China Shengmu Organic Milk Limited announced that as disclosed in the Announcement, in relation to the raw fresh milk to be sold by Shengmu High-tech to Yiyingmei Dairy pursuant to the Raw Fresh Milk Supply Framework Agreement, the purchase price of raw fresh milk shall be determined and adjusted in accordance with market condition, seasonal factors and quality of raw
fresh milk (the "Base Price"). The final purchase price of raw fresh milk (the "Final Purchase Price") shall be adjusted in accordance with the quality grade as agreed between Shengmu High-tech and Yiyingmei Dairy. In respect of the aforementioned factors, the Company would like to further elaborate that pursuant to the Raw Fresh Milk Supply Framework Agreement, specific sale agreements will be entered into between the Company and Yiyingmei Dairy within the scope of the Raw Fresh Milk Supply Framework Agreement. Accordingly, it is contemplated that the Company and Yiyingmei Dairy will enter into a sale agreement each year during the term of the Raw Fresh Milk Supply Framework Agreement to agree on the Base Price for that year, whereby the Base Price would be determined based on the below various factors and as agreed after arm's length negotiations between the parties: the Company's expected production costs Shengmu High-tech has taken into account the expected production costs of cow feeding, feed market condition, packaging, cost of labour, fixed overheads, utilities, human resources and other operational and administrative affairs in respect of the sales of raw fresh milk; the Company's expected logistics costs -- Shengmu High-tech has taken into account the oil price and the distance between the customer's location and Shengmu High-tech's ranch; average gross profit margin -- Shengmu High-tech makes reference to the gross profit margin for organic milk of other organic milk producers in the dairy farming industry, and the Company's gross profit margin for organic milk from the previous year (e.g. approximately 38.6% for the year ended 31 December 2021); and reference to the market cycle and the sales price of raw fresh milk produced by other companies in the vicinity. As disclosed in the Announcement, Yiyingmei Dairy is required to make monthly payments based on the volume of raw fresh milk purchased during the month on or before the 20th of the following month (each a "Settlement Date").