to Zhongshan WINHA is of acceptable quality, including that levels of pesticide residue are satisfactory and the products conform to national hygiene and food safety standards. In 2016, Zhongshan WINHA also entered into 51 leases of agricultural land, on which it is currently growing a range of fruit and vegetables, with a focus on species which have been locally bred, or which are traditionally used in Chinese cooking (such as water spinach, pak choi, soybean, hyacinth bean and mugwort).
26 Winha Commerce and Trade International Ltd PROSPECTUS 02 Company Structure and Business Overview / CONTINUED
The WINHA Business has also attempted to differentiate itself from its competitors by purchasing and retailing consumables which are produced with a minimum of pesticides or additives, including some food which has been certified to be organic by the German certification body BCS Öko-Garantie GmbH, and some food certified to be organic in accordance with the Japanese Agricultural Standards (but which is retailed as conventional food in China, as it has not been certified as organic in accordance with Chinese standards). However, the fruit and vegetables produced on the farms leased by Zhongshan WINHA are not currently certified as organic or “green”. Zhongshan WINHA also takes orders for fresh food from customers, where the orders are filled by a WINHA supplier and the food is made available for pick-up at the Franchise Stores or Retail Stores. Zhongshan WINHA maintains quality control and provides advice to customers on recipes and nutrition. Likewise, WINHA Catering operates the Experience Halls. These Experience Halls are flagship stores where selected chefs prepare food using ingredients retailed by the WINHA Business. Customers can dine at the Experience Halls, enjoying dishes comprising the WINHA Products, resulting in an innovative marketing and dining experience. WINHA Catering operates the Experience Halls like a restaurant, selecting staff with strong customer service and catering skills. Through the Experience Halls, the Company aims to attract middle-class customers wishing to dine in an upmarket setting, and enjoying high quality fresh produce. Zhongshan Supermarket also operates the WINHA Supermarket, offering the WINHA Products in a more traditional supermarket format.
2.4 (RETAIL STORES) The first retail store was established in 2013 in Zhongshan city in China, prior to the WINHA Business moving to a franchise model during 2015. The six (6) Retail Stores established prior to this move to franchising are now operating in parallel to the franchise model. Zhongshan WINHA owns the Retail Stores, but has entered into Outsourcing Contracts with managers, who purchase the WINHA Products from Zhongshan WINHA at wholesale prices and sell WINHA Products directly to consumers, receiving all profits generated by the Retail Stores. Pursuant to the Outsourcing Contracts, all pre-existing leases between landlords of each Retail Store and Zhongshan WINHA have been terminated, and new leases entered into between the Retail Store managers and the relevant landlord. Zhongshan WINHA retains ownership of the fixed assets of each Retail Store, and the inventory of each Retail Store has been sold to the relevant manager. The Retail Stores were opened prior to the Franchise Stores because Chinese law requires certain indicia to be met before commercial franchising activities can be undertaken, such prerequisites including a mature business model, the capability to provide long-term business guidance and training services to franchisees and ownership of at least two self-operated storefronts that have been in operation for at least one year within China. While Zhongshan WINHA initially operated the Retail Stores itself, it has outsourced management and operation of the Retail Stores from June 2016. For further information, please refer to Section 10 of this Prospectus (‘China Legal Overview’).
2.5 (FRANCHISE STORES) As at the date of this Prospectus, forty four (44) Franchise Stores are currently operating in Guangdong Province, China. Zhongshan WINHA charges Franchisees an initial management fee and ongoing monthly management fees. The franchisees retail the WINHA Products, being local specialty products from different regions across China, through their Franchise Stores. Zhongshan WINHA enters into Franchise Agreements with the Franchisees, introduces the Franchisees to suppliers and assists the Franchisees with training and store fit-outs. Franchisees must pay monthly management fees and one-off franchise fees, such fees set by Zhongshan WINHA according to the population of the city in which the store is located. For more information about the Franchise Agreements between Zhongshan WINHA and the Franchisees, please refer to Section 9 of this Prospectus (‘Material Contracts’).
Winha Commerce and Trade International Ltd PROSPECTUS 27 02 Company Structure and Business Overview / CONTINUED
2.6 (EXPERIENCE HALLS) The Company’s subsidiary, Zhongshan WINHA, operates the Experience Halls. As noted above, the Experience Halls provide an innovative dining experience, whereby consumers can sample and purchase the WINHA Products cooked to order in a WINHA-branded restaurant. The Company intends on using funds raised under this Offer to open further Experience Hall restaurants in the Guangdong Province. If the Company successfully establishes the WINHA Business model throughout Guangdong Province, the Company shall seek to achieve future growth by opening further Franchise Stores and Experience Hall restaurants in China’s eastern coastal provinces and major cities. However, please note that there is no guarantee that the Company will open such Franchise Stores and Experience Hall restaurants in China’s central coastal provinces and major cities. As part of the rollout of the WINHA Business model throughout China, the Company intends to adopt a similar business model in other cities and provinces of China as it has adopted in Zhongshan, Guangdong Province, by setting up Franchise Stores and Experience Hall restaurants. While the Experience Halls support the WINHA Business’ marketing strategy, the Experience Halls are also intended to be profit-generating business units, and are currently profitable.
2.7 (ORCHARDS) Zhongshan WINHA has entered into ten-year leases for the following orchards:
TOTAL PRICES ANNUAL RENT LAND AREA LOCATION FRUIT TYPE LEASE TERM OF SEEDLINGS P/ACRE (RMB) (ACRES)
1. Xinyi, Maoming Plum 2016.07.01 592,915.00 1,300.00 153 City,Guangdong Province – 2026.06.30
2. Sihui,Zhaoqing Orange 2016.07.04 2,003,445.00 1,270.00 162 City,Guangdong Province – 2026.07.03
3. Chaoyang, Shantou City, Waxberry 2016.07.04 1,833,309.00 1,250.00 306 Guangdong Province – 2026.07.03
4. Jinzao, Shantou City, Olive 2016.07.04 3,724,069.80 1,270.00 344 Guangdong Province – 2026.07.03
5. Chaozhou, Chaozhou City, Mandarin 2016.07.06 831,757.00 1,300.00 129 Guangdong Province Orange – 2026.07.05
6. Lianping,Heyuan City, Nectarine 2016.07.06 1,974,559.00 1,250.00 162 Guangdong Province – 2026.07.05
7. Nanshan, Shenzhen City, Lychee 2016.07.06 513,409.00 1,250.00 151 Guangdong Province – 2026.07.05
8. Fuchuan, Hezhou City, Navel Orange 2016.07.08 1112839 1500 156 Guangxi Province – 2026.07.07
9. Pinghe County, Zhangzhou Pomelo 2016.07.11 523512 1380 134 City, Fujian Province – 2026.07.10
10. Yunxiao County, Zhangzhou Loquat 2016.07.12 1288293 1380 152 City, Fujian Province – 2026.07.11
28 Winha Commerce and Trade International Ltd PROSPECTUS 02 Company Structure and Business Overview / CONTINUED
TOTAL PRICES ANNUAL RENT LAND AREA LOCATION FRUIT TYPE LEASE TERM OF SEEDLINGS P/ACRE (RMB) (ACRES)
11. Youxi County, Sanming City, Kumquat 2016.07.14 1133970 1380 161 Fujian Province – 2026.07.13
12. Chishui City, Zunyi Area, Bamboo Shoot 2016.07.18 890484 500 193 Guizhou Province – 2026.07.17
13. Mengzi City, Honghe Hani Loquat 2016.07.19 865202 1150 134 and Yi Nationality – 2026.07.18 Autonomous Prefecture, Yunnan Province
14. Zhaotong City, Apple 2016.07.22 1670229 1200 151 Yunnan Province – 2026.07.21
15. Jade Dragon Snow Mountain, Snow Peach 2016.07.25 868950 1150 137 Lijiang City, Yunnan Province – 2026.07.24
16. Nanfeng County, Fuzhou Honey Orange 2016.07.28 1523059 720 129 City, Jiangxi Province – 2026.07.27
17. Xinfeng County, Ganzhou Navel Orange 2016.07.29 1032732 750 153 City, Jiangxi Province – 2026.07.28
18. Xunwu County, Ganzhou City, Honey Orange 2016.08.01 462218 680 162 Jiangxi Province – 2026.07.31
19. Suichuan County, Ji’an City, Kumquat 2016.08.01 927992 700 147 Jiangxi Province – 2026.07.31
20. Panzhihua, Chengdu City, Peach 2016.08.09 441805 920 143 Sichuan Province – 2026.08.08
21. Pujiang County, Chengdu Red Heart Kiwi 2016.08.11 1759251 1000 151 City, Sichuan Province Fruit – 2026.08.10
22. Panzhihua, Chengdu City, Loquat 2016.08.14 457489 920 162 Sichuan Province – 2026.08.13
23. Liguo Town, Dongle County, Mango 2016.08.16 1861747 1500 146 Hainan Province – 2026.08.15
24. Li and Miao Nationality Green Orange 2016.08.18 606528 1560 149 Autonomous County, – 2026.08.17 Qiongzhong, Hainan Province
25. Xuanzhou District, Quinces 2016.08.22 617020 1380 158 Xuancheng City, – 2026.08.21 Anhui Province
26. Duji District, Huaibei City, Grape 2016.08.24 1145115 1400 162 Anhui Province – 2026.08.23
27. Ledu District, Haidong City, Ledu Cherry 2016.08.25 2298895 1270 201 Qinghai Province – 2026.08.24
Winha Commerce and Trade International Ltd PROSPECTUS 29 02 Company Structure and Business Overview / CONTINUED
TOTAL PRICES ANNUAL RENT LAND AREA LOCATION FRUIT TYPE LEASE TERM OF SEEDLINGS P/ACRE (RMB) (ACRES)
28. Huangnan Tibetan Yellow Pear 2016.08.26 1043919 1300 158 Autonomous Prefecture, – 2026.08.25 Tongren County, Qinghai Province
29. Chibi City, Xianning City, Kiwi Fruit 2016.08.29 637993 1730 162 Hubei Province – 2026.08.28
30. Zhongning County, Matrimony 2016.08.30 3833563 1500 302 Zhongwei City, Vine (Goji – 2026.08.29 Ningxia Province Berry)
31. Wuxi City, Jiangsu Province Waxberry 2016.09.01 2755117 1100 243 – 2026.08.31
32. Shunping County, Baoding Peach 2016.09.01 3800297 2300 241 City, Hebei Province – 2026.08.31
33. Tang County, Baoding City, Dates 2016.09.07 3244331 2350 202 Hebei Province – 2026.09.06
34. Wei County, Handan City, Pear 2016.09.09 2816708 2400 167 Heibei Province – 2026.09.08
35. Miyun District, Beijing Red Fragrant 2016.09.12 1483374 2300 159 Pear – 2026.09.11
36. Pinggu District, Beijing Peach 2016.09.13 1664254 2100 192 – 2026.09.12
37. Greater Khingan, Arctic 2016.09.14 2603487 1150 162 Heilongjiang Province Blueberry – 2026.09.13
38. Dunhuang City, Apricot 2016.09.19 1794386 3250 173 Gansu Province – 2026.09.18
39. Yanchuan County, Red Dates 2016.09.21 1036061 1150 158 Yan’an City, Shanxi Province – 2026.09.20
40. Yantai City, Apple 2016.09.23 2479339 2400 162 Shandong Province – 2026.09.22
41. Guan County, Liaocheng City, Pear 2016.09.26 725355 2350 171 Shandong Province – 2026.09.25
30 Winha Commerce and Trade International Ltd PROSPECTUS 02 Company Structure and Business Overview / CONTINUED
2.8 (VEGETABLE FARMS) Zhongshan WINHA has also entered into one-year leases for the following vegetable farms:
EXPENSES (GREENHOUSE CONSTRUCTION, ANNUAL WATER, ELECTRICITY, RENT PESTICIDES, LABOUR, P/ACRE MISCELLANEOUS) LOCATION VEGETABLE TYPES ACRES (RMB) LEASE TERM – RMB P/YR
1. Baguazhou, Nanjing, Chinese mugwort, 14 765 2016.07.01 355812 Jiangsu Province fennel – 2017.06.30
2. Wujiang District, Suzhou City, Pak choi, white 21 765 2016.07.07 471060 Jiangsu Province mustard plant – 2017.07.06
3. Qidong City, Nantong City, Hyacinth bean, 26 765 2016.07.07 747920 Jiangsu Province water spinach – 2017.07.06
4. Xiao County, Suzhou City, Carrot, wild cabbage 19 800 2016.07.12 436903.90 Anhui Province – 2017.17.11
5. Huaishang District, Green soybean, celery 26 800 2016.07.14 525819.60 Bengbu City, Anhui Province – 2017.03.13
6. Wugang City, Pingdingshan Sweet potato, 18 800 2016.07.19 425214 City, Henan Province loofah plant – 2017.07.18
7. Anlu City, Xiaogan, Cauliflower 19 500 2016.07.21 404547 Hubei Province – 2017.07.20
8. Zengcheng Guangzhou City, Spinach, 13 800 2016.07.26 350632.10 Guangdong Province late choy sum – 2017.07.25
9. Liyang City, Changzhou City, White celery, 19 765 2016.08.09 435772 Jiangsu Province loofah plant – 2017.08.08
10. Jiashan County, Jiaqing City, Cabbage, giant hyssop 23 598 2016.09.01 9508312 Zhejiang Province – 2019.08.31
2.9 (PURCHASING MODEL) Pursuant to the WINHA Business model, Zhongshan WINHA enters into contracts with suppliers, as described in section 9 of this Prospectus (‘Material Contracts’). Such suppliers deliver the WINHA Products to Zhongshan WINHA’s warehouse. Following delivery, Zhongshan WINHA distributes some WINHA Products directly to hotels and restaurants pursuant to a Cooperative Sales Contract between that establishment and Zhongshan WINHA, as described in Section 9. Using inventory management software, the Supermarket and Experience Stores report their sales daily, and Zhongshan WINHA monitors inventory and allocates WINHA Products to the stores according to inventory levels. The managers of the Retail Stores submit wholesale purchase orders to Zhongshan WINHA as required, and Zhongshan WINHA sells the WINHA Products to the Retail Store. However, this purchasing model does not apply to Franchise Stores. Pursuant to the franchise model adopted by the WINHA Business, Zhongshan WINHA introduces the Franchisee to suppliers. Following such introduction, the Franchisee and the supplier deal directly, so that WINHA Products for Franchise Stores are not ordered by or delivered to Zhongshan WINHA, but are ordered by the Franchisee direct from the suppliers.
Winha Commerce and Trade International Ltd PROSPECTUS 31 02 Company Structure and Business Overview / CONTINUED
2.10 (COMPETITOR ACTIVITY – CHINA) The Company’s operating subsidiaries face competition from enterprises throughout China, including farmers, supermarkets, hypermarkets, restaurants and other food retailers operating through a franchise model. A hypermarket is a store which combines characteristics of a department store and supermarket. Supermarkets and hypermarkets, such as those operated by Carrefour, Wal-Mart, China Resources Vanguard and Lianhua, retail food and beverages, including fresh food and organic food. Some supermarkets and hypermarkets may retail specialized local Chinese foods, similar to those retailed by the Company. E-commerce and mobile commerce platforms are also a growing trend, with stores developing their own online portals and mobile applications, and providing pick-up locations for goods ordered online. A parallel trend includes sales to Chinese consumers by foreign operators by opening stores on business-to-consumer platforms, known as ”Haitao”, which sell imported products to Chinese mainland consumers. The larger, more established competitor websites may have key competitive advantages over the Company given that they have large existing customer bases, bargaining power to negotiate product supply prices and strong experience in inventory management. For more information about the food and beverage retail market in China, please refer to section 4 of this Prospectus (‘Market Overview’). The Company will seek to distinguish itself from its competitors by specializing in local food and beverage specialty products from various regions across China, and offering high quality fresh produce to Chinese consumers. It is anticipated that the cultivation of fruit and vegetables on farms leased by Zhongshan WINHA may assist in assuring the quality and freshness of produce. The WINHA Business also seeks to distinguish itself by offering restaurants (Experience Halls) where consumers can sample the Company’s food and beverage products, dine at the Experience Hall and shop at the Experience Hall’s adjoining store. The WINHA Products include certain food products which have been certified to be organic by the German certification body BCS Öko-Garantie GmbH, and certain food products certified to be organic in accordance with the Japanese Agricultural Standards. Investors should note that these WINHA Products are not specifically marketed to Chinese consumers as organic, as they have not been certified to be organic in accordance with Chinese standards. However, WINHA Products include certain food products which have been certified as “green food” by the China Ministry of Agriculture. For more information about the organic and “green” food regime in China, please refer to section 4 of this Prospectus (‘Market Overview’). However, investors should note that the fruit and vegetables cultivated by Zhongshan WINHA are not grown in compliance with Chinese or international organic standards, and are not cultivated in accordance with “green food” standards. Suppliers of WINHA Products have also obtained ISO9001:2000 certificates and HACCP certificates, to facilitate quality control during the food handling process. The Company anticipates that this approach may appeal to consumers in China, given public concerns about additives or treatments in food produce. While the fruit and vegetables grown on the WINHA Group’s farms are produced specifically for sale in the Franchise Stores, Retail Stores and WINHA Supermarket, and are therefore not subject to external competition from other producers, Zhongshan WINHA faces competition from other growers for agricultural land, water supply, fertilizers and other products. As the terms of the leases between landowners and Zhongshan WINHA are relatively short, ranging from 1 to 10 years, Zhongshan WINHA may be vulnerable to competition from other growers to lease the same agricultural land upon the expiry of each lease.
32 Winha Commerce and Trade International Ltd PROSPECTUS 02 Company Structure and Business Overview / CONTINUED
2.11 (OVERVIEW OF FLAVOURS’ OPERATIONS) As previously noted, Flavours is a company incorporated in Australia and based in Tullamarine, Victoria. Flavours purchases herbs, fresh fruit and vegetables from wholesale markets, growers and suppliers located throughout Australia, including some fruit and vegetables which have been certified as organic. Flavours wholesales produce to a wide range of high-end restaurants, cafes, hotels and caterers in Victoria. Following Admission, it is intended that Flavours source Australian food products for Zhongshan WINHA to sell in its China business, and have WINHA Products distributed in Australia through Flavours.
2.12 (COMPETITOR ACTIVITY – AUSTRALIA) In Victoria, Flavours faces competition from larger Australia-wide fruit and vegetable wholesalers, such as LaManna Group, Premier Fruits Pty Ltd and Costa Group Holdings Ltd (ASX:CGC), who supply fresh fruit and vegetables Australia-wide. These companies operate wholesale businesses that sell fresh produce to independent third parties, such as supermarkets and markets, as well as restaurants, cafes and other hospitality industry participants, in Australia and internationally. Flavours has attempted to distinguish itself from these wholesalers by concentrating on supply of quality products to high-end hospitality clients, such as fine-dining restaurants and hotels, and also supplies a wide variety of fruit, vegetables and herbs to Qantas Catering and Qantas First-Class lounges.
2.13 (INTELLECTUAL PROPERTY) Zhongshan WINHA holds certain trade marks registered in China, which are used in conjunction with the WINHA Business, as described below:
TRADE MARK TRADE MARK CERTIFICATE NUMBER CLASS TERM STATUS
WINHA logo mark – Class 9 No.8479960 9 January 14, 2012 to January 13, Registered 2022 (transferred to Zhongshan WINHA on May 6, 2014).
WINHA logo mark – Class 41 No. 8480109 41 November 7, 2011 to November 6, Registered 2021 (transferred to Zhongshan WINHA on May 6, 2014)
WINHA logo mark – class 35 No. 8480031 35 November 21, 2011 to November 20, Registered 2021 (transferred to Zhongshan WINHA on May 6, 2014)
Winha Commerce and Trade International Ltd PROSPECTUS 33 02 Company Structure and Business Overview / CONTINUED
Zhongshan WINHA has also applied in China for the following trade marks, which are used in conjunction with the WINHA Business*:
TRADE MARK TRADE MARK APPLICATION NUMBER CLASS APPLICATION DATE STATUS
‘Wooden Box’ logo mark 20180306 31 June 2, 2016 Application being – class 31 processed
‘WINHA Network’ logo mark 12737078 35 January 14, 2016 Application being processed
‘Wooden Box’ logo mark 20180599 32 June 2, 2016 Application being – class 32 processed
‘Wooden Box’ logo mark 20180599 30 June 2, 2016 Application being – class 30 processed
‘Wooden Box’ logo mark 20180599 32 June 2, 2016 Application being – class 33 processed
‘’Wooden Box’ (Chinese 20180610 30 June 2, 2016 Application being character) logo mark – class 30 processed
‘WINHA.COM’ logo mark 17567081 35 July 31, 2016 Application rejected; – class 35 rejection currently being reviewed by China trade marks office.
‘Wooden Box’ logo mark 20180135 29 June 2, 2016 Application being – class 29 processed
* Wooden Box refers to a type of honey imported from Tasmania, Australia by Zhongshan WINHA and retailed in the WINHA Retail Stores, WINHA Supermarket and WINHA Franchise Stores.
34 Winha Commerce and Trade International Ltd PROSPECTUS 02 Company Structure and Business Overview / CONTINUED
Zhongshan WINHA also holds certain domain names, as described below:
DOMAIN NAME GRANT DATE EXPIRY DATE
winha.com February 7, 2010 February 7, 2021
winha.com.cn May 10, 2013 May 10, 2023
auwinha.com January 19, 2016 January 19, 2017
Flavours does not currently hold any registered trade marks, but holds the following domain name:
DOMAIN NAME GRANT DATE EXPIRY DATE
http://flavoursfruitandveg.com.au/ 20 August, 2013 18 August, 2017
Winha Commerce and Trade International Ltd PROSPECTUS 35
03 DETAILS OF THE OFFER 03 DETAILS OF THE OFFER
3.1 SHARES OFFERED FOR SUBSCRIPTION This Prospectus invites investors to apply for a total of up to 28,571,428 Shares at an issue price of $0.35 per Share to raise up to $10,000,000. The Offer will be open to investors with registered addresses in Australia and other investors to whom it is lawful to make an offer to pursuant to this Prospectus. All Shares issued pursuant to this Prospectus will be issued as fully paid and will rank equally in all respects with Shares already on issue. Applications must be for a minimum of 5,715 Shares and thereafter in multiples of 286 Shares. The details of how to apply for Shares are set out below. Applicants should be aware that ASX will not admit any Shares issued pursuant to this Offer to Official Quotation until the Company has complied with Chapters 1 and 2 of the Listing Rules and is admitted by ASX to the Official List. As such, the Shares issued under the Offer may not be able to be traded for some time after the close of the Offer. In the event that the Company does not receive approval for admission to the Official List, the Offer will be withdrawn and the Company will repay all Application monies received by it in connection with the Offer (without interest).
3.2 MINIMUM APPLICATION Applications must be for a minimum of 5,715 Shares. Applications to acquire Shares will only be accepted on submission of the Application Form attached to this Prospectus. The Directors may reject any application or allocate any Applicant fewer Shares than that Applicant applied for.
3.3 MINIMUM SUBSCRIPTION The Minimum Subscription for this Offer is 20,000,000 Shares to raise $7,000,000. If the Minimum Subscription is not achieved within three (3) months after the date of this Prospectus, the Directors will not allot any new Shares and all Application monies will be returned without interest.
3.4 OVER-SUBSCRIPTIONS The Company will not accept over-subscriptions over and above the Maximum Subscription.
3.5 OPENING AND CLOSING DATES Subscription for Offer Shares will open on 9.00am EST on the Opening Date and remain open until 5.00pm EST on the Offer Closing Date. The Opening Date and Offer Closing Date are subject to the right of the Directors to either close the offers at an earlier time and date or to extend the closing time and date without prior notice. Applicants are encouraged to submit their Applications as early as possible.
Winha Commerce and Trade International Ltd PROSPECTUS 37 03 DETAILS OF THE OFFER / CONTINUED
3.6 APPLICATIONS FOR SHARES – HOW TO APPLY Applications for Shares offered by this Prospectus may only be made on the Offer Application Form attached to and forming part of this Prospectus. Please read the instructions on the Application Form carefully before completing it. Completed Application Forms must be accompanied by a cheque in Australian dollars, crossed “Not Negotiable” and made payable to WINHA Commerce and Trade International Ltd and may be lodged at any time after the issue of the Prospectus and on or before the applicable closing date as follows: Computershare Investor Services Pty Limited GPO Box 52 Melbourne VIC 3001 No brokerage or stamp duty is payable by Applicants.
3.7 ACCEPTANCE OF APPLICATIONS An Application for Shares may be accepted in full, for any lesser number, or rejected by the Directors. If any Application is rejected, in whole or in part, the relevant Application monies will be returned without interest.
3.8 SHARE CAPITAL STRUCTURE AFTER THE OFFER: The effect of the Offer on the Company’s capital structure is set out below.
SHARES
MIN RAISING MAX RAISING ($7,000,000) ($10,000,000)
Shares on Issue as at the date of this Prospectus 72,000,000 72,000,000
Shares to be issued under the Offer 20,000,000 28,571,428
Total Number of Shares on Issue following Offer Close Date 92,000,000 100,571,428
OPTIONS
NO. OF EXERCISE DETAILS OPTIONS PRICE EXPIRY
Options on Issue as at the date of this Prospectus Nil N/A N/A
38 Winha Commerce and Trade International Ltd PROSPECTUS 03 DETAILS OF THE OFFER / CONTINUED
3.9 APPLICATION OF FUNDS Under the Offer, the Company plans to raise up to $10,000,000. The Company intends to apply the funds raised from the Offer as follows*:
PERCENTAGE PERCENTAGE MINIMUM OF FUNDS MAXIMUM OF FUNDS ITEM SUBSCRIPTION % SUBSCRIPTION %
Amount Raised under Prospectus $7,000,000 46% $10,000,000 55%
Cash on Hand (AUD as at 160930) $8,109,436 54% $8,109,436 45%
Total Funds Available $15,109,436 100% $18,109,436 100%
Company administration and overheads $1,000,000 6% $1,000,000 5.5%
Expenses of Offer (Section 7.6) $602,950 4% $888,600 5%
Flavours Purchase Price $2,000,000 13% $2,000,000 11%
Working Capital Requirements $4,352,183 29% $4,266,533 23.5%
Subtotal $7,955,133 $8,155,133
Experience Halls $1,439,496 10% 2,190,173 12%
Marketing and promotion of the WINHA Franchise model** $2,151,454 14% 2,667,331 15%
Marketing management fees for Experience Hall $846,498 6% 1,107,746 6%
Cultivation, planting and labour costs on farms $2,716,855 18% 3,989,053 22%
Subtotal $7,154,303 $9,954,303
Total Funds applied $15,109,436 100% $18,109,436 100%
Note: * If the Company raises less than the maximum amount offered under this Prospectus then the budgets set out above may be reduced proportionately. The use of the funds allocated to meet ongoing working capital requirements will depend on the results achieved and on future opportunities that may arise. The Directors consider that on completion of the Offer (based on the Minimum Subscription amount) the Company will have adequate capital to meet its current objectives and requirements as set out in this Prospectus. However, investors should be aware that the Company may expend its cash reserves on its activities more quickly than anticipated. The Directors will consider further equity funding where it considers that the raising of such further capital is necessary to meet the Company’s objectives and requirements. ** Marketing and promotion of the WINHA Franchise model comprises holding marketing and promotional seminars to attract new Franchisees, holding training seminars for new Franchisees, developing promotional material to place in Franchise Stores and television advertisements for the WINHA Franchise model.
Winha Commerce and Trade International Ltd PROSPECTUS 39 03 DETAILS OF THE OFFER / CONTINUED
3.10 COMPLIANCE WITH CHAPTERS 1 AND 2 OF THE ASX LISTING RULES The ASX requires the Company to comply with Chapters 1 and 2 of the ASX Listing Rules in order to be admitted to Official Quotation on the Official List of the ASX. There is a risk that the Company may not be able to meet the ASX’s requirements for listing. In the event that the conditions to the Offer are not satisfied, or the Company does not receive conditional approval for quotation of its securities on the ASX, then the Company will not proceed with the Offer and will repay all Application monies received. Key requirements of Chapters 1 and 2 of the ASX Listing Rules are: >> a prospectus must be issued and lodged with ASX. This Prospectus is anticipated to fulfil this requirement; >> the shareholder spread requirements set out in Listing Rule 1.1 relating to the minimum spread of shareholdings and the minimum number of shareholders must be met; >> the Company must satisfy the “profits test” contained in Listing Rule 1.2 or the “assets test” contained in Listing Rule 1.3; and >> the issue price of the Shares under the Prospectus must be at least $0.20.
3.11 COMPANY CONSTITUTION AND RIGHTS ATTACHING TO SHARES The Constitution sets out the internal rules of the Company. The section below summarises the material provisions of the Constitution, including the rights and liabilities attached to Shares. This summary is not intended to constitute an exhaustive statement of the rights and liabilities of Shareholders.
ISSUE OF SHARES The issue of Shares by the Company is under the control of the Directors, subject to the Corporations Act, ASX Listing Rules and any rights attached to any special class of shares.
TRANSFER OF SHARES Pursuant to the Constitution, a Shareholder may transfer a Share by any means permitted by the Corporations Act or by law. The Company participates in the share registration and transfer system known as CHESS, which is operated by ASX under the Security Clearing House Business Rules. Under CHESS, the Company may issue holding statements in lieu of share certificates. The Company is not permitted to charge any fee for registering a transfer of shares. The Directors may refuse to register a transfer of Shares only if the refusal would not contravene the Corporations Act or the Listing Rules, where the registration would create a new parcel of unmarketable securities.
VARIATION OF SHARES The rights attached to any class of Shares may, unless their terms of issue state otherwise, be varied with the written consent of 75% of the holders of issued shares of the affected class, or authorised by a special resolution passed at a separate meeting of the holders of the shares of the affected class.
MEETINGS OF MEMBERS (GENERAL MEETINGS) The Directors may call a meeting of members whenever they think fit. Members may call a meeting in accordance with the Corporations Act. Pursuant to the Constitution, the Notice of General Meeting sent to Shareholders must contain certain information. The Constitution contains provisions prescribing the content requirements for notices of meetings sent to Members. All Members are entitled to attend, and will receive at least 21 days’ notice of a general meeting (following Admission, a notice period of 28 days applies). A quorum for a general meeting is two (2) Members who are eligible to vote at the general meeting, or, if only one (1) Member is entitled to vote, that Member. The Company will hold an annual general meeting in accordance with the Corporations Act and the Listing Rules.
40 Winha Commerce and Trade International Ltd PROSPECTUS 03 DETAILS OF THE OFFER / CONTINUED
VOTING RIGHTS Subject to any rights or restrictions for the time being attached to any Shares or class of shares of the Company, each Shareholder, whether present in person or by proxy, attorney or representative at a meeting of Shareholders, has one vote on a show of hands and one vote on a poll for each fully paid share held and a fraction of a vote for each partly paid share, equivalent to the proportion paid up on that share. Resolutions of members will be decided by a show of hands unless a poll is demanded. A poll may be demanded by the chairperson of the meeting, at least 5 Shareholders (or their proxy, attorney or representative) entitled to vote on the resolution, or any one or Shareholders holding not less than 5% of the votes that may be cast on the resolution on a poll.
DIRECTORS The business of the Company is to be managed by or under the direction of the Directors. The Company must have at least three (3) Directors and not more than ten (10). The Board may appoint a person to be a Director at any time, but any such Director must retire at the next annual general meeting (at which meeting he or she may be eligible for election as director). The Company in general meeting may elect Directors by ordinary resolution. At each annual general meeting, with the exception of the Managing Director and those Directors appointed by the Board, one third of the Directors and any Director who will have been in office for three (3) or more years must retire from the Board, and are eligible for re-election. The aggregate remuneration of the non-executive Directors must not exceed the amount last fixed by ordinary resolution.
DIVIDENDS The Directors may pay any interim and final dividends as, in their judgment, the financial position of the Company justifies. Subject to any rights attaching to shares which may in the future be issued with special or preferred rights, the Directors may fix the amount, the time for payment and the method of payment of a dividend. Subject to any special rights attaching to shares (such as preference shares), dividends will be paid proportionately. The Company is not required to pay any interest on dividends. The Company anticipates that it will receive dividends from C&V International out of profits generated by the Company’s China Subsidiaries. The Company intends to pay dividends to its Shareholders out of a portion of the profits it receives from the WINHA Business activities. However, investors should note that there is no guarantee that the Company will pay any dividends in the near future. Please refer to section 3.12 of this Prospectus for further information.
WINDING UP On a winding up of the Company a liquidator may, with the sanction of a special resolution of the Shareholders, divide among the Shareholders the property of the Company in proportion to the Shares held by them. The liquidator may determine how the division is to be carried out as between the members or different classes of members.
3.12 DIVIDEND POLICY The Board of the Company has adopted a dividend policy which is summarised in this section 3.12 of the Prospectus. It is the intention of the Board to pay unfranked dividends in respect of full financial years for the Company ending 31 March each year. The Company intends to distribute a minimum of 8% of NPAT to shareholders by way of dividends in respect of each financial year, commencing for the financial year ending 31 March 2017. The maximum intended distribution of NPAT by way of dividends in a given financial year will be 10% of NPAT.
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The Company intends to commence payment of dividends to Company shareholders on an annual basis at or around June/July of each year. The Company shall fund dividends through dividends it receives from its wholly owned subsidiary, C&V International. C&V International shall receive dividends from its wholly owned subsidiary, WINHA HK. In turn, WINHA HK shall receive dividends from its wholly owned subsidiary, Shenzhen WANHA, which shall receive dividends from Zhongshan WINHA. In turn, Zhongshan WINHA shall receive dividends from Zhongshan Supermarket and Zhongshan Restaurant, which shall be generated from profits in connection with the conduct of the WINHA Business in China. The Company may also receive dividends from its shareholding in Flavours. Although the Company may derive Australian sourced income, the majority of the Company’s income and gains will be foreign. Based on advice received from its professional advisors, the Company understands that dividends received from C&V International will be considered non-assessable non-exempt income, and not subject to Australian tax. Therefore, as the Company’s income from such dividends received from C&V International will not be subject to Australian tax, the Company will not generate any Australian franking credits in respect of such income. Therefore, the dividends paid to the Company’s shareholders are likely to have a mixture of taxed and untaxed source income, and are likely to be partly franked. The WINHA Business has been profitable in past financial years, and so the Company considers that there is a reasonable basis for the adoption of the dividend policy referred to in this section 3.12 and to presume that there will be profits available for distribution to shareholders by way of dividends in accordance with the dividend policy. Please refer to section 7 of this Prospectus for further information in relation to the financial position of the WINHA Business. However, please be aware that despite the WINHA Business generating profits in the past, there is no guarantee that it will continue to be profitable in the future. Investors should be aware that past performance should not be relied upon as being indicative of future performance. The payment of dividends by the Company is at the discretion of the Board and subject to a number of factors including repatriation of dividends out of profits from the China subsidiaries of the Company, the future business conditions affecting the WINHA Business, the future cash flow requirements of the WINHA Group, taxation considerations, and contractual legal or regulatory considerations that the Board may deem relevant to the decision as to whether a dividend can be paid in respect of any given period. Despite the intentions set out in this Section, no guarantee can be given about the level or payment of dividends, the level of imputation or franking of such dividends or the payout ratios as these matters depend upon the future profits of the Company, its financial and taxation position and the Directors’ views of the most appropriate payout ratio at that time. Applicants should note that the Chinese government imposes controls on the convertibility of RMB into foreign currency and, in certain cases, the remittance of currency out of China. As at the date of this Prospectus, Chinese regulations allow profit and dividends generated in China to be paid to shareholders outside China without prior approval, provided that the Company complies with certain procedural requirements. However, the Chinese government may, at its discretion, impose restrictions on currency exchange or require approval for the conversion of RMB into foreign currency, which may restrict the Company’s China subsidiaries from remitting sufficient foreign currency to pay dividends or other payments to the Company. Similarly, the payment of dividends to the Company also depends on the repatriation of profits from the Company’s subsidiaries in China through subsidiaries in Hong Kong, and the Cayman Islands, before such dividends are paid to the Company. If any one of these jurisdictions amends the existing legal and regulatory regime governing the receipt and payment of dividends, the Company’s ability to receive and therefore to pay dividends may be adversely affected. Likewise, the directors of the Company’s subsidiaries in these jurisdictions have a discretion to pay dividends. As some of these subsidiaries are sole director companies, a single director may be in a position to make this decision. If the board of one of the Company’s subsidiaries elects not to pay dividends, the Company will not receive a dividend and will therefore be unable to pay dividends to its shareholders.
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3.13 RIGHTS ATTACHING TO OPTIONS As at the date of this Prospectus, the Company has no Options on issue, and it is not currently anticipated that Options will be issued. Any Options issued in future will be issued in accordance with the requirements of the ASX Listing Rules and the Company’s Constitution.
3.14 ALLOTMENT Acceptance of an Application by the Company creates a legally binding contract between the Applicant and the Company for the number of Shares for which the Application is accepted. The Company will allot and issue the Shares offered by this Prospectus as soon as possible after the grant of quotation of the Shares offered under this Prospectus. Following the allotment and issue of the Shares, statements illustrating Applicants’ Shareholdings in the Company will be despatched. It is the responsibility of Applicants to determine their allocation prior to trading in Shares. Applicants who sell Shares before they receive their holding statements will do so at their own risk.
3.15 APPLICATION MONIES HELD ON TRUST All Application monies received for the Shares offered under this Prospectus will be held in trust in a bank account established solely for the purpose of depositing application monies received pursuant to this Prospectus until the Shares are allotted. Application monies will be returned (without interest) if the Shares are not allotted.
3.16 TAXATION The following taxation summary provides a general overview of the Australian tax implications to Australian investors who acquire and hold Shares under the Offer contained in this Prospectus. The following summary is not intended to be a complete statement of the possible implications for investors. The individual circumstances of each investor may affect the taxation implications of the investment for that investor. It is the responsibility of each Applicant to be satisfied as to the particular taxation treatment that applies to each investment. Persons who are considering making an investment in the Company should seek independent professional advice with respect to the tax consequences arising from such an investment. This summary is based on the current Australian taxation law, and administrative practice of the Commissioner of Taxation (Commissioner), as at the date of this Prospectus. However, potential investors should be aware that the law, and the way in which the Commissioner interprets and administers the law, may change at any time, and that the ultimate interpretation of the Australian taxation law rests with the courts. These comments do not apply to Shareholders that are insurance companies, banks or carry on a business of trading in shares, or hold Shares otherwise than on capital account (ie: on revenue account.)
AUSTRALIAN CAPITAL GAINS TAX Australian income tax laws contain a capital gains tax (CGT) regime and resident Shareholders will be subject to the CGT regime on disposal of those Shares. The cost base used to assess any capital gain or loss on Shares is generally the amount a shareholder pays to acquire the Shares plus any incidental costs of acquisition and disposal and non-deductible costs of ownership incurred. A capital gain typically arises when an asset is disposed of and the capital proceeds exceed the cost base of acquiring the asset. Conversely, a capital loss generally arises if the cost base exceeds the capital proceeds.
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Capital losses made in the same or prior years can typically be offset against any capital gains. Any remaining net capital gain is included in assessable income and taxed, with the amount of tax payable depending on the individual taxpayer’s tax profile. Where a net capital loss is incurred it may be carried forward indefinitely and offset against future capital gains subject to certain restrictions. Non-resident Shareholders will not be subject to Australian CGT on disposal of their Shares, as the Shares are not in a company which is Australian “land rich”.
CHINESE CAPITAL GAINS TAX China has a 10% capital gains tax on indirect capital gains made by a non-resident of China selling shares in a non-resident company where the value of the non-resident company is “mainly” derived from Chinese assets. However, there is an exemption where the shares being sold are in a non-resident company listed on a stock exchange. Accordingly, sales of Offer Shares in the current case will not be subject to Chinese capital gains tax.
DISPOSING OF YOUR SHARES The net capital gain for Australian resident individuals or entities acting as trustees of trusts (which have presently entitled beneficiaries) may be reduced by 50% if the Offer Shares were owned for at least 12 months as at the date of disposal (this 50% discount does not apply to Companies that hold Shares). Complying superannuation entities are entitled to a CGT discount of one-third if the Offer Shares have been owned for at least 12 months at the date that the Offer Shares are disposed of.
DIVIDENDS Although the Company may derive Australian sourced income, the majority of the Company’s income and gains will be foreign, and are likely to be tax exempt non-assessable income at the level of the Company. Therefore, any dividends paid by the Company are likely to have a mixture of taxed and untaxed source income, and therefore the dividends are likely to be partly franked. Australian tax resident Shareholders will be fully subject to Australian tax on the dividends, less the applicable franking credit. Dividends received by non-Australian tax resident Shareholders will not be subject to withholding tax to the extent that they are franked. In relation to the unfranked component: >> except to the extent that the Company declares the unfranked component to be sourced from conduit foreign income (namely non-assessable non-exempt income) a dividend withholding tax will be payable at the rate of 30% if the non-Australian tax resident Shareholder is not resident in a country which has a double tax agreement with Australia (eg: Hong Kong) or usually at 15% if a resident of a treaty country (e.g. Indonesia, Singapore, Malaysia, Thailand, China); and >> if such a conduit declaration is made, no dividend withholding tax on the unfranked component, to the extent of the declaration. As referred to in section 6.1 below, there is a possibility that future guidance might be issued concerning whether companies in the Company’s position are a “Chinese controlled Offshore Incorporated Resident Enterprise”, which could result in the potential imposition of a 10% Chinese dividend withholding tax on dividends paid by the Company. This is considered to be contrary to the Australia-China double tax agreement, and so the possibility is currently considered to be remote.
NOMINEES Where a non-resident uses an Australian nominee to hold its Shares: i. as the CGT law disregards the nominee, any capital gain will continue to be free of Australian CGT; and ii. Since the issue of TD 2014/13, it has become clear that the beneficial owner will be entitled to reduced rates of withholding tax under any relevant double tax agreement.
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3.17 FOREIGN SELLING RESTRICTIONS AND OVERSEAS APPLICANTS This Prospectus does not, and is not intended to, constitute an offer of securities in any place or jurisdiction in which, or to any person to whom, it would not be lawful to make such an offer or to issue this Prospectus. The distribution of this Prospectus in jurisdictions outside Australia may be restricted by law and persons who come into possession of this Prospectus should seek advice on and observe any such restrictions. Any failure to comply with such restrictions may constitute a violation of applicable securities laws. The Company has not taken any action to register or qualify the Shares the subject of the Offer, or otherwise to permit a public offering of the Shares, in any jurisdiction outside Australia. It is the responsibility of any applicant for Shares that is based in a foreign jurisdiction (outside Australia) to ensure compliance with all laws of any foreign jurisdiction that are relevant and applicable to their Application. The return of a properly completed Application Form will be taken by the Company to constitute a representation and warranty that there has been no breach any application foreign jurisdiction laws and that all necessary approvals and consents have been obtained.
3.18 SELLING RESTRICTIONS IN SINGAPORE This Prospectus has not been, and will not be, lodged or registered as a prospectus with the Monetary Authority of Singapore pursuant to the Securities and Futures Act (Chapter 289 of the Singapore Statutes) (Futures Act). Therefore, this Prospectus and any other materials in connection with an offer of sale shall not be issued, distributed or circulated, nor may an invitation for purchase of Shares in the Company be made, whether directly or indirectly, to persons in Singapore other than in accordance with, and pursuant to, the exemptions in Subdivision (4) of Division 1, Part XII of the Futures Act, or otherwise in accordance with the conditions of any other applicable provisions of the Futures Act. This Prospectus has been provided to any persons in Singapore on the basis that they are either a person to whom an offer is being made, pursuant to section 275(1A) of the Futures Act, a ‘relevant person’ under section 275(1A) of the Futures Act, or an ‘institutional investor’ pursuant to section 4A(1)(c) of the Futures Act. By accepting this Prospectus you acknowledge and warrant that you are a person falling within the above categories, agree to be bound by the restrictions, disclaimers and limitations described herein and acknowledge that you may not forward or circulate this Prospectus to any other person in Singapore. There are resale restrictions in Singapore that may apply to investors who acquire these Shares, and the Offer is not made to you with a view to these Shares subsequently being offered for sale to any other third party.
3.19 SELLING RESTRICTIONS IN HONG KONG This Prospectus will not be authorised by the Securities and Futures Commission of Hong Kong pursuant to the Securities and Futures Ordinance (Cap. 571 of the laws of Hong Kong) (Securities Ordinance), nor has it been lodged or registered as a prospectus under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the laws of Hong Kong). The Company has not taken any action in Hong Kong to register or authorise this Prospectus or permit the distribution of this Prospectus or any documents issued in connection with it. Therefore, the Shares will not be offered or sold in Hong Kong other than to “professional investors” as defined in the Securities Ordinance. No document, offer or invitation relating to the Shares has been or will be issued in Hong Kong that is directed to the public of Hong Kong, other than to those solely directed to “professional investors” as defined in the Securities Ordinance or relating to Shares which are intended to be disposed of to investors outside Hong Kong. No person purchasing Shares pursuant to this Offer shall sell, or offer to sell, such Shares in circumstances which amount to an offer to the public in Hong Kong within six (6) months following the date of issue of such Shares. As the contents of this Prospectus have not, and will not be, reviewed or authorised by any Hong Kong regulatory authority, you are recommended to exercise caution in relation to the Offer and, if you are unsure about the contents of this Prospectus, obtain independent professional advice.
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3.20 ESCROW It is anticipated that the 72,000,000 Shares issued to Existing Shareholders may be escrowed for between 12 months (commencing on the date on which such Shares are issued) and 24 months (commencing on the date of quotation of the Shares on the ASX), depending on that Existing Shareholders’ relationship to the Company. However, if the ASX is satisfied that the WINHA Group has a sufficient track record of profitability, as contemplated by ASX Listing Rule 9.1.3, these Shares issued to Existing Shareholders may not be escrowed. If the ASX determines that the Existing Shareholders’ shares will not be escrowed because of the application of ASX Listing Rule 9.1.3, the Existing Shareholders may enter into voluntary escrow deeds to restrict their shares for 6 to 12 months following Admission, depending on their relationship with the Company. Escrow agreements in relation to the restricted Shares will be entered into in accordance with ASX Listing Rules. Please note that the ASX may determine to increase or reduce the escrow restriction periods that are to apply to the Company’s Shareholders once the Company lodges its application for quotation of the Shares. The Company has not applied for or obtained any modifications of, or exemptions from, the ASX Listing Rules pursuant to this Offer. ASX may determine further escrow restrictions once the Company lodges its application for quotation of the Shares.
3.21 CHESS The Company will apply to CHESS, the Clearing House Electronic Sub-Register System (CHESS) operated by ASX Settlement and Transfer Corporation Pty Ltd (ASTC), a wholly owned subsidiary of ASX. This is regulated by the Listing Rules and Security Clearing House Business Rules. Under this system, the Company will not issue certificates to investors. Instead, shareholders will receive a statement of their holdings in the Company. If an investor is broker sponsored, ASIC will send the broker a CHESS statement. The CHESS statement will set out the number of securities allotted to each investor under the Prospectus, give details of the investor’s Holder Identification Number and give the Participant Identification Number of the sponsor. If an investor is registered on the issuer sponsored subregister, their statement will be dispatched by the Share Registry and will contain the number of securities allotted under the Prospectus and the investor’s Security holder Reference Number and their Sponsor Issuer Number. A CHESS statement or Issuer Sponsored Statement will routinely be sent to investors at the end of any calendar month during which the balance of their holding changes. An investor may request a statement at any other time. However, a charge may be made for additional statements.
3.22 PROFESSIONAL ADVICE The Directors recommend that potential investors, when making an informed assessment of what will be the assets and liabilities, financial position, profits and losses and prospects of the Company should read this Prospectus in its entirety. Potential investors who have any questions about investing in the Company or are in any doubt about any matter relating to the Offer, should seek the advice of their professional advisers.
3.23 WITHDRAWAL The Company may at any time decide to withdraw this Prospectus and the Offer in which case the Company will return all Application monies without interest at the earliest practicable time.
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04 MARKET OVERVIEW 04 MARKET OVERVIEW
4.1 MARKET – CHINA HISTORY – FOOD AND BEVERAGE RETAIL IN CHINA Prior to 1956, most grocery and food stores were privately owned, with grocery and food stores becoming state controlled in 1956. From 1979, markets were permitted, and farmers were allowed to directly sell their products to retail stores and consumers. China’s first supermarket, the Guangzhou Friendship Store, opened in 19811 and three supermarket chains (LianHua, Hualian, and Nong-Gong-Shang) emerged in Shanghai, Beijing and Guanzhou during the early 1990s.2 By the end of 1985, there were approximately 155 supermarkets throughout China, with the majority concentrated in Beijing and Shanghai. Majority Chinese ownership was required in supermarkets until 1999, so three Western supermarket chains (Carrefour, Wal-Mart, Metro) moved into China during 1995-6 by taking on Chinese partners.3 In 1999, foreign ownership restrictions were relaxed so that a foreign company could own up to a 65% share of a retail supermarket, and foreign ownership restrictions were removed in 2004.4 According to the China Chain Store and Franchise Association, the largest key fast-moving consumer goods operators as at 2013 (when assessed by sales) were China Resources Vanguard, RT-Mart, Wal-Mart, Lianhua and Carrefour.5 The National Bureau of Statistics (NBS) reports that total sales revenues for hypermarkets (that is, a retail outlet combining the characteristics of a department store and a supermarket) and supermarkets amounted to 473.4 billion yuan and 288.9 billion yuan in 2013, respectively. In 2015, the Ministry of Commerce reported that retail sales growth for hypermarkets in the first to third quarters of 2014 was 7.1% year-on-year, while supermarkets saw a 11.5% year-on-year sales growth over the same period.6 However, the number of new store openings of hypermarket and supermarket stores fell from 11% year on year in 2008 to 5% year on year in 2012, according to the NBS,7 and commentators have identified the growing popularity of smaller, more accessible stores, as a key trend.8 Further trends identified by commentators include the introduction of more fresh foods in supermarkets and hypermarkets. Reports suggest that some hypermarket and supermarket operators have formed partnerships with different producers to source directly from those producers, facilitating a consistent supply of fresh produce. For example, according to Lianhua Supermarket’s Annual Report 2013, as at 30 June 2013, the Group had 319 fresh produce supply bases, and sales of produce from the Group’s own production bases increased by approximately 21.22% year on year.9 In parallel, reports also suggest that online retailers, such as Womai.com, Taobao, Tmall, JD.com and Yihaodian are focusing on fresh food offerings.10 E-commerce and mobile commerce platforms are also a growing trend, with stores developing their own online portals and mobile applications, and providing pick-up locations for goods ordered online. A parallel trend includes sales to Chinese consumers by foreign operators by opening stores on business-to-consumer platforms, known as ‘”Haitao”, which sell imported products to Chinese mainland consumers.11 The Board believes that the location of the WINHA Business, in Guangdong Province, may assist with expansion of the Franchise Stores. In 2012, consumers in Guandong spent US$75,382.9 million on food and non-alcoholic beverages, with Jiangsu Province coming in second with expenditure of US$46,301.2 million.12 In 2014, the China National Statistics Bureau estimated that the GDP of Guangdong Province enjoyed an annual growth rate of 8.51%, reaching to RMB 6.78 trillion. In 2015, the province’s economy grew 7.8 per cent last year, to RMB 6.78 trillion,
1 Gene A German, Jane Wu, Ming Li Chai, ‘Supermarket Development in China’ (1996), Cornell University Food Industry Management Program, 13. 2 Jean Kinsey, Min Xue, ‘Supermarket development in China’ (2005), Minnesota University Food Industries Centre, 2. 3 Ibid. 4 Ibid 11. 5 China Chain Store and Franchise Association, ‘Top 30 FMCG players among the Top 100s by sales, 2013’. 6 Ministry of Commerce, PRC, ‘Retail sales growth for different retail formats, 1-3Q14’. 7 Deloitte, ‘China’s power of retailing’ (2014) 23. 8 Fung Business Centre, ‘China Retail: Hypermarkets and Supermarkets in China’ (February 2015) 8. 9 Lianhua Supermarket Holdings Co Ltd, ‘Interim Report’ (2013). 10 Above n 8, 8. 11 Ibid 12. 12 Agriculture and Agri-Food Canada, Global Analysis Division, ‘Consumer and Retail Trends in China’ (March 2014) 2.
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and the provincial government forecasts around 7.5 per cent growth for 2016.13 In 2010, according to the Guangdong Bureau of Statics, in 2010 Guangdong was the province with the second highest urban household disposable income per capita of 23,897.8 yuan in 2010, had the highest annual consumption expenditure per capita of urban households (18,489.5 yuan) and the third-highest consumption expenditure per capital of rural households (17,858.2 yuan).14 Within Guangdong Province, the WINHA Business faces competition from a range of retailers, including supermarkets, department stores, smaller grocery stores, food and beverage retailers and street markets. As at December 2015, there were a range of international chain supermarkets present in Guangdong Province, including Wal-Mart, Carrefour, PARKnSHOP, Watsons and Trust-Mart. Convenience stores and speciality stores are also present, as are high-end food stores, such as Ole and BLT (Better Life Together), which have opened in Guangzhou and Shenzhen.
FOOD AND BEVERAGE MARKET IN CHINA – CONSUMPTION TRENDS Studies have suggested that between 2000 and 2010, nominal expenditure on food more than doubled in both rural and urban areas as income rose,15 with a decline in the consumption of grains and other low-value foods and a turn to higher-value foods, such as milk and dairy products, aquatic products, poultry meats, and fruits. However, grain and vegetables remained the most consumed food and beverage products in China as at 2012, with Chinese citizens consuming around 80kg of grains and over 100kg of fresh vegetables per household in that year.16 Reports in April 2012 suggested that the level of vegetable consumption between rural and urban rich was largely comparable, around 130 kg per person per annum. In terms of fruit consumption, the top rural income group purchased 20 kg of fruit per person in 2010, and the top urban income group purchased over 52 kg of fruit per person during that year.17 Consumption of food in venues away from home, such as restaurants, has also increased since the 1990s. In 1995, urban consumers spent a little less than 10 per cent of their food expenditure on away-from-home consumption, increasing to 15 per cent in 2000 and 22 per cent in 2009.18 For the highest income group of urban dwellers, this ratio jumped from 20% in 2000 to 35% in 2009, with the highest income group of urban dwellers spending, on average, 2,684 yuan on away-from-home food in 2009. The Board therefore anticipates that the WINHA Business model, which primarily focuses on the sale of fresh, high-value products through the Franchise Stores, Retail Stores and WINHA Supermarket, and the preparation and sale of WINHA Products at Experience Hall restaurants, may be well-positioned to capitalise on these consumption trends.
ORGANIC, “POLLUTION-FREE” AND “GREEN” CERTIFICATIONS IN CHINA There are three “eco-food” categories in China, which are overseen by the Ministry of Agriculture (MOA). Two of these standards are domestic Chinese standards, being ‘Green food’ and ‘Pollution-free food’, and the third, ‘Organic food,’ is certified to international standards. The “Green food” and “Pollution-free food” certification came from the Green Food Development Centre (CGFDC), which was founded in 1992 under the MOA. The Organic food sector is jointly overseen by the Ministry of Agriculture (MOA) and the Ministry of Environmental Protection (formerly the State Environment Protection Agency), which established the Organic Food Development Centre in 1994 and achieved accreditation by the International Foundation for Organic Agriculture in 2002.19 In 1995, the CGFDC split “green food” certification into Green Food A, where the use of pesticides, fertilizers, and other agricultural chemicals is extremely restricted, and Green Food AA, where the use of all chemicals are prohibited in the production process.20 Green Food products are sample tested for pesticide residues, and annual inspections are conducted.21 Certification for Pollution-free food is less stringent, requiring compliance with basic food safety standards.22 13 South China Morning Post, Guangdong’s economy grows at slowest pace in 25 years (9 February 2015)
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In 2005 the first Chinese national organic standard was introduced by the Certification and Accreditation Administration of the People’s Republic of China (CNCA), being the “National Standard of the People’s Republic of China: Organic Products” (GB/T19630-2005), and in June 2005, CNCA issued “The Rule on Implementation of Organic Products Certification”. These standards have been based on international norms, but further emphasis has been placed on contamination by pollutants and prohibited materials and quality management systems, including record keeping and traceability.23 However, Chinese certification systems and foreign organic certification systems have not been mutually recognised. Therefore, internationally recognised organic products that have not been certified by China or have solely been certified by an overseas organic certifying body cannot be labelled as “organic” when marketed in China.24 The WINHA Products include foods certified as “green foods” by CGFDC and certain food products certified to be organic by the German certification body BCS Öko-Garantie GmbH, and certain products certified to be organic by the Japanese Agricultural Standards. However, investors should note that WINHA Products which have not been certified as organic in accordance with the Chinese standards, despite being certified by an overseas organic certification body, are not marked as “organic” in China. Investors should also note that the fruit and vegetables which will be cultivated at Zhongshan WINHA’s farms will not be grown in accordance with “organic” or “green” certification requirements, and will therefore be retailed as conventional food products.
DOMESTIC DEMAND FOR ORGANIC AND “GREEN FOOD” According to the International Trade Centre, Chinese imports of organic foods were about US$ 20 million in 2009,25 and in 2008, the total value of organic production reached about RMB 16 billion (US$ 2.4 billion), with exported organic products exceeding US$ 500 million and the domestic organic market reaching US$ 1.1 billion, with the remaining US$ 800 million in organic products were sold as conventional products. According to the market research body Mintel, over half (56%) of urban Chinese consumers purchased organic fresh foods in 2012. Fresh milk (purchased by 37% of Chinese urban consumers), cooking oil (35%), pork (33%), beef (26%) and chicken (26%) are the most popular organic food purchase categories. Supermarkets are the most common purchase channel with 75% of consumers buying organic products from a supermarket, followed by 51% shopping for organics at a hypermarket.26 According to Paull, the number of “green foods” products grew from 892 in 1997 to 14,229 in 2007, “green food” output grew from 6.3 to 72 million tons and the number of hectares used for the production of “green food” expanded from 2.14 million hectares to 10 million hectares in that period.27 The Board believes that the growth in domestic consumption of organic and “green food” is at least partially motivated by concerns over food safety. Pew Surveys suggest that, in 2008, only 12 percent said food safety was a ‘very big problem’, but by 2012 that proportion more than tripled, to 41 percent,28 easing to 32% in 2015.29
FOOD SAFETY AND QUALITY SUPERVISION FRAMEWORK – CHINA In China, the government departments which are primarily responsible for ensuring compliance with food safety standards are the Food and Drug Administration and the Quality and Technical Supervision Bureau. The Food and Drug Administration (CFDA) is a department supervised by the State Council. The CFDA is primarily responsible for ensuring the safety of pharmaceuticals, medical equipment, cosmetics, food and beverages, food additives, and food services (such as catering). It is responsible for drafting legislation and regulations around food safety, supervising the implementation of certification standards, and investigating and penalising breaches of food and drug regulations.30 The Quality and Technical Supervision Bureau is responsible for supervising quality assurance standards, including formulating and implementing product quality plans and organising product quality inspection and supervision.31
23 Above n 23, 2. 24 Above n 22, 2. 25 Above n 22, xi. 26 Mintel, ‘Growth in Organic Products in China’ (October 2012). 27 Above n 19, 7. 28 Pew Global Research, ‘Corruption, Pollution, Inequality Are Top Concerns in China’ (24 September 2015). 29 Ibid. 30 China Food and Drug Administration, About CDFA, available (online) at
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A significant part of the Chinese food safety framework is the “QS Certification” (QS being an abbreviation of food “production permit”). The QS logo delineates that the food production enterprise has submitted material demonstrating compliance with health and safety standards, passed a mandatory government inspection and has obtained a food production licence. Food production enterprises must include a food production licence number on each item of packaging, and place a QS logo on each item of packaging before the packet leaves the factory. Food products are not allowed to be sold without this QS logo.32
4.2 MARKET – AUSTRALIA WHOLESALE FRUIT AND VEGETABLE MARKET IN AUSTRALIA–TRENDS Higher disposable incomes have driven growth in the Australian fruit and vegetable wholesaling industry over the past five years.33 According to IBISWorld, industry revenue is expected to increase at an annualised 2.4% over the five years through 2016-17, to $11. 6 billion, including an expected increase of 3.0% in 2016.34 In Australia, fruit and vegetables are primarily produced locally, with only around 25% of production volume available for processing into frozen or shelf stable ingredients, products or juices.35 As at 2012, import and export trade volume in fresh fruit and vegetables products were low, with exports equating to 7 per cent of the local production volumes and imports less than 2 per cent.36 Fresh vegetable produce is primarily distributed to local wholesalers, retail chains and vegetable processors, with these distribution channels accounting for around 92 per cent of production in 2011-12, while exports made up around 7 per cent of production and 1 per cent of fruit and vegetables produced is sold direct to consumers.37
AUSTRALIAN FRUIT & VEGETABLE EXPORTS TO CHINA Vegetable exports constitute a relatively small proportion of Australian agricultural exports, with only 4 per cent of growers selling vegetables for export in 2012.38 Vegetable exports (excluding dried vegetable exports) have remained relatively static in the last seven years, totalling $252 million in 2011-2016.39 The bulk of vegetable exports were fresh vegetables, which comprised $151 million of total exports in 2011-12.40 Vegetable exports to China from Australia rose in the 2006-2012 period, from $690,000 in 2006-07 to $1.9 million in 2011-12, but represented less than 1% of Australia’s total vegetable exports in 2012.41 Fruit exports to mainland China are estimated to have increased by 26% and reached USD 4bn over the 2009-2014 period,42 with the main products exported to China from Australia being macadamias, citrus fruit, table grapes and walnuts.43
FOOD SAFETY AND QUALITY SUPERVISION FRAMEWORK – AUSTRALIA Chapter 1 and 2 of the Australia New Zealand Food Standards Code (the Code) applies to all food sold or traded at retail and wholesale level in Australia. As Flavours is in the business of selling fruit and vegetables to the public, it must comply with the Code. Relevantly to Flavours, the Code includes transportation, storage, disposal, handling and hygiene requirements. The Australian Government’s Department of Agriculture, Fisheries and Forestry (DAFF) is responsible for inspecting imported food to ensure that it meets Australian requirements for public health and safety and compliance with Australian food standards, as detailed in the Australia New Zealand Food Standards Code.
32 Information Office of the State Council of The People’s Republic of China, ‘The Quality and Safety of Food in China, Section 2: Establishing and Strictly Implementing Market Access Systems for Food Quality and Safety’ (August 2007). 33 IbisWorld, Fruit and Vegetable Wholesaling in Australia: Market Research Report, September 2016. 34 Ibid. 35 Australian Government Department of Agriculture, Fisheries and Forestry, ‘Foodmap: an analysis of the Australian food supply chain’ (July 2012), 59. 36 Ibid. 37 Australian Bureau of Statistics Catalogue 5465.0, International Trade, Australia, 2011-12. 38 Ian James, Australian Bureau of Agricultural and Resource Economics, ‘A discussion paper on industry issues drawn from data collected by ABARES in 2012 from Australian vegetable growing farms’ (January 2012), 9. 39 Ibid. 40 AusVeg and Horticulture Australia Ltd, ‘Australian vegetable export opportunities,’ 9. 41 Ibid. 42 South China Morning Post, China’s rising fruit imports push up demand for refrigerated shipping (Monday 15 September
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05 BOARD AND CORPORATE GOVERNANCE 05 BOARD AND CORPORATE GOVERNANCE
5.1 DIRECTORS’ PROFILES MR ZHUOWEI ZHONG (EXECUTIVE DIRECTOR) Mr Zhuowei Zhong is the Chairman of Zhongshan WINHA Electronic Commerce Company Limited and holds an Executive Masters of Business Administration degree from Zhongshan University. Mr Zhong has substantial experience in management, marketing and communications and corporate strategy. His previous positions include Marketing Director of Zhongshan Science Cordyceps Products Co, Ltd, General Manager of Zhongshan New COSMOS Electrical Appliance Co, General Manager of Guangdong Guide Marketing Planning Co,. Ltd and Manager of Zhongshan WINHA Culture Media Co., Ltd. Mr Zhong has been substantially involved in developing the WINHA Business model and, as the Chairman of Zhongshan WINHA, has been significantly involved in developing and implementing the strategic direction of Zhongshan WINHA, which operates the Retail Stores and oversees the Franchise Stores. The Company anticipates that Mr Zhong will be able to bring his experience in corporate strategy, marketing and business development to the Board of the Company.
MR ZHIFEI HUANG (EXECUTIVE DIRECTOR AND CEO) Mr Zhifei Huang studied at the Railway Mechanical School of Kunming and obtained an EMBA from Sun Yat-Sen University. His previous positions include Customer Service Manager of Guangzhou Kangpu Health Industry Co and Marketing Director of Guangzhou Hecai Educational Investment Group. Since 2013, he has held the position of CEO of Zhongshan WINHA Electronic Commerce Company Limited. Mr Huang has deep experience in customer service, marketing and communications and business management. As the CEO of Zhongshan WINHA, Mr Zhifei Huang is substantially involved in the day to day operations of that company. As Zhongshan WINHA operates the Retail Stores and contracts with suppliers, Franchisees and other third parties. Mr Zhifei Huang is therefore well versed in business management, marketing and communications and customer service. Mr Zhifei Huang anticipates that he will be able to bring this experience in management, communications and customer service to the Company.
MR HUIWEN HUANG (NON-EXECUTIVE DIRECTOR) Mr Huiwen Huang is a director of WINHA Electronic Commerce Company Limited. He holds a Bachelor of Law from Sun Yat-Sen University and an MBA from the School of Management at Sun Yat-Sen University. After working as a lecturer at Foshan Shunde Teachers College, he held positions as a Company Manager of the Gaoming District branch of China Life Insurance Company Ltd, Manager of China Unicom Gaoming Branch, and founder of Guangzhou Hongda Ceramic Co., Ltd. He has worked at WINHA Electronic Commerce Company Ltd since 2010. He is skilled in business management and corporate strategy. As a law graduate, Mr Huiwen Huang assists Zhongshan WINHA in its legal affairs and also assists in developing the WINHA Group’s corporate strategy. The Company anticipates that Mr Huiwen Huang will be able to bring his management experience to assist the Company in developing its business strategy.
MR NELSON LAY (NON-EXECUTIVE DIRECTOR) Mr Nelson Lay is the managing director of Asia-United Food Service and a director of Countrywide. Asia-United Food Service was founded in 1978 and is now a major catering supplier and food distributor in the Northern Territory, with more than 60 employees and 100 products. He has been a director of Countrywide, a national food distributor, for 10 years. As a director of Countrywide, he negotiates with manufacturers and suppliers, and shapes corporate strategy. It is anticipated that Mr Nelson Lay’s substantial experience in the Australia food industry, and particularly within the areas of food supply and distribution, will enable him to assist the Company’s Australian business operations.
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MR PETER BEER (NON-EXECUTIVE DIRECTOR) Mr. Peter Beer was previously Asia Pacific Senior Director at EMC Corporation, a major US- based provider of IT storage hardware solutions, and oversaw a 1,000 person team across 12 countries. Mr Beer holds a Bachelor of Arts from Monash University and a Graduate Diploma in Business Administration from Swinburne Institute. Commencing his career at Shell before moving to Amdahl Corporation, Mr Peter Beer has previously held positions as an Asia-Pacific Senior Director of Professional Services, Asia-Pacific Pre-Sales Senior Director and Asia-Pacific Consulting Services Director for EMC Corporation, and Director of the Greater China Solutions Centres and Greater China Professional Services businesses. After leaving EMC Corporation, Mr Beer taught English at Luoyang International School in Henan Province, China. Mr Beer has significant experience in team leadership, setting and managing budgets of up to AUS$200 million, building, implementation and monitoring of governance systems and corporate presentations. Having lived in China and Hong Kong for 18 years, Mr Peter Beer is also fluent in Mandarin, and it is anticipated that his insight into Asian business markets will be an asset to the Company.
THE HON. ANDREW THOMSON (NON-EXECUTIVE DIRECTOR) The Hon. Andrew Thomson is a special counsel for Lander & Rogers Lawyers and advisor to D1 Chemical Co. Ltd, a company headquartered in Japan. Holding a Bachelor of Arts and Bachelor of Laws from the University of Melbourne and a Master of Laws from Georgetown University, he commenced his career as a solicitor at Mallesons before holding the position of Investment Manager at GT Management (Japan) Ltd and Assistant Vice President of Compliance at Credit Suisse First Boston (Japan Ltd). The Hon. Andrew Thomson has also held positions as a Member (House of Representatives) in the Australian Parliament, Parliamentary Secretary for Foreign Affairs, the Minister for Sport, Tourism and Sydney Olympic Games and Chairman of the Joint Committee on Treaties and was previously a member of the New York Bar and California Bar. He is currently a director of Australia-Japan Energy Developments Pty Ltd, Australia-Japan Aquaculture Technology Pty Ltd and Pie Face Japan GK. He has previously been a Chairman of Athena Resources Ltd (ASX:AHN), Citadel Resource Group Ltd (ASX:CGG), Celamin Holdings NL (ASX:CNL) and is fluent in Japanese and Mandarin. It is anticipated that the Hon. Andrew Thomson’s experience in public company governance, commercial law and financial services and investment management will be an asset to the Company.
5.2 COMPANY SECRETARY JUSTYN STEDWELL Justyn Stedwell is a professional Company Secretary, with over 8 years’ experience as a Company Secretary of ASX-listed companies, including biotechnology, agriculture, mining and exploration, information technology and telecommunications. Justyn’s qualifications include a Bachelor of Commerce (Economics and Management) from Monash University, a Graduate Diploma of Accounting at Deakin University and a Graduate Diploma in Applied Corporate Governance at the Governance Institute of Australia. He is currently Company Secretary at several ASX-listed companies, including Axxis Technology Group (ASX:AYG), Motopia Ltd (ASX:MOT), Rhinomed Ltd (ASX:RNO), Imugene Ltd (ASX:IMU), Australian Natural Proteins (ASX:AYB), Rectifier Technologies Ltd (ASX:RFT) and WONHE Multimedia Commerce Ltd (ASX:WMC).
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5.3 DISCLOSURE OF DIRECTORS AND COMPANY SECRETARY’S INTERESTS (DIRECTORS’ INTERESTS) Other than as set out below or elsewhere in this Prospectus, no Director and no firm in which a Director is a partner, has an interest in the promotion or in property proposed to be acquired by the Company in connection with its formation or promotion. Other than as set out below or elsewhere in this Prospectus, no amounts have been paid or agreed to be paid (in cash or shares or otherwise) to any Director or any firm in which any Director is a partner, either to induce him to become, or to qualify him as, a Director or otherwise for services rendered by him or by the firm in which he is a partner in connection with the formation or promotion of the Company. Prior to the Offer the Directors and Company Secretary had relevant interests in Shares and Options as set out in the table below:
DIRECTOR SHARES OPTIONS
Zhuowei Zhong* 39,916,800 Nil
Zhifei Huang 2,880,000 Nil
Huiwen Huang Nil Nil
Nelson Lay Nil Nil
Peter Beer Nil Nil
Andrew Thomson Nil Nil
Justyn Stedwell Nil Nil
After the Offer has occurred, the Directors and Company Secretary will have a relevant interest in Shares and Options as set out below:
DIRECTOR SHARES OPTIONS
Zhuowei Zhong* 39,916,800 Nil
Zhifei Huang 2,880,000 Nil
Huiwen Huang Nil Nil
Nelson Lay Nil Nil
Peter Beer Nil Nil
Andrew Thomson Nil Nil
Justyn Stedwell Nil Nil
* Please note that Ms Xinhi Zhong, Mr Zhuowei Zhong’s daughter, holds 3,600,000 Shares, constituting 5% of the Company’s issued share capital prior to the Offer. Ms Zening Lai is the wife of Mr Zhuowei Zhong, an Executive Director of the Company. Through her interest in Pilot, Ms Lai holds an interest in 35,181,893 shares in WINHA International Group Ltd, constituting 70.4% of that company’s issued share capital, and Mr Zhong holds 2% of WINHA International Group’s shares. Therefore, Mr Zhuowei Zhong will hold a relevant interest in 72.4% of the 43,200,000 shares Sanmei holds in the Company, being 31,276,800 Shares. As Mr Zhong holds 5,040,000 shares, constituting 7% of the Company’s issued share capital prior to the Offer, Mr Zhong therefore has a relevant interest in 39,053,800 Shares, constituting 36.84% of the Company’s share capital following the Offer (assuming that the Maximum Subscription is raised).
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(DIRECTORS’ REMUNERATION) The remuneration paid by the Company to each Director is as follows: (a) Zhuowei Zhong (Executive Director): AUD40,000 per annum; (b) Zhifei Huang (Executive Director): AUD40,000 per annum; (c) Huiwen Huang (Non-Executive Director): AUD40,000 per annum; (d) Peter Beer (Non-Executive Director): AUD40,000 per annum; (e) Andrew Thomson (Non-Executive Director): AUD40,000 per annum; (f) Nelson Lay (Non-Executive Director): AUD40,000 per annum.
5.4 DIRECTORS OF WINHA GROUP COMPANIES WINHA INTERNATIONAL GROUP LTD The sole director of WINHA International Group Ltd is Ms Chung Yan Winnie Lam. Ms Lam is currently a Director of Operations for Baoshijie International Food Co., Ltd, and was previously an Operational Manager for Oulu Food Co., Ltd. Ms. Lam holds a Bachelor of Science from the University of Southern California Marshall School of Business. Pilot International Investment Company Ltd (‘Pilot’) is a company incorporated in Anguilla and wholly owned by Ms Zening Lai. Pilot is the majority shareholder in WINHA International Group. Through her interest in Pilot, Ms Zening Lai holds an interest in 35,181,893 shares in WINHA International Group Ltd, constituting 70.4% of that company’s issued capital. Ms Zening Lai is the wife of Mr Zhuowei Zhong, an Executive Director of the Company.
SANMEI INTERNATIONAL INVESTMENT CO. LTD The sole director of Sanmei International is Qifang Zhong. Ms Qifang Zhong studied preschool education at Guangzhou University. Ms Zhong is currently engaged as a manager of Guangdong Benlai Net Electronic Commerce Co.,Ltd, and has previously held positions as the Manager of International Logistics Department in Pentium International Logistics (Guangzhou) Co Ltd and a manager at Tianhong Market Co. Ltd.
C&V INTERNATIONAL HOLDING COMPANY LTD Under Cayman Island law, a company can be appointed as a director of another company. Accordingly, WINHA International Group Limited has been appointed as the sole director of C&V International.
WINHA INTERNATIONAL INVESTMENT HOLDINGS COMPANY LTD Mr Zhuowei Zhong is currently the sole director of WINHA International. For a profile of Mr Zhong, please refer to section 5.2 above.
SHENZHEN WANHA INFORMATION TECHNOLOGY COMPANY LTD The sole director of Shenzhen WANHA is Ms Zening Lai. Ms Lai commenced her career working for Zhongshan Sugar Factory as an electronics technician before studying electronics at Zhongshan Tangzhi Technical School and studying Business English at Zhongshan College. Ms Lai then commenced a position with CTO (HK) Ltd, a shipping company, before moving to Hanjin International (Ocean Shipping), where she is now the general manager. Ms Zening Lai is Mr Zhuowei Zhong’s wife.
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ZHONGSHAN WINHA ELECTRONIC COMMERCE COMPANY LTD The directors of Zhongshan WINHA are Mr Zhuowei Zhong, Mr Huiwen Huang and Mr Zhifei Huang, who are also directors of the Company. For profiles of these directors, please refer to Section 5.1 of this Prospectus.
ZHONGSHAN WINHA SUPERMARKET CO LTD The directors of Zhongshan Supermarket are Mr Zhuowei Zhong, Mr Huiwen Huang and Mr Zhifei Huang, who are directors of the Company. For a profile of Mr Zhuowei Zhong, Mr Huiwen Huang and Mr Zhifei Huang, please refer to Section 5.1 of this Prospectus. Mr Huiwen Huang holds a Bachelor of Law from Sun Yat-Sen University and an MBA from the School of Management at Sun Yat-Sen University. After working as a lecturer at Foshan Shunde Teachers College, he held positions as a Company Manager of the Gaoming District branch of China Life Insurance Company Ltd, Manager of China Unicom Gaoming Branch, and founder of Guangzhou Hongda Ceramic Co., Ltd. He worked at WINHA Electronic Commerce Company Ltd since 2010 and held the position of executive director of the Company from its incorporation until September 2016.
ZHONGSHAN WINHA CATERING MANAGEMENT CO LTD The directors of WINHA Catering are Mr Zhuowei Zhong, Mr Huiwen Huang and Mr Zhifei Huang, who are also directors of the Company. For a profile of Mr Zhong, please refer to Section 5.1 of this Prospectus, and for a profile of Mr Huiwen Huang and Mr Zhifei Huang, please refer to Section 5.4 of this Prospectus.
5.5 KEY MANAGEMENT PERSONNEL OF ZHONGSHAN SUPERMARKET AND ZHONGSHAN CATERING ZHONGSHAN SUPERMARKET: Mr Xiuhang Chen is the operational manager of Zhongshan WINHA Supermarket Co Ltd. Mr Chen has been working in food and beverage retail since 2008, and has been the manager of Ancient Town Restaurant, manager of Zhongshan International Restaurant and department manager of Jinheng Restaurant before commencing with Zhongshan WINHA Supermarket Co Ltd in March 2014.
WINHA CATERING: Mr Jianji Zhang is the chief operating officer of Zhongshan WINHA Catering Management Co Ltd, and commenced with that company in March 2015. Mr Zhang has substantial experience in the hospitality industry, commencing in 1984. Mr Zhang has previously held positions as a director of the Food and Beverage Department of Fuhua Hotel in Zhongshan City, Vice-General Manager of Fuhua Hotel, General Manager and Food and Beverage Director of Harbour Catering Management Group, Managing Director of Tanglegong Hotel in Donguan City and General Manager of Tianyu International Hotel in Zhangye City. Ms Ying Huang is the operational manager of the Shaxi Branch of Zhongshan WINHA Catering Management Co Ltd. Ms Huang has been working in the hospitality industry since 2011, and was previously the lobby manager of Xinghui Restaurant and Manager of Taiwu Restaurant before commencing with Zhongshan WINHA Catering Management Co Ltd in September 2015.
5.5 KEY MANAGEMENT PERSONNEL OF FLAVOURS MR GASSANE (JASON) ELBOB Mr Jason Elbob commenced work as a Melbourne-based chef, working at high-end restaurants such as Becco, Matteos, Café Di Stasio and Moretti, before commencing as a Key Sales Manager at Calendar Cheese. Awarded employee of the year for a consecutive 5 years at Calendar Cheese, he sold gourmet cheese to a range of high-end Melbourne restaurants. In 2004, Jason Elbob left Calendar Cheese to start a gourmet fruit and vegetable supply business, Select Providor Pty Ltd, supplying fruit and vegetables to a wide variety of Melbourne cafes and restaurants.
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In 2013, Mr Jason Elbob commenced with Flavours, and his knowledge of fresh produce, wide variety of contacts, ability to source new business and maintain client relationships is a significant asset to the Flavours business.
MR PETER CANNAVO Mr Peter Cannavo is the founder and Managing Director of Flavours. A chef by trade, Peter Cannavo started his career working with some of Australia’s top chefs and at 5 star hotels including The Grand Hyatt in Melbourne, before developing an interest in rare, heirloom and high-quality fruit and vegetables. Flavours now supplies fruit and vegetables to a wide range of Melbourne restaurants, hotels and catering companies, including many high-end and exclusive restaurants. Skilled at building good business relationships, Peter Cannavo has developed loyal and long-standing relationships with Australian growers, and is very familiar with produce industry trends and client expectations. Peter Cannavo’s extensive operational experience and knowledge of heirloom and rare fruit and vegetables is a significant advantage to the Flavours business.
5.6 CORPORATE GOVERNANCE (ROLE OF THE BOARD) The Board is responsible for the following principal matters: >> the strategic direction of the Company; >> overseeing, negotiating and implementing the significant capital investments and material transactions entered into by the Company; >> management goals and the Company’s policies; >> monitoring and reviewing the financial and operational performance of the Company; >> risk management strategy and review; and >> future expansion of the Company’s business activities. Without intending to limit this general role of the Board, the principal functions and responsibilities of the Board include the following: 1. Leadership of the Organisation: overseeing the Company and establishing codes that reflect the values of the Company and guide the conduct of the Board; 2. Strategy Formulation: to set and review the overall strategy and goals for the Company and ensuring that there are policies in place to govern the operation of the Company; 3. Overseeing Planning Activities: the development of the Company’s strategic plan; 4. Shareholder Liaison: ensuring effective communications with shareholders through an appropriate communications policy and promoting participation at general meetings of the Company; 5. Monitoring, Compliance and Risk Management: the development of the Company’s risk management, compliance, control and accountability systems and monitoring and directing the financial and operational performance of the Company; and 6. Company Finances: approving expenses and approving and monitoring acquisitions, divestitures and financial and other reporting. The Board has adopted a Board Charter which sets out its responsibilities, processes and duties in greater detail.
(ASX CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES) The Board is committed to principles of best practice in corporate governance.
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The Board will conduct itself in accordance with the ASX Corporate Governance Principles and Recommendations, 3nd Edition (2014) as issued by the ASX Corporate Governance Council, to the extent that such principles and recommendations are applicable to an entity of the size and structure of the Company. The Company has formulated its own Corporate Governance policies and practices using the ASX Principles and Recommendations as a guide. The Board will review on an ongoing basis the corporate governance policies and structures that the Company has in place to ensure that these are appropriate for the size of the Company and nature of its activities, and that these policies and structures continue to meet the corporate governance standards that the Board is committed to.
SUMMARY OF COMPANY’S POSITION IN RELATION TO ASX PRINCIPLES AND RECOMMENDATIONS:
ASX PRINCIPLE AND RECOMMENDATION COMPANY’S POSITION:
Principle 1 – Lay solid THE ROLE OF THE BOARD foundations for The Board is responsible for, and has the authority to determine, all matters relating management and to strategic direction, policies, practices, management goals and the operations oversight of the Company.
THE ROLE OF MANAGEMENT It is the role of senior management to manage the Company in accordance with the direction and delegations of the Board and the responsibility of the Board to oversee the activities of management in carrying out these delegated duties. The Company’s officers and management have all entered into service contracts which outline the responsibilities of each of the company’s officers and of management personnel when performing their roles for the Company.
Principle 2 – Structure At the date of this Prospectus, the Company has six directors, being Zhuowei Zhong the Board to add value (Executive Director), Zhifei Huang (Executive Director), Huiwen Huang (Non-Executive Director), Nelson Lay (Non-Executive Director), Peter Beer (Non-Executive Director) and Andrew Thomson (Non-Executive Director). The Board is an appropriate size to effectively and efficiently oversee the management and operations of the Company, based on the present size of the Company’s activities. An independent director is a non-executive director who is not a member of management and who is free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the independent exercise of their judgement. Three of the Directors are independent, being Nelson Lay, Peter Beer and Andrew Thomson. The Company considers that three of the Directors being independent is appropriate for a company of its size. The Board is responsible for the nomination and selection of directors. Given the size of the Company and the nature of its operations, the Board does not believe it to be appropriate to establish a nomination committee at this time. The composition of the Board, its performance and the appointment of new Directors will be reviewed periodically by the Board, taking advice from external advisers where considered appropriate.
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ASX PRINCIPLE AND RECOMMENDATION COMPANY’S POSITION:
Principle 3 – Act CODE OF CONDUCT ethically and responsibly The Board has established a Code of Conduct for the Board and Management. The Board is committed to meeting their responsibilities under the Constitution and Corporations Act 2001 (Cth) when carrying out their functions as company officers.
DIVERSITY POLICY The Board has established a Diversity Policy in accordance with the 2014 Amendments to the ASX Corporate Governance Principles and Recommendations, and will endeavour to provide for appointments to the Board and Company in accordance with this Policy as the Company develops and grows.
SECURITIES TRADING POLICY The Company has adopted a Securities Trading Policy for directors, officers and employees. The purpose of the Securities Trading Policy is to reduce the risk of insider trading and ensure that the Company’s directors, officers and employees are aware of the legal restrictions on trading shares in the Company whilst in possession of undisclosed information concerning the Company. The Securities Trading Policy sets out when trading in the Company’s shares by directors, officers and employees is not permitted. Restrictions on trading are imposed by the Company to reduce the risk of insider trading and to minimise the chance that misunderstandings or suspicions arise that the Company’s directors, officers, or employees are trading while in possession of undisclosed information concerning the Company.
REPORTING UNETHICAL OR ILLEGAL PRACTICES Company policy requires employees who are aware of unethical or illegal practices to report these practices to management. Any reports of unethical or illegal practices are investigated by the Board. Reporters of unethical practices may remain anonymous.
Principle 4 – Safeguard The Company has established an Audit and Risk Committee which shall be responsible integrity in corporate for monitoring and reviewing financial reporting by the Company. reporting The Company has adopted a Charter for the Audit and Risk Committee which sets out the committee’s responsibilities, procedures, guidelines and composition. The Company’s Audit and Risk Committee Charter requires all members of the Audit and Risk Committee to be non-executive directors if the Company has more than four (4) directors. Therefore, Mr Nelson Lay, Mr Peter Beer, Mr Andrew Thomson and Mr Huiwen Huang are members of the Audit and Risk Committee, all being Non-Executive directors.
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ASX PRINCIPLE AND RECOMMENDATION COMPANY’S POSITION:
Principle 5 – Make The Company has adopted a Communication and Disclosure Policy to ensure compliance timely and balanced with the ASX Listing Rules disclosure requirements. disclosure To comply with the ASX Listing Rules, the Company intends to immediately notify the ASX of information: >> concerning the Company that a reasonable person would expect to have a material effect on the price or value of the Company’s securities; >> that would, or would be likely to, influence persons who commonly invest in securities. The Communication and Disclosure Policy includes processes designed to ensure that Company information: >> is disclosed in a timely manner; >> is factual; >> does not omit material information; and >> is expressed in a clear and objective manner that allows the input of the information when making investment decisions. The Company is committed to ensuring all investors have equal and timely access to material information concerning the Company. Accordingly, in following and adhering to its Communications and Disclosure Policy the Company will comply with its continuous disclosure obligations.
Principle 6 – Respect The Board is committed to ensuring that the Company’s shareholders receive information the rights of security relating to the Company on a timely basis and shall endeavour to keep shareholders well holders informed of all material developments of the Company. The Board has adopted a Communications and Disclosure Policy, and as part of this policy, will ensure that all relevant announcements and documents are published on the Company’s website in a prompt fashion. The Company will respect the rights and entitlements of the Company’s shareholders under the Constitution and the Corporations Act 2001 (Cth).
Principle 7 – Recognise The Company has established an Audit and Risk Committee which shall be responsible and manage risk for monitoring, identifying and managing risks, and ensuring that these risk identification and management procedures are implemented and followed. The Audit and Risk Committee has adopted a Charter. The Company has also adopted a Risk Management Policy designed to ensure: >> all major sources of potential opportunity for harm to the company (both existing and potential) are identified, analysed and treated appropriately; >> business decisions throughout the Company appropriately balance the risk and reward trade off; >> regulatory compliance and integrity in reporting is achieved; and >> the Company’s good standing with its stakeholders continues.
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ASX PRINCIPLE AND RECOMMENDATION COMPANY’S POSITION:
Principle 8 – The Board is responsible for the Company’s remuneration policy and has adopted a Remunerate fairly Nomination and Remuneration Policy which outlines the processes by which the Board shall and responsibly review officer and management remuneration. The Company has provided disclosure of a summary of its remuneration policies for the Company’s officers in this Prospectus. The Company is committed to remunerating its officers and executives fairly and to a level which is commensurate with their skills and experience and which is reflective of their performance. Further disclosure of officer and executive remuneration will be made in accordance with the ASX Listing Rules and the Corporations Act 2001 (Cth).
5.6 SUBSTANTIAL SHAREHOLDERS As at the date of this Prospectus, the following Shareholders hold 5% or more of the total number of Shares on issue in the Company:
NO. OF % HOLDER SHARES (UNDILUTED)
Sanmei International Investment Co. Ltd 43,200,000 60%
Zhuowei Zhong 5,040,000 7%
Beijing Ruihua Future Investment Management Co. Ltd 3,600,000 5%
Xinxi Zhong 3,600,000 5%
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06 RISK FACTORS 06 RISK FACTORS
There are a number of risk factors that may have a material adverse effect on the Company’s future operating and financial performance. The Company is a newly established company. However, as part of a restructure of the WINHA Group, the Company is now part of the WINHA Group and owns the WINHA Business. The WINHA Business has been operating since 2013 and therefore the Company’s China Subsidiaries have had a limited operating history for investors to evaluate the potential of the WINHA Business. Although the WINHA Business has generated increasing revenues since launch of the business and is profitable, the WINHA Business may face many of the risks and difficulties inherent in gaining market share as a business with a limited operating history. The Company’s underlying business model and the sustainability of such business model is therefore relatively unproven. Therefore, the Shares to be issued pursuant to this Prospectus are a speculative investment. The following summary explains some of the risks associated with investment in the Company and which may impact upon the financial performance of the Company. However, potential investors should read this Prospectus in its entirety and consult their professional advisers before applying for Shares under this Prospectus. The list of risk factors outlined here are not exhaustive. Neither the Company, nor its Directors nor any of its professional advisers give any form of guarantee on future dividends, return on capital or the price at which the Shares might trade on ASX. Investors should consider the non-exhaustive list of risks associated with investing in the Company that are outlined below, and consult with their advisors before making an investment in the Company.
6.1 COMPANY-SPECIFIC RISK FACTORS – CHINA Based on available information, a non-exhaustive list of risk factors relating to the WINHA Group’s operations in China are as follows.
(A) CONTROL RISK Sanmei International holds 60% of the Company prior to the Offer. Assuming that the Maximum Subscription is met, Sanmei International will hold 42.95% of the Company (43,200,000 Shares). Sanmei International is wholly owned by WINHA International. Sanmei International and WINHA International are therefore in a position to exert considerable influence over the outcome of matters relating to the Company, including Board composition and the approval of significant corporate transactions (where they are not excluded from voting). While the interests of Sanmei International and WINHA International and other shareholders in the Company are likely to be consistent, there may be instances where such interests diverge. The concentration of ownership may adversely affect the liquidity of the market for the Shares on the ASX, and any sale of the shares held by Sanmei International may adversely affect the market price of the Shares. Likewise, Sanmei International will have a significant influence on any potential change in control of the Company.
(B) FOREIGN INVESTMENT RISK – CHINA There are uncertainties regarding the interpretation and application of Chinese laws, rules and regulations governing foreign investment to the WINHA Business. The official interpretation of Chinese laws, regulations and rules may be uncertain, subject to retrospective application or otherwise subject to change. New laws, regulations and rules may impose additional requirements on the WINHA Business, the China Subsidiaries or the WINHA Group. There is therefore a risk that China’s regulatory authorities may deem the China Subsidiaries or the WINHA Group to be in violation of existing or future Chinese laws, regulations or rules. Likewise, the China Subsidiaries or WINHA Group may fail to obtain or maintain requisite permits and approvals. Any such violations may lead to the Chinese authorities revoking or restricting related party transactions between the WINHA Group entities, requiring the WINHA Group or China Subsidiaries to restructure their operations and ownership structure, prohibiting or restricting the use of funds from the Offer to finance the WINHA Business operations in China or revoking business or operating licences of the China Subsidiaries, adversely affecting the Company’s operations and financial position.
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(C) COUNTERPARTY RISK – CHINA The WINHA Business derives part of its revenue from the Franchise Fees paid by Franchisees to Zhongshan WINHA, and from the sale of WINHA Products to commercial purchasers, such as hotels. While Zhongshan WINHA has entered into Franchise Agreements with each Franchisee, and supply agreements with each purchaser, there can be no guarantee that these contractual arrangements will be sufficient to ensure counterparty performance. Zhongshan WINHA and Zhongshan Supermarket are also exposed to counterparty risk through the lease agreements for the Retail Stores and WINHA Supermarket. If these third parties fail to perform their obligations under the contractual arrangements, if Zhongshan WINHA suffers significant delay or other problems in the course of enforcing the contractual arrangements, or if legal remedies under Chinese law are unavailable or ineffective, the Company’s business model and operations may be severely disrupted. Such disruption may adversely affect the Company’s profitability and its ability to generate revenues in China through Zhongshan WINHA. Zhongshan WINHA has entered into a Cooperative Sales Contract with Lijiang Deyi Food Co Ltd (LDF), a company incorporated in China and based in Yunnan Province. Through LDF’s sales agents, LDF primarily provides Zhongshan WINHA with products branded “Xueshan Nongchang” (the English translation being “Xueshan Farm”). The products supplied by LDF are food and beverage products, including some food which has been certified to be organic by other countries’ certification bodies, and food which has been certified as “green food” under the Chinese certification regime. Whilst Zhongshan WINHA orders products from LDF’s agents on an as-needs basis, LDF is currently a major supplier of WINHA Products. Therefore, if LDF is unable or unwilling to fulfil its obligations under the Cooperative Sales Contract, unable to supply certain products to Zhongshan WINHA, or unable to ensure that the quality of the goods supplied is of merchantable quality and complies with all applicable laws and regulations, the Company’s financial and operating performance is likely to be adversely affected. Please refer to section 9 (‘Material Contracts’) for a summary of the Cooperative Sales Contract between Zhongshan WINHA and LDF.
(D) COMPETITION RISK – CHINA The Company and its China Subsidiaries are development-stage companies and the WINHA Business is not as established and long-standing as that of its competitors. The WINHA Business faces competition from traditional retail stores, including supermarket chains (such as Carrefours, Lianhua Supermarket, Wal-Mart and Wumart) and smaller food and beverage retailers, such as individual retail stores and local markets. As at December 2015, a number of international chain supermarkets had opened outlets within Guangdong Province, where the WINHA Business is located, such supermarkets including Wal-Mart, Carrefour, PARKnSHOP, Watsons and Trust-Mart. Larger supermarkets and hypermarkets (stores incorporating characteristics of supermarkets and department stores) are likely to have a competitive advantage over the WINHA Business, given such retailers’ potential ability to purchase large volumes of stock from suppliers at a discounted price, enabling them to offer retail products to consumers at a more competitive price than the WINHA Business. In Guangdong Province, convenience stores and specialty stores have also gained traction, and high-end food stores, such as Ole and BLT (Better Life Together) have opened in Guangzhou and Shenzhen. The WINHA Business may be unable to compete with such high-end retailers on product range or consumer appeal, and may be unable to compete with convenience stores’ pricing and accessibility. The Company and its China Subsidiaries’ competitive strategy is to implement the innovative business model of selling local specialty goods via Franchise Stores, and to further develop the WINHA Business’ customer base by using Experience Hall restaurants to publicise the WINHA Products on offer, and to provide advice on the preparation and consumption of the WINHA Products. The WINHA Business has also attempted to differentiate itself from its competitors by purchasing and retailing consumables which are produced with a minimum of pesticides or additives, including some food which has been certified to be organic by other countries’ certification bodies, and food which has been certified as “green food” under the Chinese certification regime. However, the Board considers that new competitors may enter the market, both through traditional retail and franchise stores, or online businesses based on internet or mobile-applications.
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The WINHA Business’ competitors could develop a more efficient business model or undertake more aggressive and costly marketing campaigns than the WINHA Business, which may adversely affect the WINHA Business’ marketing strategies and could have a material adverse effect on the Company and its China Subsidiaries’ business, results of operations and financial condition. Generally, the food and beverage retail industry in which the Company will be involved is subject to global and domestic competition. The Company is unable to influence or control the conduct of its competitors and such conduct may detrimentally affect the Company’s financial or operating performance. Likewise, other competitors also retail “green food” certified products, including international supermarkets such as Wal-Mart and Carrefours and domestic department stores, such as Vanguard and Trust-Mart. Whilst consumers may not primarily associate such brands with the retail of “green food,” these competitors may be better-resourced and therefore have a competitive advantage to the WINHA Business. Likewise, the domestic brand Bei Da Huang, sells “green food” certified products sourced from Heilongjiang, as well as other imported goods. Whilst the WINHA Business retails ‘green food” from all over China, Bei Da Huang’s products may be better adapted to consumer demand or the Bei Da Huang brand may enjoy a better reputation than the WINHA Business. Similarly, the domestic brand Guangdong Seven Necessities Green Food Co Ltd (Seven Necessities) is headquartered in Guangzhou. Seven Necessities’ chain stores retails similar products to those retailed by the WINHA Business but focuses on products sourced from Guangdong rather than all over China. As Seven Necessities competes directly with the WINHA Business in Guangdong Province, the WINHA Business may struggle to compete with Seven Necessities on price, quality, branding and promotion, amongst other areas. Any products imported from Australia to China by the Company will compete against Australian products retailed by competitors, such as e-commerce retailer JD.com, which has a specialist Australian section on its website, as well as e-commerce platforms such as Tmall (which features Woolworths and Metcash stores retailing Australian-made or grown products).
(E) MANAGEMENT INEXPERIENCED IN FOOD AND BEVERAGE RETAIL BUSINESS While the China Subsidiaries’ management have been operating the WINHA Business since its inception in 2013, they do not have any specific prior experience in operating a food and beverage retail business, nor do they have any specific training in running such a business. With no direct technical training or prior experience in this area, management may not be fully aware of many of the specific requirements related to working within this industry. As a result, the Company and its China Subsidiaries’ management may lack certain skills that are advantageous in managing the WINHA Business. Consequently, the Company’s operations, earnings, and ultimate financial success could suffer harm due to management’s lack of experience in the food and beverage retail industry.
(F) MANAGEMENT INEXPERIENCED IN FARM MANAGEMENT While Zhongshan WINHA has engaged agronomists and other technical specialists to oversee agricultural production on the farms it has leased, the China Subsidiaries’ key management personnel do not have any prior experience in agriculture or farm management. As key management personnel lack prior experience or technical training, the farms leased by Zhongshan WINHA may be vulnerable to agricultural risks, may not operate efficiently or may be unable to provide the Franchise Stores, Retail Stores and WINHA Supermarkets with a reliable supply of quality produce. Consequently, the Company’s financial success may be adversely affected due to management’s lack of experience in agriculture and farm management.
(G) AGRICULTURAL RISK – CHINA Zhongshan WINHA leases orchards and vegetable farms from landowners in several provinces across China. The cultivation and production of fruit and vegetables may be adversely affected by a variety of risks, including outbreaks of disease, vermin infestation, adverse or unseasonable weather conditions, natural disaster and climate change, which may materially disrupt yields. If Zhongshan WINHA is unable to attract or retain suitably qualified personnel to act as technical supervisors on each farm, or if labour shortages render it difficult to employ farm labourers, agricultural operations on Zhongshan WINHA’s farms may be disrupted, which may adversely affect the WINHA Business’ profitability.
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(H) REGIONAL AGRICULTURAL RISKS – CHINA Zhongshan WINHA has identified certain risks which may adversely affect the fruit and vegetable species which it is cultivating. In some regions of China, citrus fruit (such as oranges, mandarins and kumquats) may be particularly vulnerable to infestations of insects or outbreaks of disease. For example, tetranychus cinnbarinus (spider mite) and lyonetia clerkella (leaf-miner moth) may adversely affect the growth of orange trees in Guandong Province, while in other areas such as Jiangxi Province, diseases such as phytophthora gummosis (resin disease) and colletotrichum gloeosporioides (anthracnose) may infect citrus fruit trees. Similar regional variability of pests and diseases affect stone fruits (such as plums, dates, nectarines and peaches). For example, powdery mildew and fruit fly may adversely affect the quality of the fruit produced by plum trees in Guangdong Province, while stone fruit trees in Hebei Province are vulnerable to leaf curling disease. Other leafy vegetables, such as spinach, late choy sum, or carrots, may be at risk from downy mildew, infestation by Pieris rapae (white cabbage moth) or Plutella xylostella (diamondback moth), or rot. Finally, due to the wide variety of climatic conditions across the regions where Zhongshan WINHA leases its farms and orchards, specific regions may be more vulnerable to frost, drought, heavy rainfall or wind, which may adversely affect the quality or quantity of the produce cultivated by Zhongshan WINHA in that region. Guangdong Province may be at a higher risk of typhoons, while Hebei Province, Beijing and Qinghai Province are more vulnerable to drought, Qinghai is at risk of heavy snow and Anhui Province and Hebei Province are at risk of frost. Adverse weather conditions or natural disasters in a province may damage the crops cultivated by Zhongshan WINHA in that province or disrupt production.
(I) LAND TENURE RISK – CHINA Zhongshan WINHA has entered into land use agreements for orchards and vegetable farms, as detailed in Section 9 (‘Material Contracts’). Under PRC law, agricultural land is typically collectively owned by farmers in a rural or village collective. Therefore, as Zhongshan WINHA is legally prohibited from owning farmlands, Zhongshan WINHA leases land from rural households, villagers’ committees or local government acting on behalf of farmer households. If the land policy of the PRC government is amended so that Zhongshan WINHA is unable to continue to lease its current farmland, or if Zhongshan WINHA is unable to renew its current leases on commercially reasonable terms or at all, Zhongshan WINHA’s production of fruit and vegetables would be materially affected, which may adversely affect its profitability and may damage customer relationships. Under PRC law, the local rural collective or villagers’ committee holds the right to manage and operate agricultural land, and contracts the right to use such land out to farmer households. Zhongshan WINHA leases agricultural land from such households. If the lessors’ land operating rights are revoked, the relevant lease will be terminated, adversely affecting Zhongshan WINHA’s production. The land leased by Zhongshan WINHA is also vulnerable to expropriation or reclamation by the State, which may, under Article 2 of the Land Administration Law, lawfully expropriate or requisition land in the interest of the public, and give compensation accordingly. For more information about the land tenure system in China, please refer to Section 10 (‘China Legal Overview’).
(J) RISKS RELATED TO COMMERCIAL FRANCHISING According to Chinese laws and regulations regarding commercial franchising, the Franchise Stores conducted under the WINHA Business model are recognised as a commercial franchising operation. While the China Subsidiaries have met legal requirements to conduct commercial franchising activities, any failure to meet such requirements in the future may lead to penalties and/or administrative action. Pursuant to Chinese laws and regulations, commercial franchising refers to the business activities where an enterprise that possesses certain registered trademarks, patents, proprietary technology or any other business resources, being the franchisor, allows such business resources to be used by another business operator, being the franchisee, through a contract. The franchisee follows a uniform business model specified by the franchisor to conduct business operations, and pays franchising fees according to the contract. Pursuant to Chinese law, enterprises that wish to become a franchisor must meet certain prerequisites, including a mature business model, the capability to provide long-term business guidance and training services to franchisees and ownership of at least two self-operated storefronts that have been in operation for at least one year within China.
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Franchisors engaged in franchising activities without satisfying the above requirements may be subject to penalties such as forfeit of illegal income, imposition of fines ranging from RMB 100,000 to RMB 500,000, and may be bulletined by MOFCOM or its local counterparts. In addition, franchisors shall carry out record-filing with MOFCOM or its counterparts within 15 days upon executing the first franchise contract, and any failure to comply with such requirement may result in fines ranging from RMB 10,000 to RMB 100,000. Zhongshan WINHA has registered its franchising operation with the Ministry of Commerce, and understands that it has met the legal requirements to conduct commercial franchising activities. However, if Zhongshan WINHA fails to comply with Chinese laws and regulations on franchising activities in the future, Zhongshan WINHA may be subject to penalties such as forfeit of illegal income, imposition of fines from RMB 10,000 to RMB 500,000 and may be bulletined by MOFCOM or its local counterparts. Pursuant to the WINHA Business model, Zhongshan WINHA introduces Franchisees to suppliers of the WINHA Products and, thereafter, the Franchisees order products directly from such suppliers. Therefore, Zhongshan WINHA does not directly control the supply chain to the Franchise Stores. There is therefore a risk that Franchisees may elect to deal with the introduced suppliers directly without remaining part of the WINHA franchise model, setting themselves up in competition to the WINHA Business. There is also a risk that any deterioration in the business relationship between a Franchisee and supplier may damage the relationship between that supplier and Zhongshan WINHA, and may lead to interruptions or cessation of supply of one of more WINHA Products. Franchisees may monopolize a supplier’s products, leading to constraints on product availability for other Franchisees or the Retail Stores, or may order too much or little of certain WINHA Products, which may adversely affect consumer confidence in the WINHA brand. For more information about the regulation of commercial franchising in China, please refer to Section 10 (China Legal Overview).
(K) RISKS ASSOCIATED WITH SUPPLY OF SPECIALITY PRODUCTS The WINHA Product range includes a variety of speciality products, such as Chinese herbs and spices, speciality plant- based products (for instance, flowers and plants which have a reputation as traditional health foods) and speciality seafood products (such as abalone and eel). Many of these speciality products are sourced directly from agricultural suppliers and therefore supply of plant-based products may be interrupted due to adverse weather, blight, vermin or poor growing conditions, while supply of seafood products may be interrupted due to disease or unfavourable seasonal and environmental conditions. As such suppliers operate relatively small businesses, they may be vulnerable to fluctuations in the regional and local economy and consumer demand for their speciality products; if one or more suppliers of speciality products cease to trade, there is no guarantee that the WINHA Business will be able to source another supplier for that WINHA Product on favourable terms or at all. Conversely, as certain WINHA Products may be difficult to source, due to relative scarcity of such products, suppliers may only supply such product on terms which are unfavourable to the WINHA Business or there may be significant competition from other retailers for supply of the product. If supply of one or more of the WINHA Products is interrupted, customer confidence in the WINHA Business may be adversely affected, damaging the WINHA Business’ reputation.
(L) RISKS ASSOCIATED WITH IMPORTATION OF AUSTRALIAN PRODUCTS INTO CHINA All fruit and vegetables imported into China are subject to inspection by the China Entry-Exit Inspection and Quarantine Bureau, and products must meet labelling and packaging requirements and Chinese national food standards and legislation, including Chapter 6 of the China Food Safety Law 2015. Pursuant to a Heads of Agreement between the Company and Flavours, it is currently contemplated that Australian fruit, vegetables and herbs be imported into China for sale at the Franchise Stores, Retail Stores and WINHA Supermarket, and use in the Experience Halls. As a foreign food distributor, Flavours will be required to register with the China state entry- exit inspection and quarantine authorities. Failure to comply with China laws and regulations may result in seizure and destruction or mandatory recall of food items, cancellation of import licences or other actions, such as fines or seizure of profits. While Flavours and the Company shall use their best efforts to ensure that any fruit and vegetables imported by Flavours into China comply with this regulatory framework, if China government policies or standards are amended, the Company and Flavours may incur significant compliance costs.
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As Chinese organic certification systems and foreign organic certification systems are not mutually recognised, Flavours must obtain Chinese organic certification of fruit and vegetables which are certified as organic in Australia if it wishes to export fruit and vegetables from Australia as organic (rather than being imported as conventional products). There is no guarantee that Flavours will elect to apply for such organic certification, that obtaining such certification will be economically viable or that the products will achieve China organic certification if an application is made. Any amendments to tariffs or trade barriers levied by the Chinese government, including increased subsidies to domestic producers or the enactment of additional trade barriers, may adversely affect the Company’s ability to import Australian products sourced by Flavours into China for sale in the Franchise Stores, Retail Stores and WINHA Supermarket.
6.2 COMPANY-SPECIFIC RISK FACTORS – AUSTRALIA (A) COUNTERPARTY RISK – AUSTRALIA The Company has entered into the Flavours Acquisition Agreements with Flavours and the Flavours Vendors. The Company has also entered into Heads of Agreement with Flavours in relation to the export of WINHA Products to Australia and the import of Australian fruit, vegetables and herbs to China. There can be no assurance that Flavours or the Flavours Vendors will perform their obligations under the Flavours Acquisition Agreements or the Heads of Agreement. If Flavours or the Flavours Vendors fail to perform their obligations under the Flavours Acquisition Agreements, the Company may be unable to complete under the Flavours Acquisition Agreements or may obtain significantly reduced benefit from the acquisition of Flavours. Similarly, if Flavours fails to perform its obligations under the Heads of Agreement, the Company or the WINHA Group may be unable to realize any benefit from the Company’s acquisition of Flavours, or the benefits of such acquisition may be reduced.
(B) COMPETITION RISK – AUSTRALIA WINHA Products imported into Australia and sold and distributed by Flavours will compete against products retailed by a wide range of wholesalers and online retailers selling organic fruit, vegetables and specialty organic products to the Australian hospitality industry. While the Company anticipates that the specialized nature of the WINHA Products (which may include some Chinese specialty produce which is relatively difficult to source in Australia) may assist to differentiate the WINHA Products from competitors, there is no guarantee that this strategy will be successful or that the WINHA Products will be competitive in the Australian marketplace.
(C) REGULATORY RISK – AUSTRALIA Flavours is required to comply with a range of laws and regulations, including labelling and packaging, food standards, consumer protection and fair trading. While the Company will use its best endeavors to ensure that Flavours is compliant with this legislative framework, any amendments to existing laws, standards or government policies, or the introduction of any further laws, standards or policies may result in increased compliance costs, having a material adverse impact on the financial performance of Flavours. Conversely, the WINHA Products imported into Australia will be required to comply with a range of regulations, policies and standards, including but not limited to the Australia and New Zealand Food Standards Code, customs requirements, packaging and labelling regulations, and consumer protection legislation. While the Company will use its best endeavors to ensure that the WINHA Products are compliant with all applicable Australian standards, regulations and policies, the introduction of further laws, standards or policies may result in the Company needing to incur substantial compliance costs. Any amendments to tariffs or trade barriers, including increased subsidies to Australian producers or the enactment of additional trade barriers, may adversely affect the Company’s ability to export the WINHA Products into Australia for sale by Flavours or the profitability of such export.
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6.3 INDUSTRY-SPECIFIC RISK FACTORS Industry-specific risk factors which may affect the Company’s financial position, prospects and the price of its listed securities are set out below.
(A) SUPPLY RISKS There are a number of risks associated with the retail activities carried out by the Company’s subsidiaries, including: >> dependence on the WINHA Products being supplied by third party manufacturers, including the ability to access the WINHA Products, the reliance on third party manufacturers, distributors and suppliers and the price paid for the WINHA Products. To the extent the Company or its subsidiaries have not estimated the wholesale price of the WINHA Products accurately, or the wholesale prices vary from those prices forecast, the amount paid by the Company or its subsidiaries to suppliers for the WINHA Products may diverge from estimates, and result in a lower than forecast return. >> the continued operation of suppliers’ production facilities and availability of WINHA Products to be sold to the Company or its subsidiaries; >> competition for supply of the WINHA Products, as the Company’s subsidiaries rely on the supply of WINHA Products from contracted suppliers. Existing retailers compete with us to purchase goods from those suppliers. Competition would be intensified if a new or existing retail enterprise increases the price that they are prepared to pay for supply of WINHA Products. In this event, the Company’s costs would be increased if it had to offer higher prices to retain its suppliers, or the supply of certain WINHA Products may be jeopardised if their manufacturers or suppliers chose to supply competing retail enterprises instead of the Company or its subsidiaries, detrimentally affecting the Company’s performance. >> WINHA Products which are perishable, such as food and beverages, may be spoiled or perished at the time of delivery at the Franchise Stores. The Company or its subsidiaries may be unable to recover the cost of such goods, adversely impacting on the Company’s financial performance. There are also a number of supply risks associated with the activities carried out by Flavours, including: >> dependence on the fruit and vegetables being supplied by third party suppliers, which may lead to the risks of being unable to access a reliable or supply of produce, ensure consistent quality of produce or being exposed to material fluctuations in the price paid for such produce. Material fluctuations in supply, quality or price may damage Flavours’ relationship with existing customers or may detrimentally affect the financial performance of Flavours; and >> competition from existing competitors or new market entrants for the supply of the fruit and vegetables purchased from third party growers or suppliers, which may adversely affect reliability or quality of supply.
(B) HEALTH AND ENVIRONMENTAL RISKS There are a number of health and environmental risks associated with the Company and its subsidiaries’ business model and the WINHA Products, as follows: >> Zhongshan WINHA has commenced the cultivation of fruit and vegetables on leased farms throughout China. Conversely, many of the existing WINHA Products, such as food products, come from agricultural suppliers. Therefore the supply of WINHA Products could be adversely affected by events such as animal or plant diseases, contamination of food or beverage products or changes in laws, regulations or standards. Such factors could disrupt the Company and its subsidiaries’ business operations and may cause reputational harm by leading consumers to doubt product safety, quality and reliability of supply, adversely impacting the Company’s financial performance. >> Zhongshan WINHA must comply with environmental and agricultural laws, including laws on the use and disposal of pesticides and chemicals, handling of agricultural waste and pollution of soil, water and air from agricultural cultivation. To the extent that Zhongshan WINHA fails to comply with standards of agricultural use and environmental protection, Zhongshan WINHA may be fined or may be ordered to restrict or suspend production under Article 59 of the Environmental Protection Law (2014). If Zhongshan WINHA fails to comply with agricultural or environmental laws, Zhongshan WINHA may also face negative publicity, which is likely to damage the WINHA Group’s brand image and adversely affect the WINHA Group’s financial performance and operating results.
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>> The Company’s business model may be adversely affected by environmental factors such as drought, floods or climate change. Stricter regulation of Zhongshan WINHA or suppliers’ access to water or changes in environmental laws, regulations or standards relating to agricultural production may lead to the wholesale price of the WINHA Products increasing, adversely affecting the Company’s profitability. Likewise, any disruption to supply linked to a long-term increase in extreme weather events and changes in weather patterns and temperatures may disrupt the Company’s business model, increase operating costs and cause reputational harm in terms of reliability of supply, adversely impacting returns. >> In relation to consumable WINHA Products, there is a risk that Franchise Stores may receive contaminated WINHA Products from suppliers, or WINHA Products becomes contaminated after supply to the Franchise Stores. The risk of contamination may result in product recalls or other interventions, which may cause serious damage to the Franchise Stores’ reputation and loss of revenue. >> Retailing consumer products also carries an inherent risk of product liability, and the Company’s subsidiaries may have to limit the retailing of the WINHA Products if the Company cannot successfully renew product liability insurance or defend itself against product liability claims. The Company or its subsidiaries may not be able to obtain further product liability insurance, or may not be able to obtain insurance on commercially viable terms. >> There are also health and environmental risks associated with the food sourcing and distribution activities currently undertaken by Flavours. There is a risk of contamination, spoilage or presence of foreign materials or substances in produce purchased by Flavours from third party suppliers, which may lead to public health issues, recalls, reputational damage, damage to customer relationships, product liability claims or disputes with suppliers or growers, which may lead to damage to Flavours’ financial performance or reputation.
6.4 GENERAL INVESTMENT RISKS Some of the general risks of investment which are considered beyond the control of the Company are as follows:
(A) THE STATE OF AUSTRALIAN AND INTERNATIONAL ECONOMIES: A downturn in the Australian and/or the international economy may negatively impact the performance of the Company which in turn may negatively impact the value of securities in the Company. Any deterioration in local economic conditions in China or wider regional economic conditions may have an adverse effect on the performance of the Company. The Company’s entitlement to revenues may be negatively influenced by changes in regional or local economic variables and consumer confidence in China. Unemployment rates, levels of personal disposable income and regional or local economic conditions may adversely affect consumer spending, decreasing demand for the WINHA Products. These factors may have an adverse effect on the Company’s activities as well as its ability to finance future projects.
(B) CHANGES TO GOVERNMENT POLICIES AND LEGISLATIVE CHANGES: Government policy and legislative changes which are outside the control of the Company may also have a negative impact on the financial performance of the Company.
(C) MOVEMENTS IN LOCAL AND INTERNATIONAL STOCK MARKETS: The price of stocks in a publicly listed company can be highly volatile and the value of a company’s securities can be expected to fluctuate depending on various factors, including stock market sentiment, government policies, investor perceptions, economic conditions and market conditions which affect the retail industry. It is therefore possible that the Company’s securities will trade at below the offer price.
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(D) THE COMPANY’S ON-GOING FUNDING REQUIREMENTS: Further funding may be required by the Company to develop its business model and commercial activities. There is no guarantee that the Company will be able to raise the additional required funding on a timely basis, on favourable terms or that such further funding will be sufficient to enable the Company to implement its planned commercial strategy. Any additional equity financing will dilute shareholdings, and debt financing, if available, may involve restrictions on financing and operating activities. If the Company is unable to obtain additional financing as needed, it may be required to reduce the scope of its operations or scale back its subsidiaries’ retailing activities, as the case may be, which may adversely affect the business and financial condition of the Company and its performance. Further, the Company may not be able to maintain access to capital markets in order to fund unforeseen expenditure or to undertake further development of the Franchise Stores or Online Stores.
(E) INVESTMENT SPECULATIVE The Company has only been operating for a relatively short period, and its underlying business model is therefore unproven, and the profitability and sustainability of the business model is uncertain. The Company therefore constitutes a speculative investment.
(F) POTENTIAL ACQUISITIONS As part of its business strategy, the Company may make acquisitions or significant investments in other companies or enterprises. Any such future transactions would be accompanied by the risks commonly encountered in making acquisitions of companies or enterprises. Further, there is no guarantee that the Company will make any future acquisitions.
(G) INSURANCE RISK The Company may, where economically practicable and available, endeavour to mitigate some business risks by procuring relevant insurance cover. However, such insurance cover may not always be available or economically justifiable and the policy provisions and exclusions may render a particular claim by the Company outside the scope of the insurance cover. While the Company will undertake all reasonable due diligence in assessing the creditworthiness of its insurance providers there will remain the risk that an insurer defaults in the legitimate claim by the Company under an insurance policy. Insurance against all risks associated with the Company’s business operations is not always available and where available the cost may be prohibitive.
(H) UNFORESEEN EXPENSES The Company is not aware of any expenses that it will be required to incur in the two years after listing and which it hasn’t already taken into account. However, if the Company is required to incur any such unforeseen expenses then this may adversely affect the currently proposed expenditure plan and existing budgets for the Company’s activities. The above list of risk factors ought not to be taken as exhaustive of the risks faced by the Company or by investors in the Company. The above factors, and others not specifically referred to above, may in the future materially affect the financial performance of the Company and the value of the Shares.
(I) RELIANCE ON KEY PERSONNEL Senior management and key personnel of the Company shall direct the Company’s operations and provide strategic management. However, if key employees cease to be employed there may be a detrimental impact to the Company. While Flavours has entered into executive employment contracts with Mr Peter Cannavo and Mr Gassane Elbob, such contracts having a three-year term, there is no assurance of counterparty performance under these contracts. If one or both of these executives cease to be employed by Flavours, this is likely to adversely affect the operational performance and profitability of the Flavours business.
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(J) FOREIGN SALES As at the date of this Prospectus, the Company does not envision that it will be undertaking any international sales. However, any proposed international sales to be undertaken by the Company or its subsidiaries and subsequent operations will be subject to a number of risks inherent in selling and operating abroad which could adversely affect our ability to increase or maintain foreign sales. These include, but are not limited to, risks regarding: >> currency exchange rate fluctuations; >> local and international economic and political conditions; >> disruptions of capital and trading markets; >> accounts receivable collection and longer payment cycles; >> difficulties in staffing and managing foreign operations; >> potential hostilities and changes in diplomatic and trade relationships; >> restrictive governmental actions (such as restrictions on the transfer or repatriation of funds and trade protection measures, including export duties and quotas and customs duties and tariffs); >> changes in legal or regulatory requirements; >> the laws and policies of Australia and other countries affecting trade, foreign investment and loans, and import or export licensing requirements; and >> tax laws. Changes in circumstances or market conditions resulting from these risks may restrict the Company or its subsidiaries’ ability to operate in an affected region and/or adversely affect the profitability of the Company or its subsidiaries’ operations in that region.
(K) THE COMPANY IS EXPOSED TO CHANGES IN ACCOUNTING STANDARDS Australian Accounting Standards are developed and implemented by the Australian Accounting Standards Board (AASB). The ASSB may introduce new or refined accounting standards, which may affect the measurement and recognition of balance sheet items and income statements, including revenue and receivables. Conversely, interpretations of existing Accounting Standards may differ. Changes to Accounting Standards issued by the ASSB or changes to generally held views about the application of such Accounting Standards may adversely affect the performance and position reported in the Company’s consolidated financial statements.
6.4 RISKS ASSOCIATED WITH SUBSIDIARIES OPERATING IN CHINA (A) POLITICAL, ECONOMIC AND SOVEREIGN RISKS As the Company’s subsidiaries will be operating in China, the subsidiaries will be subject to those risks associated with operating in a foreign jurisdiction. Such risks can include, economic, social or political instability or change, hyperinflation, currency non-convertibility or instability and changes of law affecting foreign ownership, government participation, taxation, working conditions, rates of exchange, exchange control, licensing, export duties, repatriation of income or return of capital, consumer health and safety, labour relations as well as government regulations that require the employment of local residents or contractors or require other benefits to be provided to local residents. While China is currently relatively stable, there is no certainty that the political and economic conditions will remain stable. Any deterioration in political or economic conditions, including hostilities or terrorist activity, may adversely affect the Company’s operations and profitability. There is a risk that the government of China may change its policies regarding foreign investment, which may impact the relationship between Shenzhen WANHA and Zhongshan WINHA, and therefore may have an adverse impact on the Company’s profitability.
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(B) CHINA LEGAL ENVIRONMENT Due to uncertainties in the China political and legal environment, the Company’s China subsidiaries may be exposed to political and legal risks, adversely affecting the viability of their operations in China and the purchase and on-sale of the WINHA Products. Although the China legal system is well-established, it may be less certain than legal systems in other countries. This uncertainty could lead to the following risks: >> Difficulties in obtaining effective legal redress for breaches of laws or regulations or in respect of property rights; >> Inconsistencies between and within laws, regulations, decrees, orders and resolutions, or uncertainty in the application of laws and regulations; >> Difficulties in enforcing foreign judgments and arbitral awards, particularly against state bodies; and >> Lack of jurisprudence and administrative guidance on the application of laws and regulations, particularly with respect to taxation and proprietary rights. Therefore, the Company may have difficulty in obtaining effective legal redress in circumstances where the Company or its subsidiaries are adversely affected by a breach of law or regulation.
(C) TRANSFER OF CASH According to China laws and regulations, in the event that the Company needs to finance its China operations in the future, it is able to provide funding by means of capital contributions to Shenzhen WANHA and/or loans to Zhongshan WINHA. These loans would be subject to applicable government registration and approval requirements. The Company may not be able to complete those registrations or obtain those government approvals on a timely basis, or at all. If the Company fails to complete such registrations or receive such approvals, its ability to finance its subsidiaries’ China operations may be negatively impacted, adversely affecting its subsidiaries’ liquidity and the Company’s ability to fund and expand its business. Current China regulations allow the Company’s subsidiaries to pay dividends to the Company, but this is subject to applicable regulatory requirements. Cash transfers from China subsidiaries to their parent companies outside China are subject to government control of currency conversion, and the Company may receive the majority or all of its revenues in RMB. Under the current corporate structure of the WINHA group, the Company’s income is primarily derived from its China subsidiaries. Under existing China foreign exchange regulations, payment of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currency without prior regulatory approval by complying with certain procedural requirements. As profit and dividends are current account items, the profit and dividends generated in China may be paid to shareholders outside China without prior approval, as long as the Company complies with certain procedural requirements. However, the China government also may, at its discretion, restrict access in the future to foreign currencies for current account transactions. If changes to the foreign exchange control system prevents the Company’s subsidiaries’ from obtaining sufficient foreign currency to satisfy their currency demands, they may not be able to pay dividends in foreign (non-RMB) currencies to the Company. Any inability to obtain the requisite approval for converting RMB into foreign currencies, any delays in obtaining such approval or future restrictions on currency exchange may restrict the ability of the Company’s China subsidiaries to remit sufficient foreign currency to pay dividends or other payments to the Company.
74 Winha Commerce and Trade International Ltd PROSPECTUS 06 RISK FACTORS / CONTINUED
(D) EMERGING MARKET ISSUER STATUS Pursuant to ASIC’s Report 368, ‘Emerging Market Issuers,’ (Report 368), the Company may be classified as an emerging market issuer, being an entity which has: >> material assets located in, or a revenue stream derived from operations in, an emerging market; >> subsidiaries incorporated in and/or listed in an emerging market; >> directors and senior management based offshore in an emerging market. In Report 368, ASIC identified risks associated with identification as an emerging market issuer, including implementation of good corporate governance in light of a geographically scattered board of directors and implementing effective internal controls and risk management systems where operations are geographically diverse. ASIC also noted that reliance on a small number of key individuals located outside Australia may raise the risk of substantial transactions benefiting those individuals. Finally, ASIC noted that it may be difficult for external professionals, such as auditors, to verify information or opinions provided by experts or professionals in an overseas jurisdiction. While the Company is in the process of implementing best-practice corporate governance, internal controls and risk management systems, some members of the Board of Directors are based in China, while others are based in Australia. While the Company anticipates that it will tailor its compliance arrangements to take this into account, the geographical diversity of the Company’s Board may render compliance with such systems more difficult. Similarly, while the Company will seek to minimise conflicts of interest, focusing on general directors’ duties and material personal interest voting restrictions, it may difficult to identify circumstances where directors are personally interested in a matter. Finally, while the Company intends to verify and robustly test the reliability of information, it may be difficult to fully assess the sufficiency and appropriateness of information provided.
(F) PROPOSED CHANGES TO PRC FOREIGN INVESTMENT LAWS On 19 January 2015, MOFCOM issued the Foreign Investment Draft Law (‘Draft Law’) for public comment. Pursuant to the Draft Law, the following material changes to Chinese foreign investment laws are contemplated: (a) Pursuant to the Draft Law, an entity will be treated as a foreign investment entity (‘FIE’) where foreign individuals hold de-facto control over the entity. Such control is evinced if: i. non-PRC individuals have decisive influence over the operations, personnel, finance or technology of the entity, whether such influence is via contractual arrangements, share investments or trust structures; ii. non-PRC individuals hold at least 50% of voting rights at the shareholder level, whether directly or indirectly; iii. if non-PRC individuals hold less than 50% of voting rights at shareholder level, but: A. over 50% of the seats of the board of directors of the entity (or similar decision-making body) are directly or indirectly appointed by non-PRC individuals, B. non-PRC individuals are able to nominate nominees to hold over 50% of the seats of the board of directors of the entity (or similar decision-making body); or C. the voting rights held by non-PRC individuals may carry a decisive influence over the board of directors of the entity (or similar decision-making body). If the criteria set out in (a) above are satisfied, the entity will be deemed to be a FIE and be subject to the Draft Law.
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(b) It is currently proposed that a list of restricted and prohibited industries will be circulated by the State Council of the PRC (‘Draft List’). FIEs cannot operate in prohibited industries, and FIEs which operate in restricted industries must obtain approval from MOFCOM. However, FIEs which do not operate in industries cited in the Draft List will no longer be required to obtain approval from MOFCOM but, rather, will simply be required to register their ownership status with MOFCOM. If the Draft Law is adopted in its current form, it is possible that Zhongshan WINHA will be deemed to be a FIE and therefore be subject to the Draft Law. As at the date of this Prospectus, the content of the Draft List is uncertain. If the Draft List adopts the categorisation of restricted and prohibited industries adopted in the 2015 Foreign Investment Catalogue, and Zhongshan WINHA is considered to be a FIE, Zhongshan WINHA will not be classified as operating in a restricted or prohibited industry under the Draft List, and will simply be required to register with MOFCOM. However, if the categories of restricted and prohibited industries in the Draft List diverge from those in the 2015 Foreign Investment Catalogue, it is possible that Zhongshan WINHA could be classified as operating within a restricted or prohibited industry under the Draft List. In the event that Zhongshan WINHA is treated as a FIE and the WINHA Business appears to be in the “restricted” or “prohibited” category of the Draft List, then Zhongshan WINHA may be required to cease operations in the business activity or segment prohibited under the Draft List or dispose of or restructure (through a joint venture or other arrangement required by the Draft List) the business activity or segment restricted under the Draft List.
(G) CLASSIFICATION AS RESIDENT ENTERPRISE OF CHINA In 2008, China passed a new Enterprise Income Tax Law (EIT Law). Under the 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 State Administration of Taxation of China (SAT), issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies (Notice) further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. In July 2011, the SAT issued the Administrative Measures for Enterprise Income Tax on Chinese-controlled Offshore Incorporated Resident Enterprises (Trial) on July 27, 2011 (Bulletin No. 45) to provide more guidance on the implementation of the Notice. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if: (a) its senior management in charge of daily operations perform their duties mainly in China; (b) its financial or personnel decisions are made or approved by bodies or persons in China; (c) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (d) at least half of its directors with voting rights or senior management often reside in China. Bulletin No. 45 provides clarification on the resident status determination, post-determination administration and competent tax authorities. It also specifies that when provided with a copy of PRC resident determination certificate from a Chinese- controlled offshore-incorporated resident enterprise, the payer should not withhold 10% income tax when paying certain Chinese-sourced income such as dividends, interest and royalties to the Chinese-controlled offshore-incorporated resident enterprise. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders.
76 Winha Commerce and Trade International Ltd PROSPECTUS 06 RISK FACTORS / CONTINUED
However, it remains unclear as to whether the Notice is applicable to an offshore enterprise controlled by a Chinese natural person. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case. If the China tax authorities determine that the Company is a “resident enterprise” for Chinese enterprise income tax purposes, a number of unfavourable Chinese tax consequences could follow. First, the Company and its China Subsidiaries may be subject to the enterprise income tax at a rate of 25% on their worldwide taxable income as well as Chinese enterprise income tax reporting obligations. This would mean that income such as non-Chinese source income would be subject to Chinese enterprise income tax at a rate of 25%. Second, under the EIT Law and its implementing rules, dividends paid to the Company from its China Subsidiaries would qualify as “tax-exempt income.” Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends the Company pays to non-China stockholders and with respect to gains derived by the Company on non-China stockholders from transferring its shares. The Board is actively monitoring the possibility of “resident enterprise” treatment and is evaluating appropriate organizational changes to avoid this treatment, to the extent possible. As at the date of this Prospectus, the China Subsidiaries are subject to China Enterprise Income Tax at 25%.
Winha Commerce and Trade International Ltd PROSPECTUS 77
07 FINANCIAL INFORMATION 07 FINANCIAL INFORMATION
7.1. HISTORY The Company was incorporated on 18 May 2015. In the period from incorporation to 30 June 2016, the Company has effected the following key transactions: >> The issue of convertible notes on 1 September 2015 for total consideration of $750,000; >> The issue of convertible notes on 17 December 2015 for total consideration of $6,750,000; and >> Reorganisation of the group structure which settled on 11 April 2016, which was also the acquisition date for accounting purposes, whereby the Company obtained control of C&V International Holdings Co Ltd (C&V International) and its subsidiaries, referred to as the ‘C&V Group’. The Company and the C&V Group have a balance date of 31 March, whereas, Flavours has a balance date of 30 June. For the purposes of preparing the financial information for the prospectus, the directors have used the reviewed 30 June 2016 financial information of the Company and the C&V Group. The financial information of Flavours was extracted from the audited financial reports. It is anticipated that Flavours will change its balance date post completion of the IPO in order to synchronise with the balance date of the Company. Further details of the Company’s history are set out below and in Section 2.
FOREIGN CURRENCY CONVERSION As the historical financial information of C&V Group is presented in USD, it has been converted and presented in Australian dollars (AUD), using the following exchange rates:
15/04/2013 3 MONTHS (INCEPTION) ENDED YEAR ENDED YEAR ENDED THROUGH AUD 1.00 = USD X.XXXX 30/06/16 31/03/2016 31/03/2015 31/03/2014
Average rate for the period (used for conversion of the consolidated statement of profit or loss and other comprehensive income) 0.7455 0.7364 0.8757 0.9291
Spot rate at period end (used for conversion of the consolidated statement of financial position) 0.7426 0.7657 0.7634 0.9221
7.2 FINANCIAL INFORMATION The financial information included in this Section 7 was prepared by management and was adopted by the Directors. The Directors are responsible for the inclusion of all financial information in this Prospectus. The bases of preparation are identified in the relevant sections.
7.3 HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF C&V GROUP The purpose of the ensuing section is to provide historical financial information about the C&V Group. All of the following historical financial information detailed in this Section 7.3 has been extracted from the consolidation workings used to prepare the audited financial statements for the past 3 financial periods ended 31 March 2016, 2015 and 2014 and reviewed interim financial statements for the 3 months ended 30 June 2016 of WINHA International Group, which has been prepared in accordance with the requirements of US GAAP and is converted from USD and presented in AUD. WINHA International Group’s auditors (“the US auditors”), issued unmodified audit opinions on the audited financial statements for the past 3 financial periods ended 31 March 2016, 2015 and 2014, and an unmodified review conclusion to the WINHA International Group in respect of the interim financial statements for the 3 months ended 30 June 2016. WINHA International Group’s US auditors, Wei, Wei & Co., LLP have given consent for their opinion being used in this Prospectus.
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Table 7.3.1 below provides a summary of the consolidated statement of financial position of C&V Group as at 30 June 2016.
TABLE 7.3.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
30-JUN-16 AUD
Current assets
Cash 35,717,913
Accounts receivable 2,040,564
Inventory 1,609,428
Advances to suppliers 119,300
Prepaid expenses 147,708
Total current assets 39,634,913
Non-current assets
Fixed assets 2,278,446
Intangible assets 58,360
Deferred tax asset 9,519
Total non-current assets 2,346,325
Total assets 41,981,238
Current liabilities
Accounts payable 196,638
Intercompany loan* 7,500,000
Advances from customers 1,689,321
Taxes payable 2,366,743
Accrued expenses 345,485
Loan from stockholders** 431,856
Total current liabilities 12,530,043
Net assets/(liabilities) 29,451,195
Equity
Paid up capital 12,581,046
Statutory reserve 1,736,873
Retained earnings 17,286,290
Other comprehensive income (2,153,014)
Total equity 29,451,195
* The amount is owing to the Company’s subsidiary and is at call and non-interest bearing. ** The amount is owing to a stockholder and is at call and non-interest bearing.
80 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
Table 7.3.2 below provides a summary of the consolidated statement of profit or loss and other comprehensive income of C&V Group for the past 3 financial periods ended 31 March 2016, 31 March 2015 and 31 March 2014 and for the 3 months ended 30 June 2016.
TABLE 7.3.2 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
AUD
15/4/2013 3 MONTHS (INCEPTION) ENDED YEAR ENDED YEAR ENDED THROUGH 30-JUN-16 31-MAR-16 31-MAR-15 31-MAR-14
Sales 18,669,127 57,635,096 10,304,490 107,364
Cost of sales 8,615,340 27,149,312 4,940,909 76,316
Gross profit 10,053,787 30,485,784 5,363,581 31,048
Gross Profit Margin 54% 53% 52% 29%
Operating expenses:
Selling and marketing 751,995 3,384,837 644,987 53,685
General and administrative 700,661 10,458,259 1,155,387 747,258
Financial expenses 12,801 52,933 2,286 2,793
Total operating expenses 1,465,457 13,896,029 1,802,660 803,736
Other income/(expense) 5,476 (101,166) (13,953) (423)
Income/(loss) before provision for (benefit from) income taxes 8,593,806 16,488,589 3,546,968 (773,111)
Provision for (benefit from) income taxes 2,053,847 6,168,288 844,499 –
Net income(loss) 6,539,959 10,320,301 2,702,469 (773,111)
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Table 7.3.3 below provides a summary of the consolidated statement of cash flows of C&V Group for the past 3 financial periods ended 31 March 2016, 31 March 2015 and 31 March 2014 and for the 3 months ended 30 June 2016.
TABLE 7.3.3 CONSOLIDATED STATEMENT OF CASH FLOWS
AUD
15/4/2013 3 MONTHS (INCEPTION) ENDED YEAR ENDED YEAR ENDED THROUGH 30-JUN-16 31-MAR-16 31-MAR-15 31-MAR-14
Cash flows from operating activities: Net (loss) income 6,539,959 10,320,301 2,702,469 (773,111) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 143,449 276,431 91,795 3,061 Decrease/(Increase) in accounts receivable (130,735) (233,107) (1,188,302) (221,658) Decrease/(increase) in inventory 441,044 1,490,625 (2,946,672) (44,402) Decrease/(increase) in advances to suppliers 84,021 98,858 (255,828) – Decrease/(Increase) in prepaid expenses 86,280 (38,683) (165,794) – Decrease/(Increase) in deferred tax assets 34,529 (44,555) – – Increase/(Decrease) increase in accounts payable (7,778) (131,285) 346,093 2,950 Decrease/(Increase) in deferred revenue – – (7,153) 6,742 Increase/(Decrease) in advances from customers 650,135 51,062 341,360 466,347 Increase/(Decrease) in taxes payable 98,771 1,634,125 549,396 – Increase/(Decrease) in accrued expenses 13,643 244,921 (131,417) 135,205 Net cash provided by/(used in) operating activities 7,953,318 13,668,693 (664,053) (424,866) Cash flows from investing activities: Payments for website expansion – (13,897) (36,873) (33,121) Purchase of fixed assets (3,038) (2,316,066) (475,923) (60,662) Advance from parent entity – 7,519,499 – – Net cash (used in)/provided by investing activities (3,038) 5,189,536 (512,796) (93,783) Cash flows from financing activities: Proceeds from non-controlling interest – – – 7,066 Purchase of non-controlling interest – – (7,409) – Additional capital contribution – 9,277,872 2,122,906 690,048 Proceeds from stockholder loan-net 138,675 549,933 82,480 – Payment to intercompany loan (31,379) (288,311) – (10,960) Net cash provided by financing activities 107,296 9,539,494 2,197,977 686,154 Effect of exchange rate changes on cash (482,056) (1,701,133) 256,407 763 Net change in cash 7,575,520 26,696,590 1,277,535 168,268 Cash, beginning of year/period 28,142,393 1,445,803 168,268 – Cash, end of year/period 35,717,913 28,142,393 1,445,803 168,268
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7.3.4 ANALYSIS OF US GAAP AND AAS The historical financial information outlined in Section 7.3 has been prepared in accordance with the requirements of US GAAP applicable to a company controlled by a company listed on the NASDAQ OTC. The US auditors provided unmodified audit opinions on the audited financial statements for the financial periods ended 31 March 2016, 31 March 2015 and 31 March 2014, and an unmodified review conclusion to the WINHA International Group in respect of the interim financial statements for the 3 months ended 30 June 2016. Management performed an analysis of the material variances which existed from applying US GAAP and AAS and did not identify any adjustments that needed to be made.
7.4 RELEVANT HISTORICAL FINANCIAL INFORMATION OF FLAVOURS As highlighted in section 2.1 of the prospectus, upon completion of the offer, the Company will acquire a 49% shareholding in Flavours. Accordingly, additional historical financial information about Flavours has been included. The ensuing section provides the historical financial information of Flavours as extracted from the audited financial statements of Flavours for the past 2 financial years ended 30 June 2016 and 30 June 2015. Flavours was incorporated on 31 October 2013 and did not commence trading until 1 July 2014, during this period there was no transactions, and therefore, financial information about Flavours for the period ended 30 June 2014 have not been included. The historical financial information has been prepared in accordance with the requirements of AAS. Flavours’ auditors, HLB Mann Judd (VIC Partnership) has issued an unmodified audit opinion on the audited financial statements, being a set of special purpose financial statements, for the years ended 30 June 2016 and 30 June 2015. The audit opinions both contained an emphasis of matter in respect of the application of the going concern basis of accounting and the basis of accounting. HLB Mann Judd (VIC Partnership) has given consent for their opinion being used in this Prospectus.
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STATEMENT OF FINANCIAL POSITION The table below provides a summary of Flavours’ historical statement of financial position as at 30 June 2016.
TABLE 7.4.1
AUD
AUDITED 30-JUN-16
Current assets
Cash 35,938
Accounts receivable 759,575
Prepaid expenses 7,500
Related party loans* 602,814
Total current assets 1,405,827
Non-current assets
Fixed assets 385,237
Total non-current assets 385,237
Total assets 1,791,064
Current liabilities
Accounts payable 1,688,750
Interest bearing liabilities 537,633
Total current liabilities 2,226,383
Non-current liabilities
Interest bearing liabilities 96,042
Total non-current liabilities 96,042
Total liabilities 2,322,425
Net assets/(liabilities) (531,361)
Equity
Paid up capital 2
Accumulated losses (531,363)
Total equity/(net deficiency) (531,361)
* related party loans are receivable from the shareholders and directors. These loans are non-interest bearing and is repayable at call.
84 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME The table below provides a summary of Flavours’ historical statement of profit or loss and other comprehensive income for the past 2 years ended 30 June 2016 and 30 June 2015.
TABLE 7.4.2
AUD
AUDITED AUDITED YEAR ENDED YEAR ENDED 30-JUN-16 30-JUN-15
Sales 9,735,754 9,046,888
Cost of sales 9,510,281 8,597,819
Gross profit 225,473 449,069
Operating expenses:
Selling and marketing 6,703 10,076
General and administrative 583,671 520,723
Financial expenses 73,126 11,606
Total operating expenses 663,500 542,405
Income/(loss) before provision for (benefit from) income taxes (438,027) (93,336)
Provision for (benefit from) income taxes – –
Net income(loss) (438,027) (93,336)
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STATEMENT OF CASH FLOWS The table below provides a summary of Flavours’ historical statement of cash flows for the past 2 years ended 30 June 2016 and 30 June 2015.
TABLE 7.4.3
AUD
AUDITED AUDITED YEAR ENDED YEAR ENDED 30-JUN-16 30-JUN-15
Cash flows from operating activities:
Receipts from customers 9,824,050 8,199,018
Payments to suppliers and employees (9,068,217) (7,213,934)
Finance costs (73,126) (11,606)
Net cash provided by (used in) operating activities 682,707 973,478
Cash flows from investing activities:
Purchase of fixed assets (16,086) (39,073)
Net cash (used in) investing activities (16,086) (39,073)
Cash flows from financing activities:
Proceeds from external borrowing 3,057,106 0
Repayment of external borrowing (2,552,903) 0
Loans advanced to related parties (1,079,883) (989,410)
Net cash provided by (used in) financing activities (575,680) (989,410)
Net change in cash 90,941 (55,005)
Cash, beginning of year (55,003) 2
Cash, end of year 35,938 (55,003)
86 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
7.5 REVIEWED HISTORICAL AND PRO-FORMA FINANCIAL INFORMATION OF THE COMPANY AND ITS SUBSIDIARIES (THE GROUP)
BASIS OF PREPARATION Unless otherwise stated all of the financial information included in this Section 7.5 has been prepared in accordance with the measurement and recognition criteria (but not the disclosure requirements) of Australian Accounting Standards (AAS) and the proposed summary of significant accounting policies outlined in Section 7.7. The financial information is presented in an abbreviated form in so far as it does not include all the disclosures and notes required in an annual financial report prepared in accordance with AAS and the Corporations Act. The Company’s historical financial information for the period ended 31 March 2016 has been audited by HLB Mann Judd (Vic Partnership) who have issued an unmodified audit opinion with an emphasis of matter in respect of applying the going concern basis. The financial information contained in this section 7.5 has been reviewed by HLB Mann Judd Corporate Finance Pty Ltd as set out in the Investigating Accountant’s Report (IAR) in Section 8. Investors should note the scope and limitations of the IAR.
7.5.1 REVIEWED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY The reviewed historical financial information of the Company and its subsidiaries as at 30 June 2016 has been prepared in accordance with the measurement and recognition criteria (but not the disclosure requirements) of AAS and the proposed summary of significant accounting policies outlined in Section 7.7.
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STATEMENT OF FINANCIAL POSITION The table below provides a summary of the Company’s historical statement of financial position as at 30 June 2016 and 31 March 2016.
TABLE 7.5.1.1
AUD
GROUP PARENT 30-JUN-16 31-MAR-16
Current assets Cash 35,783,513 – Accounts receivable 2,043,858 2,198 Inventory 1,609,428 – Advances to suppliers 119,300 – Prepaid expenses 147,708 65,500 Intercompany loan* – 7,500,000 Total current assets 39,703,807 7,567,698 Non-current assets Fixed assets 2,278,446 – Intangible assets 58,360 – Deferred tax asset 9,519 – Total non-current assets 2,346,325 – Total assets 42,050,132 7,567,698 Current liabilities Accounts payable 218,232 43,494 Convertible debt 7,754,836 7,642,644 Advances from customers 1,689,321 – Taxes payable 2,366,743 – Accrued expenses 357,985 – Loan from stockholders 771,516 299,771 Total current liabilities 13,158,633 7,985,909 Net assets/(liabilities) 28,891,499 (418,211) Equity Paid up capital 10 10 Statutory reserve 1,736,873 – Retained earnings 5,727,509 (418,221) Other reserve** 22,303,375 – Other comprehensive income (876,268) – Total equity 28,891,499 (418,211)
88 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
* interest free loan to one of the Company’s PRC subsidiaries. ** as outlined in section 7.1, the reorganisation of the group structure was determined to meet the definition of a transaction between entities under common control as outlined in AASB 3. It was accounted for as such, whereby the variance between the purchase consideration paid and the net assets acquired was recognised in other reserve on consolidation as follows:
Purchase consideration paid $66
Net assets at date of acquisition $23,386,136
Excess of net assets over purchase consideration paid, recognised as follows: $23,386,070
– Other reserve $22,303,375
– Statutory reserve $1,082,695
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME The table below provides a summary of the Company’s historical statement of profit or loss and other comprehensive income for the past 2 periods ended 30 June 2016 and 31 March 2016.
TABLE 7.5.1.2
AUD
GROUP PARENT 3 MONTHS PERIOD ENDED ENDED 30-JUN-16 31-MAR-16
Sales 18,669,127 –
Cost of sales 8,615,340 –
Gross profit 10,053,787 –
Gross Profit Margin 54% N/A
Operating expenses:
Selling and marketing 751,995 –
General and administrative 729,955 277,159
Financial expenses 124,993 146,974
Total operating expenses 1,606,943 424,133
Other income/(expense) 5,476 5,912
Income/(loss) before provision for (benefit from) income taxes 8,452,320 (418,221)
Provision for (benefit from) income taxes 2,053,847 –
Net income/(loss) 6,398,473 (418,221)
Winha Commerce and Trade International Ltd PROSPECTUS 89 07 FINANCIAL INFORMATION / CONTINUED
STATEMENT OF CASH FLOWS The table below provides a summary of the Company’s historical statement of cash flows for the past 2 periods ended 30 June 2016 and 31 March 2016.
TABLE 7.5.1.3
AUD
GROUP PARENT 3 MONTHS PERIOD ENDED ENDED 30-JUN-16 31-MAR-16
Cash flows from operating activities:
Receipts from customers 19,188,527 –
Payments to suppliers and employees (9,241,737) (301,353)
Interest received 5,476 –
Finance costs (12,801) (4,330)
Income tax (paid)/refunded (1,920,547) –
Net cash provided by (used in) operating activities 8,018,918 (305,683)
Cash flows from investing activities:
Purchase of fixed assets (3,038) –
Net cash (used in) investing activities (3,038) –
Cash flows from financing activities:
Proceeds from convertible debt – 7,500,000
Proceeds from stockholder loan-net 138,675 305,683
Loans advanced to intercompany – (7,500,000)
Deferred registration costs (31,379) –
Cash acquired on re-organisation of C&V Group 28,142,393 –
Net cash provided by financing activities 28,249,689 305,683
Effect of exchange rate changes on cash (482,056) –
Net change in cash 35,783,513 –
Cash, beginning of year/period – –
Cash, end of year/period 35,783,513 –
90 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
7.5.2 REVIEWED PRO-FORMA HISTORICAL FINANCIAL INFORMATION OF THE GROUP The pro-forma historical statement of financial position as at 30 June 2016 and the accompanying notes set out below, have been prepared to illustrate the financial position of the Group, following completion of the Offer and the transactions outlined below. While the transactions occurred post 30 June 2016, they have been accounted for as if they had occurred on 30 June 2016. 1) On 13 July 2016, the Company repaid the convertible debt outstanding as at 30 June 2016, along with accrued interest of $16,027 up to the date of repayment. 2.1) Land leases – subsequent to 1 July 2016, one of the Company’s subsidiaries (Zhongshan WINHA) entered into 41 orchard land tenure agreements as outlined in Section 2.7 of the Prospectus. The key financial terms of the orchard land tenure agreements are: i) 10 year lease term with the land to be used for crop planting, with Zhongshan WINHA having exclusive use of the land rented; ii) Zhongshan WINHA shall pay for the crops already planted on the lands with such crop belonging to Zhongshan WINHA; iii) Zhongshan WINHA shall pay 3 years’ rent and the purchase price of the crop within 30 days of execution of contract. The value of the payments made up to 30 September 2016 totalled RMB 94,724,017 or AUD equivalent of $18,733,119, converted using the average exchange rate from 1 July 2016 – 30 September 2016 of 5.0565 RMB, of which $12,435,277 AUD relates to the payment for seedlings and is recognised as biological assets and $6,297,842 AUD relates to the prepayment for land rent, of which $2,099,281 AUD is recognised in current prepaid expenses and $4,198,561 is recognised in non-current prepaid expenses. 2.2) Farm Management Agreements – subsequent to 1 July 2016, one of the Company’s subsidiaries (Zhongshan WINHA) entered into 41 farm management agreements as outlined in Section 9 of the Prospectus. The key financial terms of the farm management agreements are: i) Zhongshan WINHA shall be responsible for outgoings such as water and electricity, and the purchase of fertilisers and pesticides; ii) Zhongshan WINHA shall pay labour costs and general expenses for the first year upfront within 15 days of execution of the contract. The value of the prepayment made up to 30 September 2016 totalled RMB 7,248,899 or AUD equivalent of $1,433,578, converted using the average exchange rate from 1 July 2016 – 30 September 2016 of 5.0565 RMB. The prepayment is recognised in current assets. 2.3) Farm land tenure agreement – subsequent to 1 July 2016, one of the Company’s subsidiaries (Zhongshan WINHA) entered into 10 farm land Tenure agreements as outlined in Section 2.8 of the Prospectus. The key financial terms of the Farm Land Tenure Agreements are: i) 12 months lease term with the land to be used for crop planting; ii) Zhongshan WINHA shall be entitled to the crops produced and shall pay for outgoings including greenhouse construction, fertiliser and pesticides, water and electricity, labour and maintenance; iii) Zhongshan WINHA shall pay 12 month rent and the estimated outgoings to the lessor in full within 30 days of execution of contract. The value of the prepayment made up to 30 September 2016 totalled RMB 4,807,247 or AUD equivalent of $950,706, converted using the average exchange rate from 1 July 2016 – 30 September 2016 of 5.0565 RMB. The repayment is recognised in current assets. 3) Outsource Agreement – subsequent to 1 July 2016, one of the Company’s subsidiaries (Zhongshan WINHA) entered into agreements to outsource the operation of the 6 retail stores owned by Zhongshan WINHA as outlined in Section 2.4 of the Prospectus. The key financial terms of the outsource agreements are: i) 12 month terms with Zhongshan WINHA being the sole supplier and the store operators are prohibited from selling any products apart from WINHA Products; ii) all inventories held in the retail stores are sold to the store operators at wholesale price on the date of execution of contract; iii) operating lease obligations for the retail stores were terminated; and iv) the store operators will have the right to use the existing fixed assets owned by Zhongshan WINHA at no additional costs. The outsource agreements result in sales of RMB 3,234,160 or AUD equivalent of $639,604 with a total cost of the inventory sold of RMB 2,216,815 or AUD equivalent of $438,409, converted using the average exchange rate from 1 July 2016 – 30 September 2016 of 5.0565 RMB.
Winha Commerce and Trade International Ltd PROSPECTUS 91 07 FINANCIAL INFORMATION / CONTINUED
4) As outlined in section 2.1 of the prospectus, the Company has entered into an agreement to subscribe for 1,000,000 secured convertible notes in Flavours with a face value of $1 per note, such notes convertible to shares constituting 16.3% of Flavours’ issued share capital. Upon gaining in-principle approval for admission from the ASX, the Company will also purchase shares constituting 9.8% of Flavours for consideration of $600,000 and subscribe for shares constituting 22.9% of Flavours for consideration of $1,400,000. By this transaction, the Company will acquire a 49% shareholding in Flavours for a total consideration of $3,000,000. In addition, a call option agreement between the Company, Flavours and the Flavours’ vendor was executed whereby for a consideration of $1 paid by the Company to each of Flavours’ vendors, each of Flavours’ vendor’s granted the Company a call option over 255 ordinary shares in Flavours held by Flavours’ vendors’ (option shares). The call option may be exercised over the option shares in the period from 1 April 2019 to 30 June 2019 by making a payment of a total purchase price calculated at 8x Flavours’ financial year 2019 net profit after tax. In light of the options agreement, whereby the call option can only be exercised in the period from 1 April 2019 to 30 June 2019, the Company has also considered the shareholder agreement and Flavours’ constitution and concluded that it does not have control over Flavours as at 30 June 2016. To this end, the 49% equity interest in Flavours has been accounted for in accordance with the accounting policy noted in 7.7(k), on the basis that the Company had received in-principle approval for admission from the ASX as at 30 June 2016. 5) Issuing a minimum of 20,000,000 shares or up to a maximum of 28,571,428 shares at $0.35 to raise a minimum of $7 million or up to a maximum of $10 million before costs. The expenses associated with the offer would range between $602,950 and $888,600 as outlined in section 7.6 below. This pro forma historical Consolidated Statement of Financial Position is intended to be illustrative only and will not reflect the actual position and balances as at the date of this Prospectus or at the conclusion of the Offer.
92 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
TABLE 7.5.2.1 PRO FORMA HISTORICAL CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016
IMPACT OF OFFER PRO FORMA TOTAL REVIEWED PRO FORMA 30-JUN-16 TRANSACTIONS MIN MAX MIN MAX
Current assets
Cash at bank(i) 35,783,513 (31,248,662) 6,397,050 9,111,400 10,931,901 13,646,251
Accounts receivable 2,043,858 – – – 2,043,858 2,043,858
Inventory(ii) 1,609,428 (438,409) – – 1,171,019 1,171,019
Advances to suppliers 119,300 – – – 119,300 119,300
Prepaid expenses(iii) 147,708 4,483,565 – – 4,631,273 4,631,273
Total current assets 39,703,807 (27,203,506) 6,397,050 9,111,400 18,897,351 21,611,701
Non-current assets
Fixed assets 2,278,446 – – – 2,278,446 2,278,446
Prepaid expenses(iii) – 4,198,561 – – 4,198,561 4,198,561
Intangible assets 58,360 – – – 58,360 58,360
Investment in associate(iv) – 3,000,000 – – 3,000,000 3,000,000
Biological assets(v) – 12,435,277 – – 12,435,277 12,435,277
Deferred tax asset 9,519 – – – 9,519 9,519
Total non-current assets 2,346,325 19,633,838 – – 21,980,163 21,980,163
Total assets 42,050,132 (7,569,668) 6,397,050 9,111,400 40,877,514 43,591,864
Current liabilities
Accounts payable 218,232 – – – 218,232 218,232
Convertible debt(vi) 7,754,836 (7,754,836) – – – –
Advances from customers 1,689,321 – – – 1,689,321 1,689,321
Taxes payable 2,366,743 – – – 2,366,743 2,366,743
Accrued expenses 357,985 – – – 357,985 357,985
Related party loans* 771,516 – – – 771,516 771,516
Total current liabilities 13,158,633 (7,754,836) – – 5,403,797 5,403,797
Net Assets/(liabilities) 28,891,499 185,168 6,397,050 9,111,400 35,473,717 38,188,067
Equity
Paid up capital(vii) 10 – 6,577,935 9,377,980 6,577,945 9,377,990
Statutory reserve 1,736,873 – – – 1,736,873 1,736,873
Retained earnings(viii) 5,727,509 185,168 (180,885) (266,580) 5,731,792 5,646,097
Other reserve 22,303,375 – – – 22,303,375 22,303,375
Other comprehensive income (876,268) – – – (876,268) (876,268)
Total equity 28,891,499 185,168 6,397,050 9,111,400 35,473,717 38,188,067
* The amount is owing to a stock holder and is at call and non-interest bearing.
Winha Commerce and Trade International Ltd PROSPECTUS 93 07 FINANCIAL INFORMATION / CONTINUED
NOTES TO PRO FORMA
PRO FORMA
MIN MAX
I) CASH AT BANK
Opening balance 35,783,513 35,783,513
Repayment of convertible note (7,770,863) (7,770,863)
Prepayment on land lease agreements (18,733,119) (18,733,119)
Prepayment on the farm management (1,433,578) (1,433,578)
Prepayment on the farm land tenure (950,706) (950,706)
Sale of inventory under outsource agreement 639,604 639,604
Flavours acquisition (3,000,000) (3,000,000)
Impact of the offer 7,000,000 10,000,000
Expense of the offer (602,950) (888,600)
Closing balance 10,931,901 13,646,251
II) INVENTORY
Opening balance 1,609,428 1,609,428
Sale of inventory under outsource agreement (438,409) (438,409)
Closing balance 1,171,019 1,171,019
III) PREPAID EXPENSES
Current
Opening balance 147,708 147,708
Land lease agreements 2,099,281 2,099,281
Farm management 1,433,578 1,433,578
Farm land tenure 950,706 950,706
Closing balance 4,631,273 4,631,273
Non-current
Opening balance – –
Land lease agreements 4,198,561 4,198,561
Closing balance 4,198,561 4,198,561
94 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
PRO FORMA
MIN MAX
IV) INVESTMENT IN ASSOCIATE
Opening balance – –
Acquisition of 49% interest in Flavours 3,000,000 3,000,000
Closing balance 3,000,000 3,000,000
V) BIOLOGICAL ASSETS
Opening balance – –
Purchase of seedlings 12,435,277 12,435,277
Closing balance 12,435,277 12,435,277
VI) CONVERTIBLE NOTES
Opening balance 7,754,836 7,754,836
Interest accrued 16,027 16,027
Repayment of convertible notes (7,770,863) (7,770,863)
Closing balance – –
VII) PAID UP CAPITAL
Opening balance 10 10
Impact of the offer 7,000,000 10,000,000
Expense of the offer (net of tax effect) (422,065) (622,020)
Closing balance 6,577,945 9,377,990
VIII) RETAINED EARNINGS
Opening balance 5,727,509 5,727,509
Interest expense of convertible note (16,027) (16,027)
Sale of inventory under outsource agreement (net of PRC tax) 201,195 201,195
Deferred tax expensed (180,885) (266,580)
Closing balance 5,731,792 5,646,097
Winha Commerce and Trade International Ltd PROSPECTUS 95 07 FINANCIAL INFORMATION / CONTINUED
7.6 EXPENSES OF THE OFFER The expenses of the Offer are estimated below, according to the amount of funds raised under the Offer:
MINIMUM MAXIMUM PROCEEDS FROM PROSPECTUS $7 MILLION $10 MILLION
Capital Raising Costs 225,000 495,000
Legal Fees associated with Offer:
Australian Legal Fees 120,000 120,000
Chinese Legal Fees 42,600 42,600
Accounting Fees associated with Offer:
Australian Accounting Fees 70,000 70,000
United States Accounting Fees 25,500 25,500
ASX Fees 50,000 65,650
ASIC Fees 2,350 2,350
Printing and Postage 55,000 55,000
Share Registry Fees 2,500 2,500
Listing Ceremony 10,000 10,000
Total Estimated Gross Expenses of the Offer 602,950 888,600
Deferred tax asset expensed (180,885) (266,580)
Total Estimated Expenses of the Offer (net of tax) 422,065 622,020
7.7 PROPOSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies which have been adopted in the preparation of the reviewed historical Statement of Financial Position and the pro-forma Statements of Financial Position as set out in Section 7.5 is set out as follows:
(A) BASIS OF PREPARATION The reviewed historic Statement of Financial Position and pro-forma Statement of Financial Position have been prepared in accordance with Australian Accounting Standards, Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act (as modified for inclusion in the Prospectus). Australian Accounting Standards set out accounting policies that the Australian Accounting Standards Board have concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions to which they apply. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards. The financial information presented in the Prospectus is presented in an abbreviated form and does not contain all the disclosures that are usually provided in an annual report prepared in accordance with the Corporations Act. The pro-forma statement of financial position has been prepared on the basis of assumptions outlined in Section 7.5.2.
96 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
The reviewed historical Statement of Financial Position and pro-forma Statements of Financial Position have been prepared on an accrual basis and are based on historical costs, modified where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. The reviewed historical and pro-forma Statement of Financial Position have been prepared for the Group comprising the Company and its controlled entities. The Company is a public company limited by shares incorporated and domiciled in Australia.
(B) PRINCIPLES OF CONSOLIDATION The consolidated financial statements incorporate all of the assets, liabilities and results of the Company and all of its subsidiaries. Subsidiaries are entities the parent controls. The parent controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. A list of the subsidiaries is outlined in Section 2.1 Company Background and Structure. The assets, liabilities and results of all subsidiaries are fully consolidated into the financial statements of the Group from the date on which control is obtained by the Group. The consolidation of a subsidiary is discontinued from the date that control ceases. Intercompany transactions, balances and unrealised gains or losses on transactions between group entities are fully eliminated on consolidation. Accounting policies of subsidiaries have been changed and adjustments made where necessary to ensure uniformity of the accounting policies adopted by the Group. Equity interests in a subsidiary not attributable, directly or indirectly, to the Group are presented as “non-controlling interests”. The Group initially recognises non-controlling interests that are present ownership interests in subsidiaries and are entitled to a proportionate share of the subsidiary’s net assets on liquidation at either fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net assets. Subsequent to initial recognition, non-controlling interests are attributed their share of profit or loss and each component of other comprehensive income. Non-controlling interests are shown separately within the equity section of the statement of financial position and statement of comprehensive income. The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the group. A change in ownership interest results in an adjustment between the carrying amount of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and the consideration paid or received is recognised in a separate reserve within the equity attributable to owners of the Company.
(C) BUSINESS COMBINATIONS Business combinations occur where an acquirer obtains control over one or more businesses. A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The business combination is accounted for from the date that control is attained, whereby the fair value of the identifiable assets acquired and liabilities (including contingent liabilities) assumed is recognised (subject to certain limited exceptions). As the ultimate controlling party prior to the WINHA Group Restructure, remained the ultimate controlling party of the group post acquisition, these transactions are deemed to be between entities under common control. As a ‘transaction between entities under common control’ the acquisition does not meet the definition of a business combination as per AASB 3 Business Combinations. As a result, the Company has incorporated the assets and liabilities of the entities acquired at their pre-combination carrying amounts without fair value uplift. This accounting is applied on the basis that there has been no substantive economic change. No goodwill has been recorded as part of the transaction, instead, any difference between the cost of the transaction and the carrying value of the net assets acquired has been recorded in equity (other reserve).
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(D) INCOME TAX The income tax expense (income) for the year comprises current income tax expense (income) and deferred tax expense (income). Current income tax expense charged to profit or loss is the tax payable on taxable income. Current tax liabilities (assets) are measured at the amounts expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses. Current and deferred income tax expense (income) is charged or credited outside profit or loss when the tax relates to items that are recognised outside profit or loss. Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. With respect to non-depreciable items of property, plant and equipment measured at fair value and items of investment property measured at fair value, the related deferred tax liability or deferred tax asset is measured on the basis that the carrying amount of the asset will be recovered entirely through sale. When an investment property that is depreciable is held by the company in a business model whose objective is to consume substantially all of the economic benefits embodied in the property through use over time (rather than through sale), the related deferred tax liability or deferred tax asset is measured on the basis that the carrying amount of such property will be recovered entirely through use. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Where temporary differences exist in relation to investments in subsidiaries, branches, associates and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (a) a legally enforceable right of set-off exists; and (b) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities, where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. The income tax laws of various overseas jurisdictions in which the Company and its controlled entities operate are summarised as follows:
BVI C&V International Holdings Company Limited is incorporated in the BVI and is governed by the income tax laws of the BVI. According to current BVI income tax law, the applicable income tax rate for the Company is 0%.
HONG KONG WINHA International Investment Holdings Company Limited is incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.
PRC Shenzhen WANHA, WINHA Catering, Zhongshan WINHA and Zhongshan Supermarket are subject to an Enterprise Income Tax at 25% and each files its own tax return.
98 Winha Commerce and Trade International Ltd PROSPECTUS 07 FINANCIAL INFORMATION / CONTINUED
(E) FAIR VALUE OF ASSETS AND LIABILITIES The Group measures some of its assets and liabilities at fair value on either a recurring or non-recurring basis, depending on the requirements of the applicable Accounting Standard. Fair value is the price the Group would receive to sell an asset or would have to pay to transfer a liability in an orderly (i.e. unforced) transaction between independent, knowledgeable and willing market participants at the measurement date. As fair value is a market-based measure, the closest equivalent observable market pricing information is used to determine fair value. Adjustments to market values may be made having regard to the characteristics of the specific asset or liability. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. To the extent possible, market information is extracted from either the principal market for the asset or liability (i.e. the market with the greatest volume and level of activity for the asset or liability) or, in the absence of such a market, the most advantageous market available to the entity at the end of the reporting period (i.e. the market that maximises the receipts from the sale of the asset or minimises the payments made to transfer the liability, after taking into account transaction costs and transport costs). For non-financial assets, the fair value measurement also takes into account a market participant’s ability to use the asset in its highest and best use or to sell it to another market participant that would use the asset in its highest and best use. The fair value of liabilities and the entity’s own equity instruments (excluding those related to share-based payment arrangements) may be valued, where there is no observable market price in relation to the transfer of such financial instrument, by reference to observable market information where such instruments are held as assets. Where this information is not available, other valuation techniques are adopted and, where significant, are detailed in the respective note to the financial statements.
(F) INVENTORIES Inventories are measured at the lower of cost and net realisable value. The cost of manufactured products includes direct materials, direct labour and an appropriate proportion of variable and fixed overheads. Overheads are applied on the basis of normal operating capacity. Costs are assigned on the basis of weighted average costs.
(G) PROPERTY, PLANT AND EQUIPMENT Each class of property, plant and equipment is carried at cost or fair value as indicated less, where applicable, any accumulated depreciation and impairment losses.
PLANT AND EQUIPMENT Plant and equipment are measured on the cost basis and are therefore carried at cost less accumulated depreciation and any accumulated impairment losses. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised either in profit or loss or as a revaluation decrease if the impairment losses relate to a revalued asset. A formal assessment of recoverable amount is made when impairment indicators are present (refer to Note 7.7(j) for details of impairment). The cost of fixed assets constructed within the consolidated group includes the cost of materials, direct labour, borrowing costs and an appropriate proportion of fixed and variable overheads. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised as expenses in profit or loss in the financial period in which they are incurred.
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DEPRECIATION The depreciable amount of all fixed assets, including capitalised lease assets, is depreciated on a straight-line basis over the asset’s useful life to the consolidated group commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The depreciation rates used for each class of depreciable assets are:
CLASS OF FIXED ASSET USEFUL LIFE
Furniture and Fixtures 3-5 years
Computer Equipment 5 years
Leasehold improvements Over the shorter of the remaining term of the lease or the useful life of the improvements
Motor vehicles 5-10 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses are recognised in profit or loss when the item is derecognised. When revalued assets are sold, amounts included in the revaluation surplus relating to that asset are transferred to retained earnings.
(H) LEASES Leases of fixed assets, where substantially all the risks and benefits incidental to the ownership of the asset – but not the legal ownership – are transferred to entities in the consolidated group, are classified as finance leases. Finance leases are capitalised by recognising an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term. Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are recognised as expenses on a straight-line basis over the lease term. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term.
(I) FINANCIAL INSTRUMENTS INITIAL RECOGNITION AND MEASUREMENT Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions of the instrument. For financial assets, this is equivalent to the date that the Group commits itself to either purchase or sell the asset (i.e. trade date accounting is adopted). Financial instruments are initially measured at fair value plus transaction costs, except where the instrument is classified “at fair value through profit or loss”, in which case transaction costs are recognised as expenses in profit or loss immediately.
CLASSIFICATION AND SUBSEQUENT MEASUREMENT Financial instruments are subsequently measured at fair value, amortised cost using the effective interest method, or cost. Where available, quoted prices in an active market are used to determine fair value. In other circumstances, valuation techniques are adopted.
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Amortised cost is calculated as the amount at which the financial asset or financial liability is measured at initial recognition less principal repayments and any reduction for impairment, and adjusted for any cumulative amortisation of the difference between that initial amount and the maturity amount calculated using the effective interest method. The effective interest method is used to allocate interest income or interest expense over the relevant period and is equivalent to the rate that exactly discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) through the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying amount with a consequential recognition of an income or expense item in profit or loss. The Group does not designate any interests in subsidiaries, associates or joint ventures as being subject to the requirements of Accounting Standards specifically applicable to financial instruments. Accordingly, such interests are accounted for on a cost basis.
(I) FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets are classified at “fair value through profit or loss” when they are held for trading for the purpose of short-term profit taking, derivatives not held for hedging purposes, or when they are designated as such to avoid an accounting mismatch or to enable performance evaluation where a group of financial assets is managed by key management personnel on a fair value basis in accordance with a documented risk management or investment strategy. Such assets are subsequently measured at fair value with changes in carrying amount being included in profit or loss.
(II) LOANS AND RECEIVABLES Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Gains or losses are recognised in profit or loss through the amortisation process and when the financial asset is derecognised.
(III) HELD-TO-MATURITY INVESTMENTS Held-to-maturity investments are non-derivative financial assets that have fixed maturities and fixed or determinable payments, and it is the Group’s intention to hold these investments to maturity. They are subsequently measured at amortised cost. Gains or losses are recognised in profit or loss through the amortisation process and when the financial asset is derecognised.
(IV) AVAILABLE-FOR-SALE INVESTMENTS Available-for-sale investments are non-derivative financial assets that are either not capable of being classified into other categories of financial assets due to their nature or they are designated as such by management. They comprise investments in the equity of other entities where there is neither a fixed maturity nor fixed or determinable payments. They are subsequently measured at fair value with any remeasurements other than impairment losses and foreign exchange gains and losses recognised in other comprehensive income. When the financial asset is derecognised, the cumulative gain or loss pertaining to that asset previously recognised in other comprehensive income is reclassified into profit or loss. Available-for-sale financial assets are classified as non-current assets when they are not expected to be sold within 12 months after the end of the reporting period. All other available-for-sale financial assets are classified as current assets.
(V) FINANCIAL LIABILITIES Non-derivative financial liabilities other than financial guarantees are subsequently measured at amortised cost. Gains or losses are recognised in profit or loss through the amortisation process and when the financial liability is derecognised.
IMPAIRMENT At the end of each reporting period, the Group assesses whether there is objective evidence that a financial asset has been impaired. A financial asset (or a group of financial assets) is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events (a “loss event”) having occurred, which has an impact on the estimated future cash flows of the financial asset(s).
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In the case of available-for-sale financial assets, a significant or prolonged decline in the market value of the instrument is considered to constitute a loss event. Impairment losses are recognised in profit or loss immediately. Also, any cumulative decline in fair value previously recognised in other comprehensive income is reclassified into profit or loss at this point. In the case of financial assets carried at amortised cost, loss events may include: indications that the debtors or a group of debtors are experiencing significant financial difficulty, default or delinquency in interest or principal payments; indications that they will enter bankruptcy or other financial reorganisation; and changes in arrears or economic conditions that correlate with defaults. For financial assets carried at amortised cost (including loans and receivables), a separate allowance account is used to reduce the carrying amount of financial assets impaired by credit losses. After having taken all possible measures of recovery, if management establishes that the carrying amount cannot be recovered by any means, at that point the written-off amounts are charged to the allowance account or the carrying amount of impaired financial assets is reduced directly if no impairment amount was previously recognised in the allowance account. When the terms of financial assets that would otherwise have been past due or impaired have been renegotiated, the Group recognises the impairment for such financial assets by taking into account the original terms as if the terms have not been renegotiated so that the loss events that have occurred are duly considered.
(J) IMPAIRMENT OF ASSETS At the end of each reporting period, the Group assesses whether there is any indication that an asset may be impaired. The assessment will include considering external sources of information and internal sources of information, including dividends received from subsidiaries, associates or joint ventures deemed to be out of pre-acquisition profits. If such an indication exists, an impairment test is carried out on the asset by comparing the recoverable amount of the asset, being the higher of the asset’s fair value less costs of disposal and value in use to the asset’s carrying amount. Any excess of the asset’s carrying amount over its recoverable amount is recognised immediately in profit or loss, unless the asset is carried at a revalued amount in accordance with another Standard (e.g. in accordance with the revaluation model in AASB 116: Property, Plant and Equipment). Any impairment loss of a revalued asset is treated as a revaluation decrease in accordance with that other Standard. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Impairment testing is performed annually for goodwill and intangible assets with indefinite lives.
(K) INVESTMENT IN ASSOCIATES An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the entity but is not control or joint control of those policies. Investments in associates are accounted for in the consolidated financial statements by applying the equity method of accounting, whereby the investment is initially recognised at cost (including transaction costs) and adjusted thereafter for the post-acquisition change in the Group’s share of net assets of the associate. In addition, the Group’s share of the profit or loss of the associate is included in the Group’s profit or loss. The carrying amount of the investment includes, when applicable, goodwill relating to the associate. Any discount on acquisition, whereby the Group’s share of the net fair value of the associate exceeds the cost of investment, is recognised in profit or loss in the period in which the investment is acquired. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the associate. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group discontinues recognising its share of further losses unless it has incurred legal or constructive obligations or made payments on behalf of the associate. When the associate subsequently makes profits, the Group will resume recognising its share of those profits once its share of the profits equals the share of the losses not recognised.
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(L) FOREIGN CURRENCY TRANSACTIONS AND BALANCES FUNCTIONAL AND PRESENTATION CURRENCY The functional currency of each group entity is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars, which is the parent entity’s functional and presentation currency. The primary economic environment in which the Company’s subsidiaries operate (i.e. the economic environment in which an entity generates and expends cash) is China. Accordingly, the functional currency of the Group is Chinese Renminbi (RMB).
TRANSACTIONS AND BALANCES Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. Exchange differences arising on the translation of monetary items are recognised in profit or loss, except where deferred in equity as a qualifying cash flow or net investment hedge. Exchange differences arising on the translation of non-monetary items are recognised directly in other comprehensive income to the extent that the underlying gain or loss is directly recognised in other comprehensive income, otherwise the exchange difference is recognised in profit or loss.
GROUP COMPANIES The financial results and position of foreign operations whose functional currency is different from the Group’s presentation currency are translated as follows: >> assets and liabilities are translated at year-end exchange rates prevailing at that reporting date; >> income and expenses are translated at average exchange rates for the period; and >> retained earnings are translated at the exchange rates prevailing at the date of the transaction. Exchange differences arising on translation of foreign operations are transferred directly to the Group’s foreign currency translation reserve in the statement of financial position via other comprehensive income. The cumulative amount of these differences is reclassified into profit or loss in the period in which the operation is disposed of.
(M) EMPLOYEE BENEFITS SHORT-TERM EMPLOYEE BENEFITS Provision is made for the Group’s obligation for short-term employee benefits. Short-term employee benefits are benefits (other than termination benefits) that are expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service, including wages and salaries. Short-term employee benefits are measured at the (undiscounted) amounts expected to be paid when the obligation is settled. The Group’s obligations for short-term employee benefits such as wages and salaries are recognised as a part of current trade and other payables in the statement of financial position.
OTHER LONG-TERM EMPLOYEE BENEFITS Provision is made for employees’ long service leave and annual leave entitlements not expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service. Other long-term employee benefits are measured at the present value of the expected future payments to be made to employees. Expected future payments incorporate anticipated future wage and salary levels, durations of service and employee departures and are discounted at rates determined by reference to market yields at the end of the reporting period on government bonds that have maturity dates that approximate the terms of the obligations. Upon the remeasurement of obligations for other long-term employee benefits, the net change in the obligation is recognised in profit or loss as a part of employee benefits expense. The Group’s obligations for long-term employee benefits are presented as non-current provisions in its statement of financial position, except where the Group does not have an unconditional right to defer settlement for at least 12 months after the end of the reporting period, in which case the obligations are presented as current provisions.
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(N) PROVISIONS Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period.
(O) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities on the statement of financial position.
(P) REVENUE AND OTHER INCOME Revenue is measured at the fair value of consideration received or receivable after taking into account any trade discounts and volume rebates allowed. Any consideration deferred is treated as the provision of finance and is discounted at a rate of interest that is generally accepted in the market for similar arrangements. The difference between the amount initially recognised and the amount ultimately received is interest revenue. The following describes the accounting policies applied to the Group’s main revenue streams. The Company recognizes revenue from the following channels: >> Retail stores – The Company recognizes sales revenue from its retail stores, net of sales taxes and estimated sales returns at the time it sells merchandise to the customer. Customer purchases of shopping cards are not recognized as revenue until the card is redeemed and the customer purchases merchandise by using the shopping cards. >> Custom-made sales – Revenue from the sale of products is recognized upon delivery to customers provided that there are no uncertainties regarding customer acceptance, there is persuasive evidence of an arrangement, the sales price is fixed and determinable. >> Franchise and management fees – Franchise and management fee revenue from franchise sales is recognised only when all material services or conditions relating to the sale have been substantially performed or satisfied by the Company. Zhongshan WINHA grants certain commercial customers limited rights to return products and provides price protection for inventories held by resellers at the time of published price reductions. Zhongshan WINHA establishes an estimated allowance for future product returns based upon historical return experience when the related revenue is recorded and provides for appropriate price protection reserves when pricing adjustments are approved. Zhongshan WINHA’s return policy, customers can return their merchandise in the original box and/or packaging within 7 days. Interest revenue is recognised using the effective interest method, which for floating rate financial assets is the rate inherent in the instrument. Dividend revenue is recognised when the right to receive a dividend has been established. Dividends received from associates and joint ventures are accounted for in accordance with the equity method of accounting.
(Q) TRADE AND OTHER RECEIVABLES Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinary course of business. Receivables expected to be collected within 12 months of the end of the reporting period are classified as current assets. All other receivables are classified as non-current assets. Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Refer to Note 7.7(i) for further discussion on the determination of impairment losses.
(R) TRADE AND OTHER PAYABLES Trade and other payables represent the liabilities for goods and services received by the Group that remain unpaid at the end of the reporting period. The balance is recognised as a current liability with the amounts normally paid within 30 days of recognition of the liability.
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(S) GOODS AND SERVICES TAX (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the ATO is included with other receivables or payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities, which are recoverable from or payable to the ATO, are presented as operating cash flows included in receipts from customers or payments to suppliers.
(T) STATUTORY RESERVE FUND The Company’s China-based subsidiaries are required to make appropriations of retained earnings for certain non-distributable reserve funds. Pursuant to the China Foreign Investment Enterprises laws, the Company’s China-based subsidiaries, are required to make appropriations from their after-tax profit as determined under generally accepted accounting principles in the PRC (the “after-tax-profit under PRC GAAP”) to a general non-distributable reserve fund. Each year, at least 10% of each entities after-tax-profit under PRC GAAP is required to be set aside as general reserve fund until such appropriations for the fund equal 50% of the paid-in capital of the applicable entity. The general reserve fund is restricted to set-off against losses, expansion of production and operations and increasing registered capital of the respective company. The fund is not allowed to be transferred to the Company in terms of cash dividends, loans or advances, nor is it allowed for distribution except under liquidation.
(U) BIOLOGICAL ASSETS Trees and plants from which agricultural produce is harvested are measured at their fair value less costs to sell. Changes in fair value less costs to sell of the trees and plants are recognised in the statement of profit or loss and other comprehensive income. The produce is transferred to inventory at its fair value less costs to sell at the time of harvest. The fair value of harvested produce is determined by reference to market prices at the time of harvest. The gain or loss on initial recognition of the produce is recognised in the statement of profit or loss and other comprehensive income in the year of harvest.
(V) GOING CONCERN BASIS The historical financial information of the Company has been prepared on a going concern basis which assumes the continuity of the Company’s normal business activities and the realisation of assets and the discharge of liabilities in the ordinary course of business. The Company had a net deficiency of $418,211 as at 31 March 2016. The Company’s ability to continue as a going concern was dependent on the continued financial support of the entity’s shareholders. On the basis that sufficient funding to meet the Company’s expenditure forecasts was expected to be available from the continued support from shareholders, the directors considered that the Company was a going concern and its 31 March 2016 financial statements were prepared on this basis. Should the Company be unable to continue as a going concern it may be required to realise its assets and discharge its liabilities other than in the normal course of business. This financial report did not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessarily incurred should the Company not continue as a going concern. Subsequent to the settlement of the acquisition of C&V Group, the Group had a net asset position of $28,891,499 as at 30 June 2016.
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08 INVESTIGATING ACCOUNTANT’S REPORT 08 IN VESTIGATINGINVESTIGATING ACCOUNTANT’S REPORT ACCO / CONTINUEDUNTANT’S REPORT
16 November 2016
The Board of Directors WINHA Commerce and Trade International Ltd C/o Pointon Partners Level 14, 565 Bourke Street MELBOURNE VIC 3000
Dear Directors,
Independent Limited Assurance Report on WINHA Commerce and Trade International Ltd historical and pro forma historical financial information
8.1 Introduction We have been engaged by WINHA Commerce and Trade International Ltd ("the Company") to report on the historical financial information and pro forma historical financial information of the Company for inclusion in the public document (“the Prospectus”) dated on or about 16 November 2016 and relating to the issue of a minimum of 20 million and up to a maximum 28,571,428 ordinary shares at an application price of $0.35 per share in the Company and listing on the Australian Securities Exchange (“the ASX”) ("the Offer").
Expressions and terms defined in the Prospectus have the same meaning in this report.
The nature of this report is such that it can only be issued by an entity which holds an Australian Financial Services License under the Corporations Act 2001. HLB Mann Judd Corporate Finance Pty Ltd (“HLB Mann Judd”) holds an appropriate Australian Financial Services License (AFS License Number 240988) under the Corporations Act 2001. Refer to our Financial Services Guide included as part 2 of this report.
8.2 Scope 8.2.1 Historical Financial Information You have requested HLB Mann Judd to review the Historical Financial Information, as set out in Section 7.5.1 of the Prospectus comprising:
• The historical statement of profit or loss and other comprehensive income for the periods ended 30 June 2016 and 31 March 2016; • The historical statement of financial position as at 30 June 2016 and 31 March 2016; and • The historical statement of cash flows for the periods ended 30 June 2016 and 31 March 2016.
The historical financial information has been prepared in accordance with the stated basis of preparation, being the recognition and measurement principles contained in Australian Accounting Standards and the Company's adopted accounting policies as outlined in Section 7.7 of the Prospectus. The Historical Financial Information of the Company has been extracted from the audited financial statements for the period ended 31 March 2016 which were audited by HLB Mann Judd (Vic Partnership) in accordance with Australian Auditing Standards (“AAS”).
HLB Mann Judd issued an unmodified audit opinion on the financial report, which contained an emphasis of matter in respect of applying the going concern basis. The 30 June 2016 Historical Financial Information has been reviewed by HLB Mann Judd (Vic Partnership) which issued an unmodified review conclusion. The Historical Financial Information is presented in the Prospectus in an abbreviated form, in so far as it does not include all of the presentation and disclosure required by
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AAS and other regulatory professional reporting requirements appropriate to general purpose financial report prepare in accordance with the Corporations Act 2001.
As part of this process, historical financial information about C&V Group had been extracted from the reviewed interim financial statements of WINHA International Group for the three months ended 30 June 2016 (“the interim accounts”). The interim accounts were reviewed by WINHA International Group’s auditors (“US auditors”) in accordance with the standards of Public Company Accounting Oversight Board (United States). The review conclusion issued to WINHA International Group was unmodified.
The procedures we performed in respect of the extraction of the reviewed historical financial information as outlined in Section 7.3 of the Prospectus were based on professional judgement and included consideration of audit working papers of the US auditors, reviewing management’s variance analysis between applying US GAAP and AAS as outlined in Sections 7.3.4 of the Prospectus, reviewing accounting records and other documents dealing with the extraction of historical financial information by the Company for the three months ended 30 June 2016.
8.2.2 Pro Forma historical financial information You have requested HLB Mann Judd to review the pro forma historical statement of financial position as at 30 June 2016 included in Section 7.5.2 of the Prospectus, referred to as "the pro forma historical financial information".
The pro forma historical financial information has been derived from the historical financial information of the Company, after adjusting for the effects of pro forma adjustments described in section 7.5.2 of the Prospectus. The stated basis of preparation is the recognition and measurement principles contained in AAS applied to the historical financial information and the event(s) or transaction(s) to which the pro forma adjustments relate, as described in section 7.5.2 of the Prospectus, as if those event(s) or transaction(s) had occurred as at 30 June 2016. Due to its nature, the pro forma historical financial information does not represent the Company's actual or prospective financial position and financial performance.
We disclaim any responsibility for any reliance on the report or the financial information to which it relates for any purpose other than that for which it was prepared. This report should be read in conjunction with the full Prospectus and has been prepared for inclusion in the Prospectus.
8.3 Directors' responsibility The directors of the Company are responsible for the preparation of the historical financial information and pro forma historical financial information, including the selection and determination of pro forma adjustments made to the historical financial information and included in the pro forma historical financial information. This includes responsibility for such internal controls as the directors determine are necessary to enable the preparation of historical financial information and pro forma historical financial information that are free from material misstatement, whether due to fraud or error.
8.4 Our responsibility Our responsibility is to express a limited assurance conclusion on the financial information based on the procedures performed and the evidence we have obtained. We have conducted our engagement in accordance with the Standard on Assurance Engagement ASAE 3450 Assurance Engagements involving Corporate Fundraisings and/or Prospective Financial Information.
A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain reasonable assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
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Our engagement did not involve updating or re-issuing any previously issued audit or review report on any financial information used as a source of the historical and pro forma historical financial information.
8.5 Conclusions 8.5.1 Historical financial information Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the historical financial information, as described in section 7.5.1 of the Prospectus, comprising: • The historical statement of profit or loss and other comprehensive income for the periods ended 30 June 2016 and 31 March 2016; • The historical statement of financial position as at 30 June 2016 and 31 March 2016; and • The historical statement of cash flows for the periods ended 30 June 2016 and 31 March 2016
is not presented fairly, in all material respects, in accordance with the stated basis of preparation, as described in section 7.7 of the Prospectus.
8.5.2 Pro Forma historical financial information Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the pro forma historical financial information as outlined in section 7.5.2 of the Prospectus, being the Statement of Financial Position as at 30 June 2016 is not presented fairly in all material respects, in accordance with the stated basis of preparation as described in section 7.7 of the Prospectus.
8.6 Restriction on Use Without modifying our conclusions, we draw attention to section 7.5 of the Prospectus, which describes the purpose of the financial information, being for inclusion in the Prospectus. As a result, the financial information may not be suitable for use for another purpose.
8.7 Subsequent Events Apart from the matters dealt with in this report and the Prospectus, and having regard to the Scope of our report, to the best of our knowledge and belief no other material transactions or events outside of the ordinary business of the Company have come to our attention that would require comment on, or adjustment to, the information referred to in our report or that would cause such information to be misleading or deceptive.
8.8 Sources of Information We have made enquiries of the Directors of the Company and other parties, as considered necessary during the course of our analysis. We have also referred to the Prospectus and material documents which relate to the operations of the Company. We have no reason to believe the information supplied is not reliable.
8.9 Legal Proceedings To the best of our knowledge and belief, we are not aware of any material legal proceeding outstanding or currently being undertaken, not otherwise disclosed in this report, which could cause the information included in this report to be misleading.
8.10 Consent HLB Mann Judd has consented to the inclusion of this assurance report in the Prospectus in the form and context which it is included. At the date of this report, this consent has not been withdrawn.
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8.11 Independence and Disclosure of Interests HLB Mann Judd has no financial or other interest that could reasonably be regarded as being capable of affecting its ability to give an unbiased conclusion on the matters that are subject of this report for which normal professional fees will be received.
No director of HLB Mann Judd or any individuals involved with the preparation of this report have any interest in the outcome of the Offer other than the preparation of this report for which normal professional fees will be received.
Our associated partnership, HLB Mann Judd (Vic Partnership) is the auditor of the Company. HLB Mann Judd (Vic Partnership) will receive fees for performing audit services.
8.12 Liability The liability of HLB Mann Judd is limited to the inclusion of this report in the Prospectus. Unless specifically referred to in this Report, or elsewhere in the Prospectus, HLB Mann Judd was not involved in the preparation of any other part of the Prospectus and did not cause the issue of any other part of the Prospectus. Accordingly, HLB Mann Judd makes no representations or warranties as to the completeness or accuracy of the information contained in any other part of the Prospectus.
8.13 Financial Services Guide We have included our Financial Services Guide as part 2 of this report. The Financial Services Guide is designed to assist retail clients in their use of any general financial product advice in our report.
Yours faithfully HLB Mann Judd Corporate Finance Pty Ltd
Jude Lau Director
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Part 2 Financial Services Guide How does HLB Mann Judd get paid for its Services? HLB Mann Judd payments come from fees generated from the provision of Services. What is the purpose of this Financial Services Guide? This Financial Services Guide (FSG) provides you with The fees will vary depending on the services provided, the information about us to help you decided whether to use the complexity and nature of the services and other factors such as the services that we offer. size of the transaction. The fees will be negotiated on a case by It explains: case basis and will be clearly disclosed to you in our engagement • The services offered by us; letter. • How instructions may be provided to us; • How we are remunerated; and Our staff are paid a salary and may be entitled to receive bonuses • The details of our internal and external complaints or non-monetary benefits. These bonus payments are not an handling procedures and how you can access additional cost to you. them. This FSG is provided by HLB Mann Judd Corporate Finance The fees and charges that you pay to us may ultimately benefit our Pty Ltd (AFSL: 240988). In this FSG, each of the companies is employees, directors or other associates of our authorising licensee referred to as “we”, “our” or “us”, and collectively referred to as or its authorised representatives.
“HLB Mann Judd” What fee does the person who referred me receive? What Services can we provide? We do not currently pay a fee to any person who refers you to use Under our AFS licence authorisation, we may carry on a financial our Services. However, we may enter into referral arrangements services business to provide: with such parties in the future. Any fees or commissions payable for • financial product advice on basic deposit products, securities, the referral will be disclosed to you. Furthermore, we may receive derivatives limited to old law securities options contracts and payments for referring you to other service providers or product warrants, and issuers.
• dealing services in respect of the above financial products. Disclosure of Interest Collectively these are referred to as “Services”. HLB Mann Judd We may provide services in relation to products and services provided by other product issuers or invest in those products provides corporate finance services including valuations and merger and acquisition advice. This includes capital raising, ourselves. To the extent permitted by law, we may receive fees and strategic option analysis and financial modelling. other benefits from these product issuers as a result of you investing in one of their products or using one of their services. We Will you provide me with advice which is suitable to my needs may pay to, or receive fees or commissions from, third parties to the and financial circumstances? extent permitted by law. We provide general financial product advice only, not personal Except as disclosed in this FSG, we do not have any relationships financial product advice because the advice has been prepared or associations which might reasonably be expected to be capable without taking into consideration your personal objectives, financial situation or needs. You should consider the appropriateness of the of influencing the way we provide our Services to you.
advice, having regards to your objectives, financial situation and needs before acting on the advice. Compensation Arrangements We are covered by our professional indemnity insurance in place We are authorised to provide you with personal advice in relation to that complies with section 912B of the Corporations Act and ASIC basic deposit products, securities and derivatives limited to old law Regulatory Guide 126.
securities options contracts and warrants. We may not provide advice of any kind in relation to any other interest, financial products Who can I complain to if I have a complaint about the Services or other investments. provided to me? If you have a complaint about the Services provided to you, you Generally if personal advice is given – that is, the advice that takes should take the following steps: into account your particular circumstances, financial situation and 1. Contact us and tell us your complaint. needs, you would be provided with a Statement of Advice (SOA) / If you complaint is not satisfactorily resolved within seven Statement of Additional Advice (SOAA) in accordance with the days, please call our complaints Manager on (03) 9606 3888. requirements of the Corporations Act. The SOA/SOAA would contain the advice, the basis on which it is given and the 2. Alternatively, you can put your complaint in writing and information about fees, commissions and associations which may forward it to: have influenced the provision of the advice. The Complaints Manager HLB Mann Judd Corporate Finance In some circumstances, SOA or SOAA is not required to be given. Level 9, 575 Bourke Street, Melbourne VIC 3000 In this case, a Record of Advice (ROA) documenting the personal Tel: (03) 9606 3888 Fax: (03) 9606 3800 advice is to be given. You may request a copy of the ROA from your adviser up to 7 years after the advice has been given. Email: [email protected] 3. We will endeavour to investigate and resolve your
complaint and communicate our decision to you within If a recommendation to acquire a particular financial product is 45 days. If you still do not get a satisfactory outcome, made, you would be provided with a Product Disclosure Statement you may be able to lodge a complaint with The Financial containing information about the particular product, which will Ombudsman Service (FOS). You can write to FOS at enable you to make an informed decision in relation to purchasing GPO Box 3, Melbourne VIC 3001 or call them on 1300 that product. 780 808 or visit www.fos.or.au
How do I give information to HLB Mann Judd? HLB Mann Judd Corporate Finance Pty Ltd (AFS Licence 240988) You can give us information by telephone, post, fax or email, using Level 9, 575 Bourke Street, Melbourne VIC 3000 the details provided below. In some cases, however, you will need Tel: (03) 9606 3888 to complete and return certain documents, such as application form Fax: (03) 9606 3800 and client identification form. Email: [email protected]
Date Issued: 16 November 2016
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09 MATERIAL CONTRACTS 09 MATERIAL CONTRACTS
The Company and its subsidiaries have entered into various agreements which the Board consider to be material and relevant to potential investors in the Company. Set out below is a summary of these material contracts.
LIST OF MATERIAL CONTRACTS: 1. Cooperative Sales Contracts, various dates 2. Cooperative Sales Contract between LDF and Zhongshan WINHA (LDF Sales Contract) 3. Agricultural Procurement Agreement, various dates 4. Franchise Agreements, various dates 5. Land Lease Contracts (Orchards), various dates (Orchard Land Tenure Agreement) 6. Land Leasing Service Agreements (Vegetable Farms), various dates (Farm Land Tenure Agreement) 7. Employment Contract (Technician) (Technician Employment Contract) 8. Outsourcing Contract (Farm Manager) (Farm Management Agreement) 9. Outsourcing Operating Agreement, various dates (Outsourcing Agreement) 10. Financial Consultation Service Agreement between Beijing Ruihua Future Investment Management Co Ltd and Zhongshan WINHA (Financial Consultation Service Agreement); 11. Loan Agreement between Zhongshan WINHA and Winnie Lam (Zhongshan WINHA Loan Agreement) 12. Share Sale Agreement between the Company, Flavours Vendors and Flavours (Share Sale Agreement) 13. Share Subscription Agreement between the Company, Flavours Vendors and Flavours (Share Subscription Agreement) 14. Convertible Note Subscription Agreement between Flavours, the Company, Peter Leslie Cannavo and Gassane Elbob (Flavours Convertible Note Subscription Agreement); 15. Call Option Agreement between the Company, Flavours Vendors and Flavours (Call Option Agreement); 16. Shareholders’ Agreement between the Company, the Flavours Vendors and Flavour (Shareholders’ Agreement); 17. Heads of Agreement between the Company and Flavours for export of Australian products into China (Heads of Agreement – Australian Products); 18. Heads of Agreement between the Company and Flavours for import of WINHA Products into Australia (Heads of Agreement – WINHA Products); 19. Lead Manager Mandate between the Company and Beer & Co (Lead Manager Mandate);
EMPLOYMENT, CONSULTANT AND SERVICE AGREEMENTS: 20. Director’s Deeds of Indemnity, Insurance and Access 21. Director’s Service Agreements and Executive Employment Agreements; and 22. Restriction Agreements. The whole of the provisions of the agreements are not repeated in this Prospectus.
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1. COOPERATIVE SALES CONTRACTS Zhongshan WINHA has entered into thirty-eight (38) Cooperative Sales Contracts with hotel operators, with the terms of such contracts typically set at one year. Pursuant to each Cooperative Sales Contract, the parties agree that: >> Zhongshan WINHA agrees to provide certain food products to the purchaser on an ongoing basis; >> Zhongshan WINHA agrees that the WINHA Products supplied to the purchaser shall conform to certain industry standards. Packaging of the WINHA Products shall comply with all national laws and regulations in China, and shall clearly specify the place of origin, ingredients, directions of uses, preservation method, warnings, date of manufacture, expiry date, bar codes, and QS certification. Zhongshan WINHA shall submit quality guarantee certificates when providing the WINHA Products to the purchaser. If the WINHA Products have quality problems (such as failure in quality examination procedures or deterioration), Zhongshan WINHA shall allow the purchaser to return the defective WINHA Products unconditionally. If Zhongshan WINHA fails to respond to two notifications that the WINHA Products shall be returned, the purchaser may dispose of WINHA Products, and the costs of such disposal may be deducted from any monies owed to Zhongshan WINHA; >> for WINHA Products re-sold in the purchaser’s stores, the purchaser must notify Zhongshan WINHA of the expiry date of such goods at least two (2) months prior to expiry (Expiry Period). Zhongshan WINHA shall then exchange those products for the same products with a longer shelf life, provided that replacement WINHA Products with less than 75% of their shelf life remaining will not be accepted for delivery, unless otherwise agreed; >> the parties shall mutually agree the price of the WINHA Products; and >> payment must be made by the purchaser to Zhongshan WINHA within 45 days after Zhongshan WINHA receives the purchaser’s acceptance of the WINHA Products. Zhongshan WINHA shall deliver the WINHA Products within fifteen (15) working days of receiving a purchase order from the purchaser.
2. LDF SALES CONTRACT The LDF Sales Contract was executed by Zhongshan WINHA and LDF on 20 October 2014. The key terms of the LDF Sales Contract are as follows: >> The term of the agreement is 5 years, commencing from 20 October 2014; >> LDF authorises Zhongshan WINHA to purchase LDF’s “Xueshan Farm” branded products from two of LDF’s distributors, being Guangdong Jinyou Group Co Ltd and Zhongshan Rongsheng Food Co Ltd (LDF Agents) and then retail these products through the WINHA Business’ sales channels; >> The parties agree that Zhongshan WINHA may, from time to time, request from the LDF Agents free products in order to promote new product lines, and LDF and the LDF Agents shall cooperate with any loyalty schemes or discount voucher programmes implemented by the WINHA Business from time to time; >> LDF agrees that the goods supplied to Zhongshan WINHA shall conform to certain industry and national standards in China, and that packaging of the products shall comply with all national laws and regulations in China, and shall specify clearly the place of origin, ingredients, directions of use, preservation methods and conditions, warnings, date of manufacture, expiry date, bar code and QS certification; >> Zhongshan WINHA shall be entitled to return products supplied by the LDF Agents if such goods do not meet industry or national standards (or other standards agreed between the parties from time to time) or fail quality examination procedures. In the event of a return, the LDF Agents shall compensate Zhongshan WINHA for any ensuing loss; >> Except for those goods where price is fixed or guided by the China governmental agency, the price of goods supplied shall be agreed by mutual negotiation, and it is agreed that the price of seasonal products shall be negotiated separately; and >> the price of the goods provided by the LDF Agents to Zhongshan WINHA shall not exceed the lowest price at which LDF supplies those products to other customers, and any increase in the price of goods shall be notified by the LDF Agents to Zhongshan WINHA ten (10) days prior to such increase.
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3. AGRICULTURAL PROCUREMENT AGREEMENT As at the date of this Prospectus, Zhongshan WINHA has entered into thirty-six (36) Agricultural Procurement Agreements with food suppliers and farmers. The key terms of such Agricultural Procurement Agreements are as follows: >> the supplier shall deliver the goods to Zhongshan WINHA within 10 days of each order, and Zhongshan WINHA shall pay the supplier within 3 days of submitting an order form. >> the suppliers warrant that they shall cooperate with requirements for pesticide residue detection, satisfy national hygiene standards, and that they have obtained national food safety certifications and green food authentication for the products supplied. >> the suppliers warrant that the products are fresh and clean and that there is no chemical fertilisers and pesticides in the products. >> if payment by Zhongshan WINHA is more than 5 days overdue, it shall accrue 3% interest on the amount outstanding. >> The supplier shall be responsible for any freight charges. >> If the supplier fails to deliver the goods by the due date for delivery, it shall pay damages (calculated at 20% of the amount owed to the supplier by Zhongshan WINHA under that order), unless such delay is caused by Zhongshan WINHA. If goods that are delivered by the supplier do not meet the contractual requirements, the supplier shall pay compensation of RMB10,000 to Zhongshan WINHA in respect of those goods.
4. FRANCHISE AGREEMENT (JOINT COOPERATION AGREEMENT) As at the date of this Prospectus, Zhongshan WINHA has entered into Franchise Agreements with forty four (44) Franchisees. The key terms of the Franchise Agreements are as follows: >> The term of the Franchise Agreement is five (5) years. Franchisees shall have a priority right to renew the Franchise Agreement within 60 days of the expiration of the term by making a written application to Zhongshan WINHA. >> Zhongshan WINHA shall authorise the Franchisee to use the WINHA trade marks, name and logo in accordance with the uniform operating standards set by Zhongshan WINHA and within the agreed location and territory. The Franchisee may not, without Zhongshan WINHA’s approval, use any other trade marks or logo in the operation of the Franchise Store, and shall not amend or modify the WINHA Business’ trade marks. >> Zhongshan WINHA shall assist the Franchisee with selection of the Franchise Store location, fit-out, equipment purchase and business training, and provide ongoing assistance during the term of the Franchise Agreement. >> Zhongshan WINHA shall introduce the Franchisee to approved commodity suppliers, and the Franchisee shall purchase goods from those approved suppliers. >> The Franchisee shall complete the fit-out of the Franchise Store within one (1) month of execution of the Franchise Agreement, and shall pay for such fit-out.
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>> The following management and franchise fees are payable by Franchisees, with the amount of such fees depending on the size of the city and the size of the Franchise Store:
CITY TYPE* FIRST-TIER CITY SECOND-TIER CITY
Store Size 100m2 100m2 200m2 100m2 and 100m2 200m2 and above – 200m2 – 300m2 above – 200m2 – 300m2
Management Fee RMB 70,000 RMB 80,000 RMB 100,000 RMB 50,000 RMB 60,000 RMB 70,000 (per month)
Franchise Fee RMB 600,000 RMB 550,000
CITY TYPE THIRD-TIER CITY
Store Size 200m2 and 200m2 below – 300m2
Management Fee RMB 40,000 RMB 50,000 (per month)
Franchise Fee RMB 450,000
* Note: In China, city types are calculated based on the city’s permanent resident population, as set out in the Notification of State Council on the Adjustment of City Scale Classifying Criteria issued by the State Council, No.51 2014 on 29 October 2014. First-Tier cities are cities whose permanent resident population is above 10,000,000. Second-Tier cities are those which have a permanent resident population of between 5,000,000 and 10,000,000, and Third-Tier cities are those which have a permanent resident population of between 1,000,000 and 5,000,000. >> The Franchisee warrants that they have investigated the local market conditions prior to execution of the agreement, and acknowledge that their success depends on their own ability to successfully undertake business operations. >> The parties shall first attempt to settle disputes through negotiation and, if negotiations fail, shall litigate the dispute in the local People’s Court. The locations of the Franchise Stores are set out below: First-Tier City: 1. Futian Road, Futian District, Shenzhen City – 180 m2 2. Tianfu Road, Tianhe District, Guangdong Province, Guangzhou City – 150 m2 3. Guangzhou Avenue, Zhuhai District, Guangzhou City – 250 m2 4. Chigang Street, Haizhu District, Guangzhou City – 80 m2 5. Qinghe East Road, Panyu District, Guangzhou City – 280 m2 6. Liuhua Street, Yuexiu District, Guangzhou City, – 180 m2 7. Binjiang Street, Zhuhai District, Guangzhou City – 97 m2 8. Shipai Street, Tianhe District, Guangzhou City – 130 m2 9. Jinhua Street Liwan District, Guangzhou City, – 96.6 m2 10. Futian Street Futian District, Shenzhen – 237 m2
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Second-Tier City: 1. Kuiqi Road, Chancheng District, Shenzhen City – 150 m2 2. Guicheng Street, Nanhai District, Foshan City – 160 m2 3. Guancheng Street, Guancheng District, Dongguan City – 150 m2 4. Jinsha Road, Jinping District, Shantou City – 230 m2 5. North Longhu Road, Longhu District, Shantou City – 180 m2 6. Nanshui Town, Jinwan District, Zhuhai City – 150 m2 7. Shilong Town, Wanjiang District, Dongguan City – 150 m2 8. Xiangwan Street, Xiangzhou District, Zhuhai City – 280 m2 9. Cuijing Road, Xiangzhou District, Zhuhai City – 90 m2 10. Yunhe Three East Road, Dongguan City – 160 m2 11. Hongyuan Road, Dongguan City – 260 m2 12. Tangjiawan Town, Xiangzhou District, Zhuhai city – 80 m2 13. Dongcheng Street, Guancheng District, Dongguan City –150 m2 14. Xinjin Street, Longhu District, Shantou City – 160 m2 15. North River Two Road, Jinwan District, Zhuhai City – 90 m2 16. Hongshan Road, Xiangzhou District, Zhuhai City – 220 m2 17. Jinpu Street Chaoyang District, Shantou City – 261 m2 18. Nanxiangli Two Street, Xiangzhou District, Zhuhai City – 96 m2 19. Nancheng Street Nancheng District, Dongguan City – 142 m2 20. Jinsha Road Jinping District, Shantou City –84 m2 21. Qianshan Street Xiangzhou District, Zhuhai City – 156 m2 Third-Tier City: 1. Longcheng Street, Longmen County, Huizhou City, Guangdong Province – 180 m2 2. Shiqi Street, Zhongshan City – 180 m2 3. Shenchuan Road, Chikan District, Zhanjiang City – 170 m2 4. West Liberation Road, Xiashan District, Zhanjiang City – 180 m2 5. Huanshi Street, Pengjiang District, Jiangmen City – 280 m2 6. Huguang Town, Mazhang District, Zhanjiang City – 180 m2 7. Jiaotou Street, Jianghai District,Jiangmen City – 150 m2 8. Fumin Road, Jianghai District, Jiangmen City – 280 m2 9. Nandiao Street, Potou District, Zhanjiang City – 150 m2 10. Huanshi Street, Pengjiang District, Jiangmen City – 190 m2 11. Nandiao Street, Potou District, Zhanjiang City, Guangdong Province – 164 m2 12. Huayuan Community, Dongqu Street, Zhongshan City – 233 m2 13. Jiantou Street, Jianghai District, Jiangmen City – 203 m2 As at the date of this Prospectus, no Franchisee operates more than one (1) Franchise Store.
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5. ORCHARD LAND TENURE AGREEMENT Generally, as set out in Articles 8 and 9 of the Land Administration Law of the PRC, land in urban areas is owned by the State, and land in rural areas is collectively owned, unless otherwise specified by law. Land located within a rural collective economic organisation or a village are collectively owned by rural residents, unless such land is stipulated by law as being owned by the State. If individuals, organisations or businesses are granted land use rights of collectively owned or state owned agricultural land, they may develop, hold and lease those lands. Collectively owned land may be reclaimed by the State in accordance with law. Zhongshan WINHA has entered into 41 Orchard Land Tenure Agreements, each with similar terms. The key terms of the Orchard Land Tenure Agreements are as follows: >> the term of the lease is 10 years, and the land is to be used for crop planting. During the term of the lease Zhongshan WINHA shall have exclusive use of the land rented; >> Zhongshan WINHA shall pay for the crops already planted on the land, and such crops shall belong to Zhongshan WINHA; >> Zhongshan WINHA shall pay three years’ rent, and the purchase price of the crops, within 30 days of execution of the contract. The balance of the rent shall be paid annually at the end of July. If the lease is terminated within three years of the commencement date, Zhongshan WINHA will not be able to recoup the rental downpayment, nor the cost of the crops. However, if Zhongshan WINHA terminates the lease after this three year period, it will only be liable for the balance of rental costs accrued at the date of termination; >> the lessor shall be responsible for the resolution of disputes with the village collective and shall handle any administrative procedures if Zhongshan WINHA elects to change the purpose of the land leased; >> during the duration of any disputes with the village collective, Zhongshan WINHA has the right to suspend the payment of any rent, without liability for breach of contract. If the purpose of the contract cannot be fulfilled due to such dispute, Zhongshan WINHA has the right to terminate the contract and will not assume liability for breach; >> Zhongshan WINHA has the right to sub-let the land to third parties during the term; >> if the lessor wishes to continue to lease the land on the expiration of the term, Zhongshan WINHA shall be offered a renewal of the lease on the same terms; >> if Zhongshan WINHA defaults on payment of rent, Zhongshan WINHA shall be liable to pay a penalty of 1/1000 annual rent for each day that the payment is overdue. If the default lasts more than 30 days, the lessor may terminate the contract and Zhongshan WINHA shall pay a penalty of 10% of annual rent to the lessor; >> the lessor may not terminate the contract, and, if it does, shall compensate Zhongshan WINHA for loss incurred by Zhongshan WINHA; >> if the contract cannot be fulfilled or the contract cannot be fulfilled due to force majeure, the contract shall be terminated without further liability.
6. FARM LAND TENURE AGREEMENT Zhongshan WINHA has also entered into ten Farm Land Tenure Agreements, each in similar terms. The key terms of the Farm Land Tenure Agreements are as follows: >> Zhongshan WINHA leases the relevant land from the lessor, and shall entrust the lessor to manage and cultivate the land rented; >> the term of the lease is a year; >> the lessor shall provide labour services to Zhongshan WINHA, and shall undertake cultivation and management work, including planting, maintenance, tilling, fertilisation and so on, which Zhongshan WINHA shall supervise; >> Zhongshan WINHA shall be entitled to the crops produced, and shall pay for outgoings including greenhouse construction, fertilisers and pesticides, water and electricity, labour and maintenance; >> Zhongshan WINHA shall pay rental and estimated outgoings to the lessor in full within 30 days of execution of the contract;
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>> the lessor shall be responsible for the resolution of disputes with the village collective, and shall handle any administrative procedures if Zhongshan WINHA elects to change the purpose of the land leased; >> during the duration of any disputes with the village collective, Zhongshan WINHA has the right to suspend the payment of any rent, without liability for breach of contract. If the purpose of the contract cannot be fulfilled due to such dispute, Zhongshan WINHA has the right to terminate the contract and will not assume liability for breach; >> Zhongshan WINHA shall be entitled to sublet the land to third parties during the term; >> if Zhongshan WINHA defaults on payment of rent, Zhongshan WINHA shall be liable to pay a penalty of 1/1000 annual rent for each day that the payment is overdue. If the default lasts more than 30 days, the lessor may terminate the contract and Zhongshan WINHA shall pay a penalty of 5% of annual rent to the lessor; >> the lessor shall enjoy a priority right of renewal upon expiry of the term, and the parties shall enter into a contract confirming the renewal of the lease term six (6) months before the expiry of the current lease; >> the lessor may not terminate the contract, and, if it does, shall compensate Zhongshan WINHA for loss incurred by Zhongshan WINHA; and >> if the contract cannot be fulfilled or the contract cannot be fulfilled due to force majeure, the contract shall be terminated without further liability.
7. TECHNICIAN EMPLOYMENT CONTRACT Zhongshan WINHA has entered into 31 labour contracts for the employment of technical specialists to work on Zhongshan WINHA’s farms. The key terms of these employment contracts are as follows: >> the term of the contract and the probationary period varies according to the identity of the employee; >> the employee is entitled to statutory leave and workers’ insurance in accordance with relevant laws and regulations; >> if the employee is required to work overtime, any overtime should not exceed maximum hours prescribed by regulation, and Zhongshan WINHA is required to pay for overtime worked or arrange for supplementary leave; >> the employee’s salary shall be paid monthly; >> the employee shall protect the business secrets and intellectual property of Zhongshan WINHA and shall return all property to Zhongshan WINHA upon termination of the contract; and >> the employment contract may be terminated during the probation period for violation of company rules or regulations, misstatement of academic or work history, or inability to perform the role, or otherwise terminated by mutual agreement.
8. FARM MANAGEMENT AGREEMENT Zhongshan WINHA has entered into 41 contracts with individuals for the provision of farm management services. The key terms of such contracts are as follows: >> the term of the contract and remuneration will vary, according to the identity of the employee; >> the employee shall be responsible for farm management and farming and cultivating the young crops, and shall be supervised by Zhongshan WINHA; >> Zhongshan WINHA shall be responsible for outgoings such as water and electricity, and the purchase of fertilisers and pesticides, and Zhongshan WINHA shall pay labour costs and general expenses for the first year upfront within 15 days of execution of the contract; >> the employee can construct production facilities and living facilities on the land; >> the employee shall conserve water and soil and protect the land; >> if the contract is frustrated due to force majeure, the contract may be amended or terminated without any liability accruing to the parties;
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>> if Zhongshan WINHA is unable to secure an adequate supply of water, road access or electricity such that the employee is unable to perform its duties, or Zhongshan WINHA repeatedly sub-leases the land, the employee can terminate the agreement; >> if the employee wishes to continue employment at the expiry of the term, they shall enjoy priority; >> if either party breaches the contract, they shall pay a penalty of 10% of the loss caused by default.
9. OUTSOURCING AGREEMENT Zhongshan WINHA has entered into agreements to outsource the operation of the six (6) Retail Stores owned by Zhongshan WINHA. Each Outsourcing Agreement has been entered into on similar terms. The key terms of the Outsourcing Agreements are as follows: >> the term of the Outsourcing Agreement is one year; >> Zhongshan WINHA shall outsource a specified store to the manager to operate; >> the manager shall enter into a lease with the landlord of the Retail Store and shall bear outgoings for water and electricity; >> the manager shall place orders for WINHA Products with Zhongshan WINHA from time to time, Zhongshan WINHA shall supply the WINHA Products at a wholesale price, and the manager shall sell the WINHA Products to the public, Zhongshan WINHA recommending the retail price for such sales; >> the manager is prohibited from selling any products apart from WINHA Products; >> the manager must maintain the brand reputation of WINHA, immediately report any material problems to Zhongshan WINHA, and may not assign the management rights to a third party without consent from Zhongshan WINHA; >> Zhongshan WINHA shall supply the WINHA Products to the manager in a timely manner and in accordance with the orders provided by the manager from time to time, and shall bear liability for losses caused by poor product quality; >> Zhongshan WINHA shall provide training and logistical support to the manager in a timely manner; >> Zhongshan WINHA shall be entitled to terminate the agreement if profits from the store decrease in a continuous 5 month period, if the manager misappropriates money or goods, engages in corrupt practices, breaches company rules and regulations, fails to report material problems, or causes material safety accidents or damage due to negligence; >> termination of the agreement by the manager requires the consent of Zhongshan WINHA; and >> the parties may renew the agreement at the expiry of the term. Pursuant to the Outsourcing Contracts, all leases between landlords of each Retail Store and Zhongshan WINHA have been terminated, and new leases entered into between the Retail Store managers and the relevant landlord. Zhongshan WINHA has retained ownership of the fixed assets of each Retail Store, and the inventory of each Retail Store has been sold to the relevant manager.
10. FINANCIAL CONSULTATION SERVICE AGREEMENT On 26 August, 2014, Zhongshan WINHA entered into the Financial Consultation Service Agreement with Beijing Ruihua. The key terms of the Financial Consultation Service Agreement are as follows: >> the term of the agreement is for 3 years commencing on signing of the agreement (i.e. 26 August 2014), and Beijing Ruihua shall be the sole financial consultant of Zhongshan WINHA during the term; >> from 28 April 2013 to 30 June 2014, Beijing Ruihua shall check all financial documentation of Zhongshan WINHA to ensure that it is in accordance with US GAAP and AASB principles, and shall administer Zhongshan WINHA’s accounts processing and preparation of financial documents after 1 July 2014 to ensure that such accounts are prepared in accordance with US GAAP and AASB principles; >> from 28 April 2013 to 30 June 2014, Beijing Ruihua shall check all legal and internal documentation of Zhongshan WINHA to ensure that it complies with United States and Australian laws, and shall administer Zhongshan WINHA’s management of legal affairs from 1 July 2014, to ensure that Zhongshan WINHA’s legal affairs and internal controls adhere to the standards required for Chinese, United States and Australian listed companies;
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>> in relation to the Offer made pursuant to this Prospectus, Beijing Ruihua shall coordinate domestic and foreign auditors and lawyers to complete work required for this Prospectus, and shall assist them to complete the drafting of Prospectus and submit listing application to Australian Securities Exchange and ASIC; >> Beijing Ruihua shall also assist Zhongshan WINHA in establishing and maintaining an internal control system that complies with the listing requirements of Australian Securities Exchange; >> Beijing Ruihua shall provide advisory services to Zhongshan WINHA in relation to the NASDAQ listing of WINHA International Group, including assisting with correspondence with domestic and foreign lawyers and auditors; >> Beijing Ruihua shall provide advisory services to Zhongshan WINHA in relation to the establishment of a family trust. >> Beijing Ruihua shall be granted securities in the Company equivalent to 5% of the total shares issued by the Company in order to list on ASX; >> during the term of the Agreement, Zhongshan WINHA shall pay: (a) an annual fee of RMB1.2 million (i.e. AUD256,707.65) to Beijing Ruihua for data analysis services, payable by twelve equal monthly instalments of RMB100,000 (AUD21,392.30) within the first 3 days of each month; (b) an advisory services fee totalling RMB300,000 for providing advisory services in relation to listing with Australian Securities Exchange, payable as follows: a. payment of RMB100,000 (AUD21,392.30) upon finalising preparation of the Company’s listing documents; b. payment of RMB100,000 (AUD21,392.30) upon the Company executing service agreements with other transaction advisors; and c. payment of RMB100,000 (AUD21,392.30) upon the Company listing on the ASX. (c) An one-off service fee of RMB150,000 for providing advisory services of settling a family trust.
11. LOAN AGREEMENT BETWEEN ZHONGSHAN WINHA AND WINNIE LAM The key terms of the Zhongshan WINHA Loan Agreement are as follows: >> Zhongshan WINHA may borrow monies at any time from Winnie Lam, but such borrowings shall be capped at a total of RMB 2,000,000 (AUD 403,680) (Loan), with additional loans to be negotiated between the parties; >> the Loan shall be non-interest bearing; and >> any disagreements shall be resolved by negotiation between the parties.
12. SHARE SALE AGREEMENT BETWEEN THE COMPANY, FLAVOURS VENDORS AND FLAVOURS The key terms of the Share Sale Agreement, dated 8 November 2016, are as follows: >> the Flavours Vendors shall each sell 49 Shares in Flavours (totalling 9.8% of Flavours’ issued capital on completion), each Flavours Vendor receiving consideration of $300,000 from the Company; >> completion under the Share Sale Agreement is subject to the following conditions precedent (Share Sale Conditions Precedent): • execution of the Share Subscription Agreement, Flavours Convertible Note Subscription Agreement, General Security Agreement and Call Option Agreement; • Mr Peter Cannavo and Mr Gassane Elbob each entering into an Employment Agreement with Flavours; and • the Company gaining in-principle approval to list on the ASX, with such approval to be received in writing and subject to the satisfaction of such usual administrative terms and conditions prescribed by the ASX and ASX Listing Rules. >> Completion under the Share Sale Agreement shall occur within 7 days of all Share Sale Conditions Precedent being satisfied or waived. >> If the Share Sale Conditions Precedent are not met by 30 June 2017, any party may terminate the Share Sale Agreement by written notice to the others.
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13. SHARE SUBSCRIPTION AGREEMENT BETWEEN THE COMPANY, FLAVOURS VENDORS AND FLAVOURS The key terms of the Share Subscription Agreement, dated 8 November 2016, are as follows: >> the Company shall apply for 229 shares in Flavours for a total subscription price of $1,400,000; >> completion under the Share Subscription Agreement shall be subject to the same conditions precedent as under the Share Sale Agreement, save that execution of the Share Sale Agreement is substituted for execution of the Share Subscription Agreement (Share Subscription Conditions Precedent); >> completion under the Share Subscription Agreement shall occur within 5 business days of all Share Subscription Conditions Precedent being satisfied or waived. >> if such Share Subscription Conditions Precedent are not met by 30 June 2017, any party may terminate the Share Subscription Agreement by written notice to the others.
14. CONVERTIBLE NOTE SUBSCRIPTION AGREEMENT BETWEEN FLAVOURS, THE COMPANY, PETER LESLIE CANNAVO AND GASSANE ELBOB The key terms of the Flavours Convertible Note Subscription Agreement, dated 8 November 2016, are as follows: >> the Company has subscribed for 1,000,000 secured convertible notes in Flavours (Flavours Convertible Notes); >> the Flavours Convertible Notes shall be issued at an issue price of AUD1.00 per note, which issue price shall be the face value of the Flavours Convertible Notes, so that the total subscription monies paid by the Company is $1,000,000; >> the Company shall pay 10% interest upon each Flavours Convertible Note, which will accrue daily until the redemption or conversion of the Flavours Convertible Note, and which will be payable as a lump sum at that time; >> the directors of Flavours personally guarantee the convertible note debt and the issuance of the Flavours Convertible Notes entitles the Company to register a security interest over all present and after-acquired property of Flavours; >> Conditions precedent to the conversion of Flavours Convertible Notes shall be the Company gaining in-principal approval to list on the ASX by 24 months from the date of the Flavours Convertible Note Subscription Agreement (Flavours CN Expiry Date), subject to the satisfaction by the Company of any terms and conditions prescribed by the ASX or ASX Listing Rules (Flavours CN Conditions Precedent). >> If the Flavours CN Conditions Precedent are satisfied prior to the Flavours CN Expiry Date, the Company may request that Flavours convert all Convertible Notes held by the Company and issue paid ordinary shares in Flavours by converting the outstanding principal debt on the Flavours Convertible Notes plus interest into shares in Flavours (Flavours Conversion Request). >> If the Company does not give a Flavours Conversion Request to Flavours within 30 days of the Flavours CN Conditions Precedent being met, Flavours may elect to convert all Flavours Convertible Notes to shares in Flavours. >> The number of shares to be issued by Flavours to the Company on the conversion of the Flavours Convertible Notes shall be equal to 16.3% of the total issued share capital of Flavours immediately following conversion of the Flavours Convertible Notes.
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15. CALL OPTION AGREEMENT BETWEEN THE COMPANY, FLAVOURS VENDORS AND FLAVOURS The key terms of the Call Option Agreement, dated 8 November 2016, are as follows: >> for consideration of $1.00 paid by the Company to each of the Flavours Vendors, each Flavours Vendor grants the Company a call option over 255 ordinary shares in Flavours held by that Flavours Vendor (Option Shares) totalling 57% of the issued Share capital in Flavours; >> the call options may be exercised over the Option Shares in the period from 1 April 2019 to 30 June 2019, and may be exercised by payment of a total purchase price calculated at 8 x Flavours’ financial year 2019 net profit after tax, which may be satisfied by a cash payment, the issue of fully paid ordinary shares in the Company or a combination of both (Option Share Consideration). The quantum of the Option Share Consideration shall be calculated on the financial year ending 31 March 2019 by using Australian Generally Accepted Accounting Principles; >> if the parties dispute the Option Share Consideration an independent valuer shall be appointed to determine the Option Share Consideration, and the Company shall bear the costs of such valuation; and >> a Flavours Vendor may only transfer part or all of its Option Shares to a third party if the Company consents to such transfer, and the transferee executed a deed of novation, such that the call options existing over the transferred Option Shares.
16. SHAREHOLDERS’ AGREEMENT BETWEEN THE COMPANY, THE FLAVOURS VENDORS AND FLAVOURS. The Company, the Flavours Vendors and Flavours have also entered into a shareholders’ agreement, dated 11 November 2016. The key terms of the Shareholders’ Agreement are as follows: >> the Company and each of the Flavours Vendors have the right to appoint a director to the board of Flavours, and each director shall have one vote; >> the quorum for a board meeting is all directors being present, and the quorum for a shareholders’ meeting is all shareholders being present; >> increases or reductions in Flavours’ share capital shall require a special resolution of directors (75%); >> each shareholder may not transfer their shares to an unrelated third party unless: • the transferor obtains the prior consent of the other shareholders; or • the transferor first offers the shares to the other shareholders on a pro rata basis; and • if a transferor holding more than 75% of the issued shares in Flavours accepts an offer to transfer all of their shares to an unrelated third party, in which case: – the transferor may require the remaining shareholders to sell their shares to the third party on the same or more favourable terms, or; – the remaining shareholders may require the transferor to cause the third party to purchase from the remaining shareholders that number of shares which is in proportion to the number of sale shares which the transferor proposes to transfer to the third party.
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17. HEADS OF AGREEMENT BETWEEN THE COMPANY AND FLAVOURS FOR EXPORT OF AUSTRALIAN PRODUCTS INTO CHINA The key terms of the Heads of Agreement – Australian Products, dated 11 November 2016, are as follows: >> Flavours shall source fresh fruit, vegetables and herbs from wholesalers, suppliers and growers located in Australia, the specific varieties and quantities of such products to be agreed between the parties from time to time, and the price of each product to be agreed on a case by case basis (which may fluctuate); >> Flavours shall be responsible for: • purchasing the products from suppliers located in Australia for on-sale onto the Company; • payment of any export duties or taxes levied by the Australian government or regulatory authorities on the products, if applicable; • invoicing the Company for the products and any applicable duties on payment terms to be agreed between the parties; • ensuring that the products and the manner in which the products are transported, handled and stored in Australia are compliant with all applicable Australian laws, regulations and ordinances; • procuring delivery of the products to Flavours’ warehouse facility, arranging export of the products to China by air freight or ocean freight (at the Company’s discretion) and procuring shipping insurance for the Products at the Company’s cost and on terms approved by the Company; and • procuring all bills of lading, customs documentation and any other documentation required by Australian or Chinese authorities for export of the Products from Australia into China; and • any other obligations, duties or responsibilities as agreed between the parties from time to time. >> The Company and its subsidiaries will be responsible for: • payment of any import duties or taxes levied by the China government or regulatory authorities on the products and payment of the Invoices according to their terms; • taking delivery of the products upon landing in China and transportation and storage of the products in China; • the marketing, distribution and sale of the products through the WINHA Business; • ensuring that the products and the manner in which the products are transported, handled and stored in China are compliant with all applicable Chinese laws, regulations and ordinances; and • any other obligations, duties or responsibilities as agreed between the parties from time to time. >> Through its subsidiaries, the Company will be solely entitled to all revenues and profits derived from or in connection with the sale of the products by the Franchise Stores, Retail Stores or WINHA Supermarket.
18. HEADS OF AGREEMENT BETWEEN THE COMPANY AND FLAVOURS FOR IMPORT OF WINHA PRODUCTS INTO AUSTRALIA The key terms of the Heads of Agreement – WINHA Products, dated 11 November 2016, are as follows: >> Through its subsidiaries, the Company shall source WINHA Products from wholesalers, suppliers and growers located in Australia, the specific varieties and quantities of such WINHA Products to be agreed between the parties from time to time, and the price of each WINHA Product to be agreed on a case by case basis (which may fluctuate); >> The Company and its subsidiaries shall be responsible for: • purchasing the WINHA Products from suppliers located in China and payment of any export duties or taxes levied by the Chinese government or regulatory authorities on the WINHA Products, if applicable; • invoicing Flavours for the WINHA Products and any applicable duties on payment terms to be agreed between the parties;
124 Winha Commerce and Trade International Ltd PROSPECTUS 09 MATERIAL CONTRACTS / CONTINUED
• ensuring that the WINHA Products and the manner in which the products are transported, handled and stored in China are compliant with all applicable Chinese laws, regulations and ordinances; • procuring delivery of the products to the WINHA subsidiaries’ warehouse facility, arranging export of the WINHA Products to Australia by air freight or ocean freight (at Flavours’ discretion) and procuring shipping insurance for the WINHA Products at Flavours’ cost and on terms approved by Flavours; and • procuring all bills of lading, customs documentation and any other documentation required by Australian or Chinese authorities for export of the WINHA Products from Australia into China; and • any other obligations, duties or responsibilities as agreed between the parties from time to time. >> Flavours will be responsible for: • payment of any import duties or taxes levied by the Australian government or regulatory authorities on the WINHA Products and payment of the Invoices according to their terms; • taking delivery of the WINHA Products upon landing in Australia and transportation and storage of the WINHA Products in Australia; • the marketing, distribution and sale of the WINHA Products through the WINHA Business; • ensuring that the WINHA Products and the manner in which the WINHA Products are transported, handled and stored in Australia are compliant with all applicable Australian laws, regulations and ordinances; and • any other obligations, duties or responsibilities as agreed between the parties from time to time. >> Flavours will be solely entitled to all revenues and profits derived from or in connection with the sale of the WINHA Products by Flavours in Australia.
19. LEAD MANAGER MANDATE BETWEEN BEER & CO PTY LTD AND THE COMPANY Beer & Co has entered into a mandate with the Company to provide capital raising and issue management services in connection with the Offer. The key terms of the Lead Manager Mandate are as follows: >> Beer & Co shall assist with the raising of up to $10,000,000 under the Offer; >> Beer & Co is entitled to receive a capital raising fee of 7.5% of the funds raised by Beer & Co under the Offer; and >> Beer & Co is entitled to receive an issue management fee of 1.5% of the funds raised under the Offer and a corporate advisory fee of $18,000 (ex. GST).
20. DIRECTORS DEEDS OF INDEMNITY, INSURANCE AND ACCESS Each of the Directors has entered into Deeds of Indemnity, Insurance and Access. The material terms of the Deeds of Indemnity, Insurance and Access are as follows: >> To the extent permitted by law, the Company indemnifies the director from any liabilities arising out of the director discharging their duties and providing services as director; >> The directors will be given access to board papers and company files; >> Unless otherwise agreed with particular Directors, the Company must maintain an insurance policy for the directors for the term in which they hold office and for a period of seven (7) years following the date they cease to be a director.
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21. DIRECTOR’S SERVICE AGREEMENTS A) DIRECTORS SERVICE AGREEMENT – ZHUOWEI ZHONG The Company has entered into a Directors Service with Zhuowei Zhong. Pursuant to such agreement, Zhuowei Zhong shall be entitled to Directors’ fees of AUD40,000 per annum, including superannuation.
B) DIRECTORS SERVICE AGREEMENT –HUIWEN HUANG The Company has entered into a Directors Service Agreement with Huiwen Huang. Pursuant to such agreement, Huiwen Huang shall be entitled to directors’ fees of AUD40,000 per annum, including superannuation.
C) DIRECTORS SERVICE AGREEMENT –ZHIFEI HUANG The Company has entered into a Directors Service Agreement with Zhifei Huang. Pursuant to such agreement, Zhifei Huang shall be entitled to directors’ fees of AUD40,000 per annum, including superannuation.
D) DIRECTORS SERVICE AGREEMENT– PETER BEER The Company has entered into a Directors Service Agreement with Peter Beer. Pursuant to such agreement, Peter Beer shall be entitled to directors’ fees of AUD40,000 per annum, including superannuation.
E) DIRECTORS SERVICE AGREEMENT – NELSON LAY The Company has entered into a Directors Service Agreement with Nelson Lay. Pursuant to such agreement, Nelson Lay shall be entitled to directors’ fees of AUD40,000 per annum, including superannuation.
F) DIRECTORS SERVICE AGREEMENT– ANDREW THOMSON The Company has entered into a Directors Service Agreement with Andrew Thomson. Pursuant to such agreement, Andrew Thomson shall be entitled to directors’ fees of AUD40,000 per annum, including superannuation.
22. RESTRICTION AGREEMENTS The Company has entered or will enter into Restriction Agreements with holders of restricted securities for the purposes of complying with Chapter 9 of the ASX Listing Rules. The Agreements are in the approved form as set out in Appendix 9A of the ASX Listing Rules.
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10 CHINA LEGAL OVERVIEW 10 CHINA LEGAL OVERVIEW
The WINHA Group’s business activities will be solely conducted in China as the WINHA Business and its operations are based in China. The Company has obtained advice of its China legal advisors, Beijing Jingze Law Firm, in relation to the key laws and regulations in China that would impact the WINHA Group. For the benefit of the prospective Investors under the Prospectus, Beijing Jingze Law Firm has advised the Company as follows:
(A) LEGAL DUE DILIGENCE IN RELATION TO WINHA GROUP 1. The China Subsidiaries have been validly incorporated under the Chinese law, are limited liability companies and have full legal capacity. No agreements have been entered into which would result in variation of share rights or fluctuations in registered capital. The shareholders of each of the China Subsidiaries have subscribed and fully paid for all registered capital, in accordance with Chinese law. 2. The WINHA Business conforms to applicable Chinese legislations, orders, regulations and bylaws (including, the Food Safety Law in China). The scope of the WINHA Business does not involve any industries which are restricted or prohibited for foreign investment or which would prevent a foreign company from, directly or indirectly, holding shares in Shenzhen WANHA, Zhongshan WINHA and/or its China Subsidiaries. 3. Zhongshan WINHA, Zhongshan Supermarket and WINHA Catering hold all necessary licences and certificates required to carry out the WINHA Business, including but not limited to business and company licences and tax registration certificates. In this regard, Zhongshan WINHA is not required under the Chinese law to obtain and hold a licence in order to conduct commercial franchising in China. 4. Zhongshan WINHA has satisfied all conditions for the conduct of the commercial franchising and has notified the relevant governmental agency in China of its commercial franchising activities. The conduct of the commercial franchising in China by Zhongshan WINHA conforms to the Chinese law. 5. The execution of the Orchard Land Tenure Agreements and Farm Land Tenure Agreements and each party’s performance under the Orchard Land Tenure Agreements and Farm Land Tenure Agreements are in compliance with the relevant laws or regulations of China, and the execution of these contracts do not violate the Property Law, Rural Land Contract Law and Administrative Management Rules of China. 6. There is no agreement between any company in the WINHA Group and shareholders whereby such shareholders hold pre-emptive or preferred rights to participate in any issue of securities in any company within the WINHA Group. 7. Beijing Jingze Law Firm has carried out searches of court records, including the Supreme Court, People’s Court and local courts, and has found no litigation to which the China Subsidiaries or other entities of the WINHA Group were parties. The China Subsidiaries have not been found to violate any China regulations, including anti-dumping and anti-monopoly regulations and there are no arbitral or governmental proceedings, investigations or inquiries against any China Subsidiary. 8. There are no security agreements over any entity in the WINHA Group, and no entity in the WINHA Group has entered into a mortgage or guarantee. No entity in the WINHA Group has incurred liabilities or costs outside those incurred in the ordinary course of business. 9. Zhongshan WINHA holds the following registered intellectual property rights in China: >> three trademark registration certificates; and >> two international domain name registration certificates, details of which are outlined in section 2.8 of the Prospectus. Zhongshan WINHA has also made the seven trade mark applications outlined in section 2.8 of the Prospectus. 10. Zhongshan WINHA has also entered into a cooperative sales contract with Lijing Deyi Food Co. Ltd whereby Zhongshan WINHA is granted a right to use the trademark “Xueshan Nongshang” and related images for the period commencing on 14 September 2012 and ending on 13 September 2022. 11. The appointment of each executive and director of Zhongshan WINHA is valid and their employment contracts and procedures under which they were appointed, conform to the laws of China and Zhongshan WINHA’s articles of association.
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12. Each executive and director of a China Subsidiary has full legal capacity and is authorised by that China Subsidiary to hold office and exert the rights granted by that China Subsidiary. There are no abnormal or unusual agreements between the China Subsidiaries and any director or executive of the China Subsidiaries. No director of the China Subsidiaries has a criminal record or has been bankrupt. 13. All contracting parties to the material contracts to which Zhongshan WINHA is a party are natural person or legal person and are capable of having legal rights and obligations. Such contracts are not have been validly formed and have been implemented according to the laws of PRC and are not outside the ordinary course of business. To the best of Beijing Jingze Law Firm’s knowledge, Zhongshan WINHA has not entered into oral or unwritten contracts, and there is no current or potential default under any material contract. 14. According to Food Safety Law of the People’s Republic of China, Zhongshan WINHA is a “food business enterprise (food sales and catering services)”, which is strictly regulated. The WINHA Products must comply with the requirements of the Food Safety Law of the People’s Republic of China. Zhongshan WINHA has complied with the requirements of the Food Safety Law of the People’s Republic of China and other Chinese law. 15. The agricultural and commercial leases entered into by Zhongshan WINHA are legal, valid and effective, and Zhongshan WINHA has exclusive use and possession of the premises and land leased under such agreements; 16. The WINHA products are not subject to any product recall or product liability claims in China. 17. The China Subsidiaries have not been the subject of any penalties or legal complaints stemming from product quality or compliance with technical standards. 18. The China Subsidiaries have not been the subject of any penalties or legal complaints for environment problems. 19. Zhongshan WINHA has kept all copies of the company’s records, including, but not limited to board minutes, meeting minutes of general meeting, consent letter and statutory book. 20. There are no criminal records or bankruptcy records of any directors and senior executives of the WINHA Group in the People’s Republic of China. 21. Zhongshan WINHA has developed a Privacy Policy in accordance with the Secrecy Laws of the People’s Republic of China. 22. The WINHA Group’s risk management policy and system conforms to the relevant Chinese laws and are legal and valid.
(B) WINHA GROUP RESTRUCTURE Pursuant to the C&V Share Sale Agreement (which is outlined in section 9 of this Prospectus), in March 2016, the Company acquired 100% of the shares in C&V International, which, in turn, owns wholly owns WINHA HK. As WINHA HK, owns 100% of the shares in Shenzhen WANHA, which in turn wholly owns Zhongshan WINHA, the acquisition of a 100% shareholding in C&V International by the Company resulted in Zhongshan WINHA becoming a wholly owned subsidiary of the Company from February 2016. Beijing Jingze Law Firm has advised that the acquisition of 100% shareholding in C&V International (and thereby, its underlying 100% ownership in the China Subsidiaries) by the Company complies with Chinese law.
(C) PROPOSED CHANGES TO PRC FOREIGN INVESTMENT LAWS On 19 January 2015, MOFCOM issued the Foreign Investment Draft Law (‘Draft Law’) for public comment. Pursuant to the Draft Law, the following material changes to Chinese foreign investment laws are contemplated: (a) Pursuant to the Draft Law, an entity will be treated as a foreign investment entity (‘FIE’) where foreign individuals hold de-facto control over the entity. Such control is evinced if: i. non-PRC individuals have decisive influence over the operations, personnel, finance or technology of the entity, whether such influence is via contractual arrangements, share investments or trust structures; ii. non-PRC individuals hold at least 50% of voting rights at the shareholder level, whether directly or indirectly;
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iii. if non-PRC individuals hold less than 50% of voting rights at shareholder level, but: A. over 50% of the seats of the board of directors of the entity (or similar decision-making body) are directly or indirectly appointed by non-PRC individuals, B. non-PRC individuals are able to nominate nominees to hold over 50% of the seats of the board of directors of the entity (or similar decision-making body); or C. the voting rights held by non-PRC individuals may carry a decisive influence over the board of directors of the entity (or similar decision-making body). (b) If the criteria set out in (a) above are satisfied, the entity will be deemed to be a FIE and be subject to the Draft Law. It is currently proposed that a list of restricted and prohibited industries will be circulated by the State Council of the PRC (‘Draft List’). FIEs cannot operate in prohibited industries, and FIEs which operate in restricted industries must obtain approval from MOFCOM. However, FIEs which do not operate in industries cited in the Draft List will no longer be required to obtain approval from MOFCOM but, rather, will simply be required to register their ownership status with MOFCOM. If the Draft Law is adopted in its current form, it is possible that Zhongshan WINHA will be deemed to be a FIE and therefore be subject to the Draft Law. As at the date of this Prospectus, the content of the Draft List is uncertain. If the Draft List adopts the categorisation of restricted and prohibited industries adopted in the 2015 Foreign Investment Catalogue, and Zhongshan WINHA is considered to be a FIE, Zhongshan WINHA will not be classified as operating in a restricted or prohibited industry under the Draft List, and will simply be required to register with MOFCOM. However, if the categories of restricted and prohibited industries in the Draft List diverge from those in the 2015 Foreign Investment Catalogue, it is possible that Zhongshan WINHA could be classified as operating within a restricted or prohibited industry under the Draft List. In the event that Zhongshan WINHA is treated as a FIE and the WINHA Business appears to be in the “restricted” or “prohibited” category of the Draft List, then Zhongshan WINHA may be required to cease operations in the business activity or segment prohibited under the Draft List or dispose of or restructure (through a joint venture or other arrangement required by the Draft List) the business activity or segment restricted under the Draft List.
(D) LAND TENURE – AGRICULTURAL LAND As all land in the PRC is either collectively owned or state owned, Zhongshan WINHA has entered into agricultural leases with 51 landowners , such leases having a term of one year (for vegetable farms) and ten years (for orchards). Under PRC law, agricultural land is typically collectively owned by farmers in a rural or village collective, and Zhongshan WINHA therefore leases land from rural households, villagers’ committees or local government acting on behalf of farmer households. According to the provisions of Article 126 of the Property Law of the People’s Republic of China, rural households or village committees can lease out cultivated land to third parties for a term of up to 30 years. Article 128 of the Property Law of the People’s Republic of China specifies that rural households and village committees can sub-contract, transfer or swap land, provided that the period of such dealing shall not exceed the remaining term of the contract period, and that no agricultural land can be used for non-agricultural purposes without government approval. After expiry of the 30 year term, the parties may enter into another lease of 30 years, pursuant to the decision of the Central Committee of the Communist Party of China, ‘On Several Important Issues Concerning the Promotion of Rural Reform and Development’ (Third Plenary Session of the Seventeenth Central Committee of the Communist Party of China, 2008). As the Company’s agricultural leases for orchards expire prior to 2027, the term of the agricultural leases do not exceed the remaining term of the 30-year contract period.
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11 ADDITIONAL INFORMATION 11 ADDITIONAL INFORMATION
11.1 DOCUMENTS AVAILABLE FOR INSPECTION The following documents are available for inspection during normal office hours, free of charge, at the registered office of the Company for a period of at least 12 months from the date of lodgement of this Prospectus with the ASIC: (a) the current Constitution of the Company; (b) the consents referred to in Section 11 of this Prospectus; (c) the material contracts referred to in Section 9 of this Prospectus.
11.2 DIRECTORS’ INTERESTS Other than as set out below or elsewhere in this Prospectus, no Director and no firm in which a Director is a partner, has an interest in the promotion or in property proposed to be acquired by the Company in connection with its formation or promotion. Other than as set out below or elsewhere in this Prospectus no amounts have been paid or agreed to be paid (in cash or shares or otherwise) to any Director or any firm in which any Director is a partner, either to induce him to become, or to qualify him as, a Director or otherwise for services rendered by him or by the firm in which he is a partner in connection with the formation or promotion of the Company.
11.3 INTERESTS OF EXPERTS AND ADVISERS Except as disclosed below or elsewhere in this Prospectus, no expert nor any firm of which such expert is a partner, has or has had any interest in the formation or promotion of, or in any property proposed to be acquired by, the Company in connection with its formation or promotion, and no amounts have been paid (in cash or shares or otherwise), or agreed to be paid, to any expert or to any firm in which such expert is a partner for services rendered by him or the firm in connection with the promotion or formation of the Company. (a) Professional fees payable to the Company’s Australian and overseas accounting service providers for work done in relation to the Offer are $70,000 (including GST) payable to HLB Mann Judd Corporate Finance Pty Ltd and $25,500 payable to Wei Wei & Co LLC; (b) Professional fees payable to the Company’s Australian and overseas legal service providers for work done in relation to the Offer are $120,000 (including GST) payable to Pointon Partners Pty Ltd and $42,600 payable to Beijing Jingze Law Firm; (c) Professional fees payable to the Lead Manager, Beer & Co, for work done in relation to the Offer are $225,000 (including GST) if the Minimum Subscription is raised or $495,000 (including GST) if the Maximum Subscription is raised. These fees are based on assumptions of funds likely to be raised directly by Beer & Co, and are gross fees before pay aways to third parties. (d) Computershare Investor Services Pty Limited has acted as the share registry for the Company. Standard commercial fees are payable to Computershare Investor Services Pty Limited for share registry services in relation to the Offer made pursuant to this Prospectus.
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11.4 CONSENTS The following consents have been given in accordance with the Corporations Act: (a) HLB Mann Judd Corporate Finance Pty Ltd has given and has not before lodgement of this Prospectus withdrawn its written consent to be named in this Prospectus as the Investigating Accountant and to the inclusion in this Prospectus of its Investigating Accountant’s Report of this Prospectus in the form and context in which it is included. Notwithstanding that it may be referred to elsewhere in this Prospectus, HLB Mann Judd has only been involved in the preparation of the Investigating Accountant’s Report and was not involved in the preparation of any other part of this Prospectus. HLB Mann Judd did not authorise or cause the issue of this Prospectus and does not accept any liability to any person in respect of any false or misleading statement in, or omission from, any part of this Prospectus other than in respect of the Investigating Accountant’s Report. (b) HLB Mann Judd (Vic) Partnership has given and has not before lodgement of this Prospectus withdrawn its written consent to be named in this Prospectus as the auditor of the Company and Flavours. HLB Mann Judd (Vic) Partnership did not authorise or cause the issue of this Prospectus and does not accept any liability to any person in respect of any false or misleading statement in, or omission from, any part of this Prospectus. (c) Pointon Partners Pty Ltd have given and have not, before lodgement of this Prospectus, withdrawn their written consent to being named in this Prospectus as solicitors to the Company in the form and context in which they are named. Pointon Partners Pty Ltd did not authorise or cause the issue of this Prospectus and do not accept any liability to any person in respect of any false or misleading statement in, or omission from, any part of this Prospectus. (d) Computershare Investor Services Ltd has given and, as at the date hereof, has not withdrawn, its written consent to be named as Share Registrar in the form and context in which it is named. Computershare Investor Services Ltd has had no involvement in the preparation of any part of the Prospectus other than being named as Share Registrar to the Company. Computershare Investor Services Ltd has not authorised or caused the issue of, and expressly disclaims and takes no responsibility for, any part of the Prospectus. (e) Beijing Jingze Law Firm has given and, as at the date hereof, has not withdrawn, its written consent to be named in this Prospectus as providing the China Legal Overview in the form and context in which it is named. Beijing Jingze Law Firm has had no involvement in the preparation of any part of the Prospectus other than being named as preparing the China Legal Overview for the Company. Beijing Jingze Law Firm has not authorised or caused the issue of, and expressly disclaims and takes no responsibility for, any part of the Prospectus other than in respect of the China Legal Overview. (f) Beer & Co has given and has not before lodgement of this Prospectus withdrawn its written consent to be named in this Prospectus as the Lead Manager to the Offer. Beer & Co did not authorise or cause the issue of this Prospectus and does not accept any liability to any person in respect of any false or misleading statement in, or omission from, any part of this Prospectus. (g) Wei, Wei & Co., LLP has given and has not before lodgement of this Prospectus withdrawn its written consent to be named in this Prospectus as the WINHA Group’s as the independent registered public accounting firm in relation to its audit of the WINHA Group’s financial statements for the year ended 31 March 2016 and its review of the WINHA Group’s financial statements for the 3 months ended 30 June 2016, and consents to the form of the statements made concerning Wei, Wei & Co., LLP. Wei, Wei & Co., LLP have not otherwise authorised or caused the issue of this Prospectus.
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11.5 EXPENSES OF THE OFFER The estimated expenses of the Offer are as follows:
MINIMUM MAXIMUM ITEM SUBSCRIPTION SUBSCRIPTION
Capital Raising Costs $225,000 $495,000
Legal Fees associated with Offer:
Australian Legal Fees $120,000 $120,000
Chinese Legal Fees $42,600 $42,600
Accounting Fees associated with Offer:
Australian Accounting Fees $70,000 $70,000
United States Accounting Fees $25,500 $25,500
ASX Fees $50,000 $65,650
ASIC Fees $2,350 $2,350
Printing and Postage $55,000 $55,000
Share Registry Fees $2,500 $2,500
Listing Ceremony $10,000 $10,000
Total Estimated Gross Expenses of the Offer $602,950 $888,600
Deferred tax asset expensed ($180,885) ($266,580)
Total Estimated Expenses of the Offer (net of tax) $422,065 $622,020
The above amounts are exclusive of GST.
11.6 LITIGATION The Company is not involved in any litigation, arbitration or other legal proceedings and the Directors are not aware of any threatened or pending litigation or arbitration against the Company.
11.7 WORKING CAPITAL STATEMENT The Directors believe that, on completion of the Public Offer, the Company will have sufficient working capital to carry out its objectives as stated in this Prospectus.
11.8 CONTINUOUS DISCLOSURE OBLIGATIONS FOLLOWING LISTING Following listing on the ASX, and pursuant to Section 111AC of the Corporations Act, the Company will be a disclosing entity and will therefore be subject to regular reporting and disclosure obligations. Following listing on the ASX, the Company is required to continuously disclose all information to the market that a reasonable person would expect to have a material effect on the value or price of the Company’s securities. All price-sensitive information will be released through the ASX before it is disclosed to market participants and shareholders, and the distribution of non-price sensitive information will also be managed through the ASX.
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11.9 DIRECTORS’ STATEMENT The Directors state that they have made all reasonable enquiries and have reasonable grounds to believe that any statements by the Directors in this Prospectus are true and not misleading and that in respect to any other statements made in this Prospectus by persons other than Directors, the Directors have made reasonable enquiry and have reasonable grounds to believe that persons making the statement or statements were competent to make such statements, those persons have given the consent required by section 716 of the Corporations Act to the issue of this Prospectus and have not withdrawn that consent, before lodgement of this Prospectus with the ASIC. This Prospectus is prepared on the basis that: (a) certain matters may be reasonably expected to be known to professional advisers of any kind with whom Applicants may reasonably be expected to consult; and (b) information is known to Applicants or their professional advisers by virtue of any Acts or laws of the Commonwealth of Australia or any State of Australia.
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12 DIRECTORS’ AUTHORISATION 12 DIRECTORS’ AUTHORISATION
In accordance with s.720 of the Corporations Act, the lodgement and issue of this Prospectus has been consented to and authorised by each of the Directors.
Signed for and on behalf of the Company
Zhuowei Zhong Chairperson Dated: 30 November 2016
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13 GLOSSARY OF TERMS 13 GLOSSARY OF TERMS
These definitions are provided to assist persons in understanding some of the expressions used in this Prospectus. “$” means Australian dollars. “Admission” means the Company’s admission to the official list of the ASX following its application for admission under Chapters 1 and 2 of the ASX Listing Rules. “AEST” means Australian Eastern Standard Time. “Applicant” means a person who submits an Application. “Application” means a valid application to subscribe for Shares under this Prospectus. “Application Form” or “Application Forms” means the application form that is attached to and forms part of this Prospectus. “ASIC” means Australian Securities and Investments Commission. “ASTC” means ASX Settlement and Transfer Corporation Pty Ltd (ACN 008 504 532). “ASX” means Australian Stock Exchange Limited (ACN 008 624 691). “ASX Listing Rules” means the listing rules of ASX as at the date of this Prospectus. “Auditor” means HLB Mann Judd. “Beer & Co” means Beer & Co Pty Ltd (ACN 158 837 186), which will provide the services of Lead Manager in connection with the Offer. “Beijing Ruihua” means Beijing Ruihua International Investment Management Co., Ltd. “Board” means the Board of Directors of the Company unless the context indicates otherwise. “Call Option Agreement” means the call option agreement between the Company, Flavours and the Flavours Vendors, dated 8 November 2016. “C&V International” means C&V International Holding Co Ltd, a company incorporated in the Caymans. “C&V Share Sale Agreement” means the share sale agreement between Sanmei International and the Company, dated 23 March 2016, whereby all share capital in C&V International was transferred to the Company on 11 April 2016. “CHESS” means ASX Clearing House Electronic Subregistry System. “China” means the People’s Republic of China. “China Legal Overview” means the report provided by Beijing Jingze Law Firm in Section 10 of this Prospectus. “China Subsidiaries” means Shenzhen WANHA and the Retail Subsidiaries. “Company” means WINHA Commerce and Trade International Ltd (ACN 605 884 848). “Constitution” means the Constitution of the Company as at the date of issue of this Prospectus. “Corporations Act” means the Corporations Act 2001 (Cth). “Directors” means the board of directors of the Company as it is constituted from time to time. “EST” means Eastern Standard Time. “Existing Shareholders” means the Shareholders of the Company prior to the Offer, being: (a) Beijing Ruihua International Investment Management Co., Ltd; (b) Black Swan Equity Partners Ltd; (c) Zhuowei Zhong; (d) Sanmei International; (e) Xinxi Zhong, (f) Zhifei Huang; and (g) the Existing Minority Shareholders.
Winha Commerce and Trade International Ltd PROSPECTUS 139 13 GLOSSARY OF TERMS / CONTINUED
“Existing Minority Shareholders” means Shareholders who held 1% of the issued ordinary share capital in the Company prior to the Offer, being: (a) Lihua Fang; (b) Ruicheng Li; (c) Weicheng Zheng; (d) Zidong Chen; (e) Haolin Zhou; (f) Senghong He; (g) Qianxin Chen; (h) Yixang Qu; (i) Zongxun Zhang; (j) Jianxin Cen; (k) Huizhen Li; (l) Wing Yuen Tam; and (m) Aek Yen Ting. “Experience Halls” means the two restaurants owned and operated by WINHA Catering Management Co Ltd on behalf of the Company, and located in Zhongshan, China, where customers can sample and purchase food and beverage products of the WINHA Business. “Exposure Period” means the period of 7 days after the date of lodgement of this Prospectus, which period may be extended by ASIC by not more than 7 days pursuant to s. 727(3) of the Corporations Act. “Financial Information” means the information described as Financial Information in section 7. “Flavours” means Flavours Fruit & Veg Pty Ltd (ACN 166 549 435), a company incorporated in Australia. “Flavours Acquisition” means the acquisition of 490 ordinary shares in Flavours by the Company, constituting 49% of Flavours’ share capital, pursuant to the Flavours Acquisition Agreements. “Flavours Acquisition Agreements” means: (a) Share Subscription Agreement; (b) Share Sale Agreement; (c) Call Option Agreement; (d) Flavours Convertible Note Subscription Agreement; (e) General Security Agreement between Flavours and the Company, dated 8 November 2016; and (f) Shareholders’ Agreement between the Company, the Flavours Vendors and Flavours, dated 11 November 2016. “Flavours Convertible Note Subscription Agreement” means the subscription agreement for Convertible Notes between Peter Cannavo, Gassane Elbob, Flavours and the Company, dated 8 November 2016. “Flavours Convertible Notes” means the 1,000,000 convertible notes which the Company has subscribed for in Flavours pursuant to the Flavours Convertible Note Subscription Agreement, each convertible note having a face value of $1.00, and converting into one (1) ordinary fully paid share in Flavours. “Flavours Vendors” means World of Flavours Pty Ltd (ACN 159 309 305) and Select Providor Pty Ltd (ACN 124 200 353). “Franchisee” means the owner and operator of a Franchise Store. “Franchise Stores” means the forty four (44) stores operated by the Franchisees. “Issuer Sponsored” means securities issued by an issuer that are held in uncertificated form without the holder entering into a sponsorship agreement with a broker or without the holder being admitted as an institutional participant in CHESS.
140 Winha Commerce and Trade International Ltd PROSPECTUS 13 GLOSSARY OF TERMS / CONTINUED
“LDF” means Lijiang Deyi Food Co Ltd, a company incorporated in China. “Lead Manager” means Beer & Co. “Maximum Subscription” means the maximum amount to be raised under the Offer made by this Prospectus, being $10,000,000. “Minimum Application” means the minimum application for Shares that can be made by an Applicant under this Offer, being valid subscriptions for at least 5,715 Shares. “Minimum Subscription” means the minimum amount to be raised under the Offer made by this Prospectus, being $7,000,000. “MOFCOM” means the Ministry of Commerce of the People’s Republic of China. “NPAT” means net profit after tax. “Offer” means the invitation made to the public pursuant to this Prospectus to subscribe for up to 28,571,428 Shares at an issue price of $0.35 per Share. “Offer Application Form” means the Application Form attached to or accompanying this Prospectus and which relates to the Offer. “Offer Closing Date” means 12 December 2016 or such earlier or later date as the Directors may determine. “Offer Period” means the period commencing on the Opening Date and ending on the Offer Closing Date. “Offer Shares” means the Shares issued under this Prospectus. “Official Quotation” means official quotation by ASX in accordance with the ASX Listing Rules. “Opening Date” means 30 November 2016 or as varied by the Directors. “Option” means an option to subscribe for Shares in the capital of the Company. “Original Prospectus” means the prospectus dated 16 November 2016 and which was lodged with ASIC on 16 November 2016. “Pilot” means Pilot International Investment Company Ltd (Registration No 2268786), a company incorporated in Anguilla. “Prospectus” means this prospectus dated 30 November 2016 and which was lodged with ASIC on that date. “Retail Stores” means the six (6) stores owned by Zhongshan WINHA and operated by managers which retail the WINHA Products. “Retail Subsidiaries” means Shenzhen WANHA, Zhongshan WINHA, Zhongshan Supermarket and WINHA Catering. “RMB” means renmimbi. “Sanmei International” means Sanmei International Investment Co. Ltd, a company incorporated in Anguilla. “Share” means a fully paid ordinary share in the capital of the Company. “Shareholder” means a holder of shares in the Company. “Share Registry” means Computershare Investor Services Pty Limited (ACN 078 279 277). “Share Sale Agreement” means the agreement between the Company, Flavours and the Flavours Vendors, dated 8 November 2016. “Share Subscription Agreement” means the agreement between the Company, Flavours and the Flavours Vendors, dated 8 November 2016. “Shenzhen WANHA” means Shenzhen WANHA Information Technology Company, a company incorporated in China. “USD” means United States dollars.
Winha Commerce and Trade International Ltd PROSPECTUS 141 13 GLOSSARY OF TERMS / CONTINUED
“US G.A.A.P” means the generally accepted accounting principles adopted by the United States’ Securities and Exchange Commission. “WINHA Business” means the business operations of the Retail Subsidiaries. “WINHA Catering” means Zhongshan WINHA Catering Management Co Ltd. “WINHA Group” means the Company, WINHA International Group, C&V International, WINHA HK, and the Retail Subsidiaries. “WINHA HK” means WINHA International Investment Holdings Company Ltd, a company incorporated in Hong Kong. “WINHA International Group” means WINHA International Group Ltd, a company incorporated in Nevada. “WINHA Products” means regional food and beverage products from throughout China sold by the WINHA Business. “Zhongshan WINHA” means Zhongshan WINHA Electronic Commerce Company Ltd, a company incorporated in China. “Zhongshan Supermarket” means Zhongshan WINHA Supermarket Co Ltd, a company incorporated in China.
142 Winha Commerce and Trade International Ltd PROSPECTUS WINHA Commerce and Trade International Ltd For all enquiries: ACN 605 884 848 (within Australia) 1300 648 187 (outside Australia) +61 3 9415 4197
Offer closes at 5.00pm (AEDT) on Monday, 12 December 2016 Application Form This Application Form is important. If you are in doubt as to how to deal with it, please contact your stockbroker or professional advisor without delay. You should read the WINHA Commerce and Trade International Ltd Prospectus dated 30 November 2016 and any relevant Supplementary Prospectus (if applicable), carefully before completing this Application Form. The Corporations Act prohibits any person from passing on this Application Form (whether in paper or electronic form) unless it is attached to or accompanies a complete and unaltered copy of the Prospectus and any relevant Supplementary Prospectus (whether in paper or electronic form).
I/we apply for I/we lodge full Application Money A$ . Number of Shares in WINHA Commerce and Trade International Ltd at A$0.35 per Share or such lesser number of Shares which may be allocated to me/us. Individual/Joint applications - refer to naming standards overleaf for correct forms of registrable title(s)
Title or Company Name Given Name(s) Surname
Joint Applicant 2 or Account Designation
Joint Applicant 3 or Account Designation
Enter the postal address - include State and Postcode
Unit Street Number Street Name or PO Box/Other information
City/Suburb/Town State Postcode
Enter your contact details
Contact Name Telephone Number - Business Hours ( )
CHESS Participant
Holder Identification Number (HIN) X Please note that if you supply a CHESS HIN but the name and address details on your form do not correspond exactly with the registration details held at CHESS, your application will be deemed to be made without the CHESS HIN, and any Shares issued as a result of the Offer will be held on the Issuer Sponsored subregister.
Payment details - Please note that funds are unable to be directly debited from your bank account
Drawer Cheque Number BSB Number Account Number Amount of cheque A$ Make your cheque, bank draft or money order payable to 'WINHA Commerce and Trade International Ltd' and cross 'Not Negotiable".
By submitting this Application Form: • I/we declare that this Application is complete and lodged according to the Prospectus, and any relevant Supplementary Prospectus, and the declarations/statements on the reverse of this Application Form, • I/we declare that all details and statements made by me/us (including the declaration on the reverse of this Application Form) are complete and accurate, and • I/we agree to be bound by the Constitution of WINHA Commerce and Trade International Ltd. See overleaf for completion guidelines
Samples/000001/000001/i12 How to complete this Application Form
Number of Shares applied for CHESS Enter the number of Shares you wish to apply for. The Application must be for a WINHA Commerce and Trade International Ltd will apply to the ASX to minimum of 5,715 Shares (A$2,000.25). Applications for greater than 5,715 participate in CHESS, operated by ASX Settlement Pty Limited, a wholly owned Shares must be in multiples of 286 Shares ($100.10). subsidiary of ASX Limited. If you are a CHESS participant (or are sponsored by Application Monies a CHESS participant) and you wish to hold Shares issued to you under this Enter the amount of Application Monies. To calculate the amount, multiply the Application on the CHESS Subregister, enter your CHESS HIN. Otherwise, number of Shares applied for in Step A by the Issue Price of A$0.35. leave this section blank and on issue, you will be sponsored by WINHA Applicant Name(s) Commerce and Trade International Ltd and allocated a Securityholder Enter the full name you wish to appear on the statement of shareholding. This Reference Number (SRN). must be either your own name or the name of a company. Up to 3 joint Payment Applications may register. You should refer to the table below for the correct Make your cheque, bank draft or money order payable in Australian dollars to forms of registrable title. Applications using the wrong form of names may be 'WINHA Commerce and Trade International Ltd' and cross it 'Not rejected. Clearing House Electronic Subregister System (CHESS) participants Negotiable'. Cheques must be drawn from an Australian bank. Cash will not be should complete their name identically to that presently registered in the CHESS accepted. The total payment amount must agree with the amount shown in Step B. system. Complete the cheque details in the boxes provided. Postal Address Cheques will be processed on the day of receipt and as such, sufficient cleared Enter your postal address for all correspondence. All communications to you funds must be held in your account as cheques received may not be re- from the Registry will be mailed to the person(s) and address as shown. For presented and may result in your Application being rejected. Paperclip (do not joint Applicants, only one address can be entered. staple) your cheque(s) to the Application Form. Receipts will not be forwarded. Contact Details Funds cannot be directly debited from your bank account. Enter your contact details. These are not compulsory but will assist us if we need to contact you regarding this Application.
Before completing the Application Form the Applicant(s) should read the Prospectus to which this Application relates. By lodging the Application Form, the Applicant agrees that this Application for Shares in WINHA Commerce and Trade International Ltd is upon and subject to the terms of the Prospectus and the Constitution of WINHA Commerce and Trade International Ltd, agrees to take any number of Shares that may be issued to the Applicant(s) pursuant to the Replacement Prospectus and declares that all details and statements made are complete and accurate. It is not necessary to sign the Application Form. Lodgement of Application Application Forms must be received by Computershare Investor Services Pty Limited (CIS) by no later than at 5.00pm (AEDT) on Monday, 12 December 2016. You should allow sufficient time for this to occur. Return the Application Form with cheque, bank draft or money order attached to: Computershare Investor Services Pty Limited GPO Box 52 MELBOURNE VIC 3001 Neither CIS nor WINHA Commerce and Trade International Ltd accepts any responsibility if you lodge the Application Form at any other address or by any other means. Privacy Notice The personal information you provide on this form is collected by CIS, as registrar for the securities issuers (the issuer), for the purpose of maintaining registers of securityholders, facilitating distribution payments and other corporate actions and communications. In addition, the issuer may authorise us on their behalf to send you marketing material or include such material in a corporate communication. You may elect not to receive marketing material by contacting CIS using the details provided overleaf or emailing [email protected]. We may be required to collect your personal information under the Corporations Act 2001 (Cth) and ASX Settlement Operating Rules. We may disclose your personal information to our related bodies corporate and to other individuals or companies who assist us in supplying our services or who perform functions on our behalf, to the issuer for whom we maintain securities registers or to third parties upon direction by the issuer where related to the issuer’s administration of your securityholding, or as otherwise required or authorised by law. Some of these recipients may be located outside Australia, including in the following countries: Canada, India, New Zealand, the Philippines, the United Kingdom and the United States of America. For further details, including how to access and correct your personal information, and information on our privacy complaints handling procedure, please contact our Privacy Officer at [email protected] or see our Privacy Policy at http://www.computershare.com/au. Correct forms of registrable title(s) Note that ONLY legal entities are allowed to hold Shares. Application Forms must be in the name(s) of a natural person(s), companies or other legal entities acceptable to WINHA Commerce and Trade International Ltd. At least one full given name and the surname is required for each natural person. Application Forms cannot be completed by persons less than 18 years of age. Examples of the correct form of registrable title are set out below.
Type of Investor Correct Form of Registration Incorrect Form of Registration
Individual: use given names in full, not initials Mr John Alfred Smith JA Smith Company: use the company’s full title, not abbreviations ABC Pty Ltd ABC P/L or ABC Co
Joint Holdings: use full and complete names Mr Peter Robert Williams & Peter Robert & Ms Louise Susan Williams Louise S Williams
Trusts: use the trustee(s) personal name(s) Mrs Susan Jane Smith Sue Smith Family Trust
Deceased Estates: use the executor(s) personal name(s) Ms Jane Mary Smith & Estate of late John Smith Mr Frank William Smith or
Minor (a person under the age of 18): use the name of a responsible adult with an Mr John Alfred Smith Master Peter Smith appropriate designation
Partnerships: use the partners personal names Mr John Robert Smith & John Smith and Son Mr Michael John Smith
Long Names Mr John William Alexander Mr John W A Robertson-Smith Robertson-Smith Clubs/Unincorporated Bodies/Business Names: use office bearer(s) personal Mr Michael Peter Smith ABC Tennis Association name(s)
Superannuation Funds: use the name of the trustee of the fund Jane Smith Pty Ltd Jane Smith Pty Ltd Superannuation Fund
Offer closes at 5.00pm (AEDT) on Monday, 12 December 2016 Application Form This Application Form is important. If you are in doubt as to how to deal with it, please contact your stockbroker or professional advisor without delay. You should read the WINHA Commerce and Trade International Ltd Prospectus dated 30 November 2016 and any relevant Supplementary Prospectus (if applicable), carefully before completing this Application Form. The Corporations Act prohibits any person from passing on this Application Form (whether in paper or electronic form) unless it is attached to or accompanies a complete and unaltered copy of the Prospectus and any relevant Supplementary Prospectus (whether in paper or electronic form).
I/we apply for I/we lodge full Application Money A$ . Number of Shares in WINHA Commerce and Trade International Ltd at A$0.35 per Share or such lesser number of Shares which may be allocated to me/us. Individual/Joint applications - refer to naming standards overleaf for correct forms of registrable title(s)
Title or Company Name Given Name(s) Surname
Joint Applicant 2 or Account Designation
Joint Applicant 3 or Account Designation
Enter the postal address - include State and Postcode
Unit Street Number Street Name or PO Box/Other information
City/Suburb/Town State Postcode
Enter your contact details
Contact Name Telephone Number - Business Hours ( )
CHESS Participant
Holder Identification Number (HIN) X Please note that if you supply a CHESS HIN but the name and address details on your form do not correspond exactly with the registration details held at CHESS, your application will be deemed to be made without the CHESS HIN, and any Shares issued as a result of the Offer will be held on the Issuer Sponsored subregister.
Payment details - Please note that funds are unable to be directly debited from your bank account
Drawer Cheque Number BSB Number Account Number Amount of cheque A$ Make your cheque, bank draft or money order payable to 'WINHA Commerce and Trade International Ltd' and cross 'Not Negotiable".
By submitting this Application Form: • I/we declare that this Application is complete and lodged according to the Prospectus, and any relevant Supplementary Prospectus, and the declarations/statements on the reverse of this Application Form, • I/we declare that all details and statements made by me/us (including the declaration on the reverse of this Application Form) are complete and accurate, and • I/we agree to be bound by the Constitution of WINHA Commerce and Trade International Ltd. See overleaf for completion guidelines
Samples/000001/000001/i12 How to complete this Application Form
Number of Shares applied for CHESS Enter the number of Shares you wish to apply for. The Application must be for a WINHA Commerce and Trade International Ltd will apply to the ASX to minimum of 5,715 Shares (A$2,000.25). Applications for greater than 5,715 participate in CHESS, operated by ASX Settlement Pty Limited, a wholly owned Shares must be in multiples of 286 Shares ($100.10). subsidiary of ASX Limited. If you are a CHESS participant (or are sponsored by Application Monies a CHESS participant) and you wish to hold Shares issued to you under this Enter the amount of Application Monies. To calculate the amount, multiply the Application on the CHESS Subregister, enter your CHESS HIN. Otherwise, number of Shares applied for in Step A by the Issue Price of A$0.35. leave this section blank and on issue, you will be sponsored by WINHA Applicant Name(s) Commerce and Trade International Ltd and allocated a Securityholder Enter the full name you wish to appear on the statement of shareholding. This Reference Number (SRN). must be either your own name or the name of a company. Up to 3 joint Payment Applications may register. You should refer to the table below for the correct Make your cheque, bank draft or money order payable in Australian dollars to forms of registrable title. Applications using the wrong form of names may be 'WINHA Commerce and Trade International Ltd' and cross it 'Not rejected. Clearing House Electronic Subregister System (CHESS) participants Negotiable'. Cheques must be drawn from an Australian bank. Cash will not be should complete their name identically to that presently registered in the CHESS accepted. The total payment amount must agree with the amount shown in Step B. system. Complete the cheque details in the boxes provided. Postal Address Cheques will be processed on the day of receipt and as such, sufficient cleared Enter your postal address for all correspondence. All communications to you funds must be held in your account as cheques received may not be re- from the Registry will be mailed to the person(s) and address as shown. For presented and may result in your Application being rejected. Paperclip (do not joint Applicants, only one address can be entered. staple) your cheque(s) to the Application Form. Receipts will not be forwarded. Contact Details Funds cannot be directly debited from your bank account. Enter your contact details. These are not compulsory but will assist us if we need to contact you regarding this Application.
Before completing the Application Form the Applicant(s) should read the Prospectus to which this Application relates. By lodging the Application Form, the Applicant agrees that this Application for Shares in WINHA Commerce and Trade International Ltd is upon and subject to the terms of the Prospectus and the Constitution of WINHA Commerce and Trade International Ltd, agrees to take any number of Shares that may be issued to the Applicant(s) pursuant to the Replacement Prospectus and declares that all details and statements made are complete and accurate. It is not necessary to sign the Application Form. Lodgement of Application Application Forms must be received by Computershare Investor Services Pty Limited (CIS) by no later than at 5.00pm (AEDT) on Monday, 12 December 2016. You should allow sufficient time for this to occur. Return the Application Form with cheque, bank draft or money order attached to: Computershare Investor Services Pty Limited GPO Box 52 MELBOURNE VIC 3001 Neither CIS nor WINHA Commerce and Trade International Ltd accepts any responsibility if you lodge the Application Form at any other address or by any other means. Privacy Notice The personal information you provide on this form is collected by CIS, as registrar for the securities issuers (the issuer), for the purpose of maintaining registers of securityholders, facilitating distribution payments and other corporate actions and communications. In addition, the issuer may authorise us on their behalf to send you marketing material or include such material in a corporate communication. You may elect not to receive marketing material by contacting CIS using the details provided overleaf or emailing [email protected]. We may be required to collect your personal information under the Corporations Act 2001 (Cth) and ASX Settlement Operating Rules. We may disclose your personal information to our related bodies corporate and to other individuals or companies who assist us in supplying our services or who perform functions on our behalf, to the issuer for whom we maintain securities registers or to third parties upon direction by the issuer where related to the issuer’s administration of your securityholding, or as otherwise required or authorised by law. Some of these recipients may be located outside Australia, including in the following countries: Canada, India, New Zealand, the Philippines, the United Kingdom and the United States of America. For further details, including how to access and correct your personal information, and information on our privacy complaints handling procedure, please contact our Privacy Officer at [email protected] or see our Privacy Policy at http://www.computershare.com/au. Correct forms of registrable title(s) Note that ONLY legal entities are allowed to hold Shares. Application Forms must be in the name(s) of a natural person(s), companies or other legal entities acceptable to WINHA Commerce and Trade International Ltd. At least one full given name and the surname is required for each natural person. Application Forms cannot be completed by persons less than 18 years of age. Examples of the correct form of registrable title are set out below.
Type of Investor Correct Form of Registration Incorrect Form of Registration
Individual: use given names in full, not initials Mr John Alfred Smith JA Smith Company: use the company’s full title, not abbreviations ABC Pty Ltd ABC P/L or ABC Co
Joint Holdings: use full and complete names Mr Peter Robert Williams & Peter Robert & Ms Louise Susan Williams Louise S Williams
Trusts: use the trustee(s) personal name(s) Mrs Susan Jane Smith Sue Smith Family Trust
Deceased Estates: use the executor(s) personal name(s) Ms Jane Mary Smith & Estate of late John Smith Mr Frank William Smith or
Minor (a person under the age of 18): use the name of a responsible adult with an Mr John Alfred Smith Master Peter Smith appropriate designation
Partnerships: use the partners personal names Mr John Robert Smith & John Smith and Son Mr Michael John Smith
Long Names Mr John William Alexander Mr John W A Robertson-Smith Robertson-Smith Clubs/Unincorporated Bodies/Business Names: use office bearer(s) personal Mr Michael Peter Smith ABC Tennis Association name(s)
Superannuation Funds: use the name of the trustee of the fund Jane Smith Pty Ltd Jane Smith Pty Ltd Superannuation Fund
DIRECTORS OF THE COMPANY AUSTRALIAN SOLICITORS TO THE COMPANY >> Zhuowei Zhong (Executive Director); Pointon Partners Lawyers Level 14, 565 Bourke Street >> Zhifei Huang (Executive Director); Melbourne VIC 3000 >> Huiwen Huang (Non-Executive Director); >> Nelson Lay (Non-Executive Director); AUDITORS >> Andrew Thomson(Non-Executive Director); and HLB Mann Judd (Vic) Partnership >> Peter Beer (Non-Executive Director). Level 9, 575 Bourke Street Melbourne VIC 3000 COMPANY SECRETARY INVESTIGATING ACCOUNTANTS Mr Justyn Stedwell HLB Mann Judd Corporate Finance Pty Ltd Level 9, 575 Bourke Street PRINCIPAL PLACE OF BUSINESS Melbourne VIC 3000 3rd Floor, No 19 Changyi Street Changmingsui Village COMPANY’S CHINA LEGAL ADVISORS Wuguishan District Zhongshan City, China Beijing Jingze Law Firm Room 805, Building A No 168 Guanganmen Wai Avenue REGISTERED ADDRESS Xincheng District, Beijing, China C/- Pointon Partners Lawyers Level 14, 565 Bourke Street CORPORATE ADVISOR (CHINA) Melbourne VIC 3000 Beijing Ruihua International Investment Management Co., Ltd; Room 1702, No.5 Jincheng Jianguo ASX CODE: Jianguo Gate North Street WQW Dongcheng, Beijing, China
SHARE REGISTRY LEAD MANAGER Computershare Investor Services Pty Limited Beer & Co Pty Ltd Yarra Falls Suite 4, Level 2, 11-19 Bank Place 452 Johnson Street Melbourne VIC 3000 Abbotsford VIC 3067
www.colliercreative.com.au #POP0003
Winha Commerce and Trade International Ltd PROSPECTUS Winha Commerce and Trade International Ltd Trade and International Commerce Winha PROSPECTUS
WINHA Commerce and Trade International Ltd www.auwinha.com