Questions to SunMoon Food Company Ltd.

Date: November 8, 2016

Date: 08 November 2016
Attn: Board of Directors:
Mr Gary Loh Hock Chuan (Executive Chairman)
Dr. Tan Eng Liang
Mr Chee Wai Pong
Mr Michael John Martin
Mrs Jessie Peh8 November 2016Dear Members of the Board,
Minority shareholders of SunMoon Food Company have approached SIAS to address issues concerning their investment in SunMoon. The issues raised by minority shareholders are highlighted below for the Board to address to shareholders.

The issues are as follows:

GENERAL OFFER

On 18 March 2013, SunMoon announced the restructuring of the existing convertible loan and the circular to shareholders containing the terms of the restructuring were despatched to shareholders in August 2013. A group of creditors (“Lenders”) executed a Settlement Agreement with SunMoon to settle the amounts (principal of $24.4m plus interest of some $12m) owing by SunMoon to the Lenders. The Lenders and SunMoon agreed as follows:

1) Lenders to waive interest of some $12m
2) SunMoon to pay $12.4m in cash to the Lenders
3) SunMoon to issue $6m in shares to the Lenders
4) Lenders to waive $6m and in return SunMoon would issue $6m in shares (60 million shares) to FACL, who would undertake to pay the Lenders S$6m in cash or 60 million shares at the end of one year.

In 2014, Gary Loh sold a substantial portion of his shares to a group of investors, making a substantial profit.

At the end of one year, FACL and Gary Loh failed to perform their obligations to the Lenders. Gary Loh did not pay the $6m nor deliver the 60 million shares. As a result, a Writ of Summons was filed by the Lenders against FACL and Gary Loh (the “Suit”).

On 17 June 2015, SunMoon announced it had entered into an agreement to acquire 51% interest in Harvest Season Singapore Pte Ltd (“Harvest Season”) (“51% Acquisition”). Harvest Season operates 6 fruit stalls in China. As purchase consideration, SunMoon was to issue 60,000,000 new shares (18.82% of issued capital) to the vendor, resulting in the vendor becoming the single largest shareholder of SunMoon. The 51% Acquisition valued Harvest Season at about S$6.2 million. The 51% Acquisition, if completed would be dilutive to existing shareholders. The Directors and Controlling Shareholders also declared they have no interest in the 51% Acquisition. Coincidently, the purchase consideration, being 60,000,000 new shares, was the same number of shares Gary Loh needed to deliver to the Lenders.

On 31 July 2015, after a lengthy delay, FACL transferred the 60 million shares to the Lenders and the transfer was announced on 31 Jul 2015 via SGXNet.

On 6 August 2015, certain Lenders who held shares in SunMoon sent a Requisition Notice to SunMoon to convene an EGM for the removal of Gary Loh as director and for the appointment of 4 new directors.

On 14 September 2015, SunMoon announced the expiry of Long Stop Date in respect of the 51% Acquisition. 

FACL and Gary Loh offered to settle the Suit brought by the Lenders. FACL, Gary Loh and the Lenders entered into a Settlement Agreement. The Settlement Agreement involved FACL acquiring 60 million shares from the Lenders.

On 21 September 2015, FACL announced:

1) Disposal of 21 million shares (6.59% of issued capital) in two separate transactions, decreasing FACL’s shareholdings from 17.8% to 10.89%. The total consideration was $1.1 million or $0.052 per share.
2) Acquisition of 60 million shares (18.82% of issued capital) increasing FACL’s shareholdings from 10.89% to 29.71%. The announcement stated that the transaction was pursuant to a Settlement Agreement. The consideration was $6.55 million or $0.11 per share.

On 10 November 2015, SunMoon announced that as a result of consultations between FACL and the Securities Industry Council (“SIC”), FACL will be effecting the sale of 14,000,000 shares.

Questions:

1. Why did FACL dispose 21 million shares and immediately acquire 60 million shares on the same day?
2. The disposal of 21 million shares was executed in 2 transactions, each falling below the 5% substantial shareholding disclosure threshold. Who are the buyers of the shares and what is their relationship to FACL and the directors of SunMoon?
3. Why was the disposal price almost 50% discount to the acquisition price?
4. It appears that if the disposal of 21 million shares were not carried out, FACL would have an interest of some 36.3%, and FACL and its concert parties would be required to make a mandatory general offer. As a result of consultations with the SIC, FACL effected the sale of 14 million shares. Please provide more clarity on the queries by SIC and FACL’s response to those queries.
5. For transparency, can FACL declare that it is not acting in concert with any other parties?


HARVEST SEASON

On 17 June 2015, SunMoon announced it had entered into an agreement to acquire 51% interest in Harvest Season Singapore Pte Ltd (“Harvest Season”) (“51% Acquisition”). Harvest Season operates 6 fruit stalls in China. As purchase consideration, SunMoon was to issue 60,000,000 new shares (18.82% of issued capital) to the vendor, resulting in the vendor becoming the single largest shareholder of SunMoon. The 51% Acquisition valued Harvest Season at about S$6.2 million. The 51% Acquisition, if completed would be dilutive to existing shareholders. The Directors and Controlling Shareholders also declared they have no interest in the 51% Acquisition.

On 14 September 2015, SunMoon announced expiry of Long Stop Date in respect of the 51% Acquisition.

On 10 February 2016, SunMoon announced an agreement to acquire 12% interest in Harvest Season (“12% Acquisition”) from the vendor of Harvest Season, valuing Harvest Season at about S$11.6m. The purchase consideration is to be paid by the discharge of 2 China customers who owe US$1.03m to SunMoon. The vendor is also granted a call option to re-purchase the 12% Acquisition shares at 10% premium. If the 12% Acquisition is completed, SunMoon may stand to lose US$1.03m and gain up to 10% of US$1.03m.

On 19 February 2016, Gary Loh informs that he and his wife are interested in the 12% Acquisition. They both are indirect owners of SLS Atelier and GLOH Fresh which have dealings with the Harvest Season vendor.

On 2 June 2016, SunMoon announced extension of Long Stop Date to 29 January 2017.

Questions:

The 2 China Customers

1. Who introduced the 2 China customers to SunMoon?
2. What credit review procedures were undertaken on the 2 China customers?
3. When did the sale of inventory take place and what were the trade terms?
4. According to SunMoon’s Annual Report the gross amount of the account receivable is $2.69m and were tested for impairment. Based on management’s assessment, management believed no impairment was required. It appears that the account receivables were not doubtful as at 31 Dec 2015 but became doubtful just prior to the announcement of the 12% Acquisition on 10 February 2016. When did SunMoon realise that the accounts receivable was in doubt and what steps were taken to recover the accounts receivable?
5. Are the 2 China customers related or connected with any director of SunMoon? If not, the director(s) should execute a statutory declaration.


Harvest Season

6. What is the background and track record of the vendor and Harvest Season?
7. How are the 2 China customers and the vendor of Harvest Season related?
8. Has SunMoon carried out any due diligence on Harvest Season? What are the results of such due diligence?
9. Is the vendor of Harvest Season related or connected with any director of SunMoon? If not, the director(s) should execute a statutory declaration.
10. If the account receivable is impaired as a result of the 2 China customers (who are purportedly part of or related to the Harvest Season group) not being able to repay its debts, the equity value of Harvest Season is questionable. What is the commercial justification for entering into the 12% Acquisition?
11. It appears that the valuation of Harvest Season has increased from  about S$6.2 million in June 2015 (where the 2 China customers were solvent) to about S$11.6 million in February 2016 (where the 2 China customers are insolvent). What has changed since the announcement on 17 June 2015?
12. In respect of the 51% Acquisition, it is not clear why FACL would want to transfer control of SunMoon to the vendor of Harvest Season. Are FACL and the vendor of Harvest Season acting in concert?
13. On 19 February 2016, Gary Loh disclosed he is an interested party. Why was this not disclosed in SunMoon’s announcement on 17 June 2015?
14. Will all of the above questions be dealt with in the Circular to shareholders?
15. As FACL is an interested party, will it and its concert parties be abstaining from voting at the EGM?


LICENSING PARTNERSHIPS WITH SLS ATELIER AND GLOH FRESH

On 19 February 2016, Gary Loh informs that he and his wife are interested in the transaction. They both are indirect owners of SLS Atelier and GLOH Fresh which have dealings with the Harvest Season vendor.

SLS Atelier is owned by First Alverstone Partners, whose owners are Gary Loh and his wife. SLS is an intellectual property manager. They designed a cartoon called “SazzyPets”. On 15 May 2014, a subsidiary of SunMoon, SunMoon Retail & Franchise, entered into a licensee agreement with SLS. In exchange for the right to use SazzyPets on SunMoon’s products, SunMoon pays SLS S$2,000 a month for 3 years, with an option to renew for another 3 years.

GLOH Fresh is owned by First Alverstone Partners. It is an online e-commerce platform for fruits. On 15th May 2014, a SunMoon subsidiary, SunMoon Distribution and Trading Company, granted GLOH Fresh a master global license. The license permits GLOH Fresh:

i) To operate e-commerce under the name “SunMoonDirect” with licensing rights in Singapore, Indonesia and Korea
ii) The rights to manage SunMoon’s vending machine operations globally
iii) The rights to use the name “SunMoon Fresh” for its retail and kiosk outlets in Singapore subject to franchise guidelines
iv) To work with SunMoon to expand its wholesale operation in Singapore

Under the license agreement, SunMoon will provide support to GLOH Fresh Design, Corporation Services and Equipment leases. GLOH Fresh will pay S$2,000 per month licensing fee for 3 years, with an option to renew for another 3 years.

Questions:

1. Have these related party transactions been disclosed before? If not, why?
2. In view of the substantial growth in e-commerce businesses globally, what was the commercial justification to allow GLOH Fresh to operate the e-commerce and vending machine business when SunMoon could have undertaken these businesses itself?
3. Materiality should not apply in situations where there is a conflict of interest. How did SunMoon arrive at the pricing for the license agreements?
4. Have the license agreements been disclosed to the Board prior to 29 February 2016?


DEHYDRATED BUSINESS

On 14 August 2015, SunMoon disclosed in their 2Q2015 results announcement that they have since in July 2015 shifted its focus from dehydrated business by leasing out its dehydrated factory in order to concentrate staffing and financial resources on the trading of fresh fruits and the development of processed fruits in order to achieve a stronger market share in these sectors.

On 29 February 2016, SunMoon released their 4Q2015 results. On their balance sheet, they classified S$3.5m of Property, Plant & Equipment (“PPE”) under operating lease. The lessee was disclosed as Taian Fei Hui Tong Kai. SunMoon also disclosed that it had entered into an agreement with the lessee to sell inventories worth S$5.9m, payable in 5 monthly instalments from 1 November 2015 to 1 March 2016.

Questions:

1. The terms of the lease were not disclosed. What are the terms of the lease?
2. Who introduced the lessee to SunMoon? What is the background of the lessee, Taian Fei Hui Tong Kai? Is the lessee a related party?
3. Is the former CEO of SunMoon currently involved in the dehydrated business/factory?
4. In SunMoon’s Annual Report, it is disclosed “customer bases and contracts related to operations at the agricultural products segment were also transferred and sold to a third party group of companies”. What price were the customer bases and contracts sold at and how was it valued?
5. It appears SunMoon has disposed the dehydrated assets/business. The PPE (dehydrated factory) under operating lease of S$3.5m and inventories of S$5.9m total some S$9.4m, which is 84% of net assets of SunMoon. Under the SGX Listing Rules, this represents a major transaction which requires shareholder approval. Why was shareholder approval not obtained for this transaction?


SunMoon’S TRACK RECORD

Based on the announcements, the profit and loss and the adjusted profit and loss after excluding non-recurring income/expenses and write-backs are summarized below:

($’000) 2008 2009 2010 2011 2012 2013 2014 2015
Profit / (Loss) after tax (49,800) 6,400 900 800 (2,500) 11,100 (2,100) (4,200)
Adjusted profit / (loss) after tax (27,500) (4,300) (1,100) (2,000) (5,300) (700) (1,100) (2,500)

The annual reports also state Gary Loh’s remuneration as follows:

Year Amount ($)
2015 502,000
2014 452,000
2013 414,000
2012 427,000


Questions:

1. If the non-recurring income/expenses and write-backs are excluded from FY2008 to FY2015, is it correct that SunMoon was operating at a loss from FY2008 to FY2015?
2. In view of SunMoon operating at a loss and SunMoon having a full time CEO, how was  Gary Loh’s remuneration justified and determined?
3. What is the breakdown of his remuneration, including salary, bonus and benefits?
4. What other expenses or reimbursements (travel, entertainment, etc) were incurred by Gary Loh since he was involved in the Company? Does he travel Business Class or First Class?

These questions will also published on the SIAS website. We ask that you make your answers to the above questions public by publishing the answers to the questions on SGX Net and also advise SIAS of your announcement, so that we too can highlight the answers to shareholders through a link on our website.

We look forward to receiving your kind responses.

Dear Members of the Board,
Minority shareholders of SunMoon Food Company have approached SIAS to address issues concerning their investment in SunMoon. The issues raised by minority shareholders are highlighted below for the Board to address to shareholders.