Attached files
| file | filename |
|---|---|
| EX-4.6 - Fuer International Inc. | v188653_ex4-6.htm |
| EX-2.1 - Fuer International Inc. | v188653_ex2-1.htm |
| EX-4.5 - Fuer International Inc. | v188653_ex4-5.htm |
| EX-2.2 - Fuer International Inc. | v188653_ex2-2.htm |
| EX-10.15 - Fuer International Inc. | v188653_ex10-15.htm |
| EX-10.14 - Fuer International Inc. | v188653_ex10-14.htm |
| EX-10.18 - Fuer International Inc. | v188653_ex10-18.htm |
| EX-10.16 - Fuer International Inc. | v188653_ex10-16.htm |
| EX-10.17 - Fuer International Inc. | v188653_ex10-17.htm |
|
|
|
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________________
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date of
Report:
(Date of
earliest event reported)
June
16, 2010
____________________________
FOREX365,
INC.
(Exact
name of registrant as specified in charter)
Nevada
(State or
other Jurisdiction of Incorporation or Organization)
|
0-53436
(Commission
File Number)
|
84-0290243
(IRS
Employer
Identification
No.)
|
North
Neiwei Road,
Fulaerji
District, Qiqihar,
Heiloingjiang,
China, 161041
(Address
of Principal Executive
Offices
and zip code)
(86) 452-6919150
(Registrant’s
telephone
number,
including area code)
(Former
Name or Former Address, if Changed Since Last Report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of registrant under any of the following
provisions:
¨ Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
¨ Soliciting
material pursuant to Rule 14a-12(b) under the Exchange Act (17 CFR
240.14a-12(b))
¨ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this Form 8-K that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Registrant’s expectations,
beliefs, intentions or strategies for the future, which are indicated by words
or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “the
Registrant believes,” “management believes” and similar words or phrases. The
forward-looking statements are based on the Registrant’s current expectations
and are subject to certain risks, uncertainties and assumptions. The
Registrant’s actual results could differ materially from results anticipated in
these forward-looking statements. All forward-looking statements included in
this document are based on information available to the Registrant on the date
hereof, and the Registrant assumes no obligation to update any such
forward-looking statements.
Item
1.01 Entry into a Material Definitive
Agreement.
On June
16, 2010, Forex365, Inc. (the “Company”), a company incorporated in Nevada,
entered into a Share Exchange Agreement (the “Exchange Agreement”) with China
Golden Holdings, Ltd., a company organized under the laws of the British Virgin
Islands (“China Golden”), the shareholders of China Golden (the “Shareholders”),
who together owned shares constituting 100% of the issued and
outstanding common shares of China Golden (the “China Golden Shares”).
Pursuant to the terms of the Exchange Agreement, the Shareholders transferred to
the Company all of the China Golden Shares in exchange for the issuance of
11,550,392 shares (the “Shares”) of our common stock (the “Share Exchange”). As
a result of the Share Exchange, China Golden became our wholly-owned subsidiary
and the Shareholders acquired approximately 96.47% of our issued and outstanding
stock.
On June
17, 2010, we entered into a securities purchase agreement (the “Purchase
Agreement”) with Allied Merit International Investment Inc. (the “Investor”) for
the sale of an aggregate of 1,018,868 common shares (the “Investor Shares”), and
warrants to purchase 873,315 common shares of the Company, for aggregate gross
proceeds equal to $2,500,000 (the “Offering”). In connection with the Offering,
we also entered into a registration rights agreement (the “Registration Rights
Agreement”) with the Investor, in which we agreed to file a registration
statement (the “Registration Statement”) with the Securities and Exchange
Commission (the “SEC”) within 60 calendar days of the Closing Date of the
Offering to register for resale the Investor Shares and the shares underlying
the warrants (which are further described in Item 3.02), and to have the
Registration Statement become effective within 150 days of the Closing Date of
the Offering.
A copy of
the Exchange Agreement is incorporated herein by reference and filed as Exhibit
2.1 to this Form 8-K. The description of the transactions contemplated by the
Exchange Agreement set forth herein does not purport to be complete and is
qualified in its entirety by reference to the full text of the exhibit filed
herewith and incorporated by this reference.
On June 9, 2010, the Registrant’s
Articles of Incorporation were amended to effect a 1 for 64 reverse stock split
and so that the authorized shares of common stock shall remain at 200,000,000
and the authorized shares of blank check preferred stock shall remain at
10,000,000 with a par value of $.001 per share. The Registrant effected the
amendments in connection with the consummation of the transactions contemplated
by that certain Share Exchange Agreement pursuant to which the Registrant
acquired all of the issued and outstanding shares of stock of China Golden
Holdings, Ltd., as previously described in Item 5.01.
Item
2.01 Completion of Acquisition or Disposition of
Assets
On the
Closing Date of the Exchange Agreement, we consummated the transactions
contemplated by the Exchange Agreement, pursuant to which we acquired all of the
issued and outstanding shares of stock of China Golden Holdings, Ltd. in
exchange for the issuance in the aggregate of 11,550,392 of the Shares to the
Shareholders. Information regarding the acquired entity is included below under
Item 5.01 Changes in Control of the Registrant.
China
Golden, with its subsidiaries, engages in the production and distribution of
hybrid seeds and fertilizer products. The Company operates only through its
subsidiary, Qiqihar Deli Enterprise Management Consultancy Co., Ltd. (“Deli”), a
wholly foreign owned enterprise (“WFOE”) located in Heilongjiang Province of the
People’s Republic of China (“PRC”) and incorporated under the laws of PRC. On
March 25, 2010, Qiqihar Deli entered into a series of contractual agreements
with Qiqihar Fuer Agronomy Inc (“Fuer”), a company incorporated under the laws
of the PRC, and its two shareholders, in which Deli effectively assumed
management of the business activities of Fuer and has the right to appoint all
executives and senior management and the members of the board of directors of
Fuer. The contractual arrangements are comprised of a series of agreements,
including a Consulting Services Agreement, Operating Agreement, Proxy Agreement,
and Option Agreement, through which Deli has the right to advise, consult,
manage and operate Fuer for an annual fee in the amount of Fuer’s yearly net
profits after tax. Additionally, Fuer’s Shareholders have pledged their rights,
title and equity interest in Fuer as security for Deli to collect consulting and
services fees provided to Fuer through an Equity Pledge Agreement.(the afore
mentioned contractual agreements and the Share Pledge Agreement to be
collectively referred to as “Contractual Agreements”) In order to further
reinforce Deli’s rights to control and operate Fuer, Fuer’s shareholders have
granted Deli the exclusive right and option to acquire all of their equity
interests in Fuer through an Option Agreement. As all of the companies are under
common control, this has been accounted for as a reorganization of entities and
the financial statements have been prepared as if the reorganization had
occurred retroactively.
The
Contractual Arrangements are such that Deli, and ultimately the Company,
have the ability to substantially influence the daily operations and financial
affairs of Fuer, in addition to being able to appoint Fuer's senior executives
and approve all
matters requiring stockholder approval. The structure of the Contractual
Agreements is such that Fuer is effectively a variable interest entity
(“VIE”) of Deli. Accordingly, the Company through its wholly-owned China Golden
subsidiary and their wholly owned Deli subsidiary consolidates Fuer's results of
operation, assets and liabilities in their financial statements.
2
The
Company was a “shell company” (as such term is defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) immediately
before the completion of the Share Exchange. Accordingly, pursuant to the
requirements of Item 2.01(a)(f) of Form 8-K, set forth below is the information
that would be required if the Company were filing a general form for
registration of securities on Form 10 under the Exchange Act, reflecting the
Company’s Ordinary Shares, which is the only class of its securities subject to
the reporting requirements of Section 13 or Section 15(d) of the Exchange Act
upon consummation of the Share Exchange, with such information reflecting the
Company and its securities upon consummation of the Share Exchange.
Item
3.02 Unregistered Sales of Equity Securities
As more
fully described in Item 1.01 above, on June 17, 2010, one day after the Share
Exchange, we consummated a private offering of 1,018,868 Investor Shares, for
aggregate gross proceeds equal to $2,500,000. In addition to the Investor
Shares, the Company issued to the Investor warrants to purchase 873,315 shares
at a price per share of $2.58. The warrants are for a term of 3-years and have a
cashless exercise feature.
The
issuance of the Shares and the warrants was exempt from registration pursuant to
either Section 4(2) of, or Regulation D or Regulation S promulgated under, the
Securities Act of 1933, as amended (“Securities Act”).
A copy of
the Purchase Agreement and the Registration Rights Agreement are incorporated
herein by reference and filed as Exhibit 2.2 and Exhibit 10.14, respectively, to
this Form 8-K. The descriptions of the Purchase Agreement and the Registration
Rights Agreement do not purport to be complete and are qualified in their
entirety by reference to the full text of the exhibits filed herewith and
incorporated by this reference.
Item
5.01 Changes
in Control of Registrant.
On June
16, 2010, we consummated the transactions contemplated by the Exchange
Agreement, pursuant to which we acquired all of the issued and outstanding
shares of stock of China Golden in exchange for the issuance in the aggregate of
11,550,392 of the Shares to the Shareholders, or 96.47% of the shares issued and
outstanding on a fully diluted basis immediately after the merger. The issuance
of the Shares was exempt from registration pursuant to either Section 4(2),
Regulation D or Regulation S promulgated under, the Securities Act.
Other
than the transactions and agreements disclosed in this Form 8-K, we know of no
arrangements which may result in a change in control.
No
officer, director, promoter, or affiliate has, or proposes to have, any direct
or indirect material interest in any asset proposed to be acquired by us through
security holdings, contracts, options, or otherwise.
3
FORM
10 DISCLOSURE
Our
Corporate Structure
We were
incorporated under the laws of the State of Nevada on February 8, 1984. On June
16, 2010 we entered into a share exchange agreement with China Golden Holdings,
Ltd.(“China Golden”), and became its sole shareholder.
China
Golden, incorporated in British Virgin Island on November 30, 2009, conduct its
business through its wholly owned subsidiary QiqihaDeli Enterprise Management
Consulting Co., Ltd.(“Deli”). Through a series of contractual agreements
(“Contractual Agreements”) entered into on March 25, 2010, Qiqihar Fuer Agronomy
Inc. (“Fuer”) was accounted for as a variable interest entity.
Qiqihar
Fuer, established in 2003, is a leading manufacturer and supplier of seeds and
fertilizer product in Northeastern China. It aims to become a regional seed
giant with up to date development capability of new seeds varieties and vertical
integration of materials production and chain store operation. The company
diversified its operation by providing quality fertilizers and plant regulator
products.
Our corporate structure is described in
the chart below:
Description
of the Contractual Agreements:
Exclusive Business Cooperation
Agreement. Pursuant to the exclusive business cooperation agreement
between Deli and Fuer, Deli has the exclusive right to provide to Fuer general
business operation services, including nomination of Fuer’s senior management
Under this agreement, Deli owns the intellectual property rights developed or
discovered through research and development, in the course of providing the
Services, or derived from the provision of the Services. Fuer shall pay
consulting service fees in Renminbi (“RMB”) to Deli that is equal to all of
Fuer’s profits as defined in the Equity Pledge Agreement. The Agreement is valid
for 10 years and can be extended solely with Deli’s discretion.
Equity Pledge Agreement.
Pursuant to the Equity Pledge Agreement, Fuer’s Shareholders pledged all
of their equity interests in Fuer to Deli to guarantee Fuer’s performance of its
obligations under the consulting services agreement. If Fuer or Fuer’s
Shareholders breach their respective contractual obligations, Deli, as pledgee,
will be entitled to certain rights, including the right to sell the pledged
equity interests. Fuer’s Shareholders also agreed that upon occurrence of any
event of default, Deli shall be granted an exclusive, irrevocable power of
attorney to take actions in the place and stead of the Fuer’s Shareholders to
carry out the security provisions of the equity pledge agreement and take any
action and execute any instrument that Deli may deem necessary or advisable to
accomplish the purposes of the equity pledge agreement. Fuer’s Shareholders
agreed not to dispose of the pledged equity interests or take any actions that
would undermine Deli’s interest. The equity pledge agreement will expire unless
all payments due under the Exclusive Business Cooperation Agreement have been
fulfilled.
4
Exclusive Option Agreement.
Pursuant to the Exclusive Option Agreement, Fuer’s Shareholders
irrevocably granted Deli, or its designated person, an exclusive option to
purchase, to the extent permitted under PRC law, all or part of the equity
interests in Fuer for the cost of the initial contributions to the registered
capital of Fuer or the minimum amount of consideration permitted by applicable
PRC law. Deli or its designated person has sole discretion to decide when to
exercise the option, whether in part or in full. The term of this agreement
shall last for 10 years, and shall be renewed at Deli’s election, unless
terminated in accordance with this agreement.
Business
Overview
Fuer is a
leading regional provider of field seeds and fertilizers in Northeastern China.
Fuer has a sales network which covers key provinces, cities, counties and towns
within the region. Our products can directly reach 3,430 sales outlets through
1,094 distributors. Fuer has 214 staff members and 64 temporary workers, among
which 27 are research and technical staff and 75 are with the sales team. The Company has signed contracts with
breeding bases of 16,474
acres, with an annual
production capacity of 20,000,000 kg. We have two
fertilizer production
lines, with an annual
production capacity of 50,000 tons. Currently, the Company has 4 seed
variety rights, 1 product patent application on fertilizer, and over 40
registered trademarks.
The
Company had annual revenue growth of 39.07% in 2009 as compared to 2008, and a
25.38% increase in revenue for the first quarter of 2010, as compared to the
same quarter of 2009. The Company is expecting future growth by introducing
advanced and improved seeds and fertilizer product, and expansion of its network
of direct sales stores.
|
|
For the quarters ended
March 31,
|
For the years ended
December 31,
|
||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
|
Unaudited
|
Unaudited
|
Audited
|
Audited
|
||||||||||||
|
|
($ in thousands)
|
($ in thousands)
|
||||||||||||||
|
Summary of Historical
Income
|
||||||||||||||||
|
Sales
|
$ | 15,307 | $ | 12,208 | $ | 16,168 | $ | 11,626 | ||||||||
|
Gross
profit
|
6,317 | 5,106 | 6,699 | 4,761 | ||||||||||||
|
Net income
|
$ | 5,032 | $ | 3,626 | $ | 2,938 | $ | 2,053 | ||||||||
Highlight
Features
Leading seeds provider in
northeastern China - Fuer was ranked the 4th largest
seed provider in Heilongjiang Province, China in 2006. Since its establishment
in 2003, Fuer has been providing quality seeds and fertilizers to the local
farmers, and has great brand loyalty in northeastern China, which is one of the
most important grain production bases in China.
Diversification in product
portfolio - The Company maintains great competitiveness due to its
diversified product portfolio among corn, rice and soybean, as well as
fertilizers. In the northeastern China, climates are different from region to
region and year to year in terms of temperature. The Company provides seed
product which can adapt to all major weather conditions in the region, and
therefore has strong resistance to changes in climate. Furthermore, our
fertilizer products enhance our profitability after the selling season of seed
products which effectively reduces the concentration risk within our product
portfolio. Production of certain crops among our farmer customers fluctuates
greatly from year to year. Our well built product portfolio enabled us to
maintain stable profitability through the past years.
5
Diversified sales channels -
The Company was the first seed provider to launch its brand stores in
northeastern China. As of March, 2010 we have opened 5 direct sales stores and
over 43 franchise stores. The new sales channel will flatten our sales network
and boost our profitability. With the help of our branded stores, we are able to
provide better sales services and launch more accurate marketing
campaigns.
Strong growth potential in China’s
agriculture market – Pursuant to the statistics of the Food and
Agriculture Organization of the United Nations (“FAO”), China’s seed market
ranked 2nd in the
world, immediately following the United States. In terms of quantity, seeds
consumption in China ranks 1st
worldwide. The underlying reason is the low seeds price, and the farmers’
tradition to use harvest crop as seeds for the next cultivation period. The
seeds used by farmers are generally inferior to hybrid seeds from providers, as
features of the hybrid seeds devolved in their descendants, which made them
unprofitable to be grown. We believe it is a great opportunity to enhance
profitability by providing quality seeds, and consistent introduction of
improved seed varieties.
Abundant acquisition opportunities in
the industry - At present, there are over 9,000 licensed seed companies
and over 10,000 providers of fertilizer, pesticides, germicides and herbicides
in China. Among these enterprises, however, there are less than 100 state owned
large companies and regional leading companies, such as Fuer, that has
registered capital of over $4.3 million. The small companies controls certain of
the regional markets and a few of the regional product patents. As the PRC
government encourages the concentration of the industry, there are great
opportunities for us to expand our sales and product line by means of acquiring
quality companies in target regions.
Product
Portfolio
China’s
seed market was estimated to be over $4 billion, most of which is the field
seeds market. Northeastern China, which consists of Heilongjiang, Jilin and
Liaoning Provinces, is one of the most important regions for China’s food
safety. In 2008, 30.70% of China’s corn, 40.45% of China’s beans, and 13.56% of
China’s rice was supplied by these provinces.
Fuer
controls exclusive authorization or patents to provide 10 corn seeds, 19 soybean
seeds and 14 rice seeds that adapt to different accumulate temperature zones in
Northeastern China. Field seed products contributed to over 79.74% of our total
revenue in 2009.
Humic
acid fertilizers have multiple functions, which included boosting plant growth,
improving soil quality, accelerating crop growth and early ripeness, enhancing
crops’ capabilities of cold-resistance, drought-tolerance,
saline-alkali-resistance, and resistance to wind and sand, increasing crop
yields, as well as improving qualities of fruits and vegetables. Currently, Fuer
produces and distributes five types of common and special humic acid foliar
fertilizers under brand “Fuer 655” which enjoy a wide market base in Northeast
China.
The
weather in Northeast China is cold. In spring, this area is frequently hit by
cold snaps, resulting in quick and large temperature drops. As seeds lose
activity in low temperature, their germination rates will drop greatly.
Cold-resistant agents can greatly improve seeds’ resistance to low temperature,
increasing germination rates and per-acre yield. Fuer launched the “Qianjinding
Series” plant cold-resistance additive, which contains intermediates extracted
from Abies sibirica. The additive can improve seeds’ cold-resistance abilities,
which can efficiently increase crop yields in high latitude areas and improve
the production of out-of-season vegetables in other areas.
In order
to enrich our agricultural material products lines, we signed an OEM agreement
with Qingdao Fuer Agronomy Pesticide Co., Ltd. in 2006 and consigned it to
produce basic pesticide products. Fuer then distributes these products under the
“Fuer Brand”. Currently, we are selling 39 types of pesticide products around
China.
|
|
Fiscal Year Ended December
31,
|
|||||||||||||||
|
Amounts
expressed in
|
2009
|
2008
|
||||||||||||||
|
USD
|
Revenue
|
% of total
revenue
|
Revenue
|
% of total
revenue
|
||||||||||||
|
Corn seeds
|
$ | 10,544,282 | 65.22 | % | $ | 6,232,071 | 53.60 | % | ||||||||
|
Soybean
seeds
|
1,287,337 | 7.96 | % | 1,825,048 | 15.70 | % | ||||||||||
|
Rice
seeds
|
1,062,094 | 6.57 | % | 1,317,461 | 11.33 | % | ||||||||||
|
Pesticides
|
247,012 | 1.53 | % | 271,507 | 2.34 | % | ||||||||||
|
Vegetables
seeds
|
419,325 | 2.59 | % | 100,810 | 0.87 | % | ||||||||||
|
Fertilizers
|
2,308,656 | 14.28 | % | 1,624,836 | 13.98 | % | ||||||||||
|
Plant
additives
|
299,715 | 1.85 | % | 254,338 | 2.19 | % | ||||||||||
|
Total
|
$ | 16,168,421 | 100 | % | $ | 11,626,071 | 100 | % | ||||||||
6
Operation
Sales
& Marketing
Sales
Team
Our major
markets include the provinces of Heilongjiang, Jilin, Liaoning and East Inner
Mongolia in China. In 2009, the revenue in these areas accounted for 93% of the
Company’s total revenue. By the end of the first quarter of 2010, we have
established 5 wholly-owned stores, 43 franchised stores, and distribute to 1,094
distributors and 3,430 sales outlets in these areas. Revenue from sales to
distributors and our franchised stores accounted for approximately 90% of the
total revenue. The Company is now trying to set up a strong selling network in
the existing markets, extend depth and width of distribution channels, and seek
development opportunities in other provinces.
At
present, our sales team consists of 75 staff, mainly responsible for developing
and maintaining channel relations, managing orders from distributors, collecting
distributors’ inventory information, sending latest market information to the
Company, drafting and implementing promotion plans in promotion areas, as well
as providing post sales services.
Channel
Currently,
the Company sells products through distributors, 43 franchised stores, and our
sales hall together with 5 stores directly operated by the Company. The Company
renews sales agreements with distributors each year. As of March 31, 2010, we
provide our product to 1,094 distributors and indirectly to about 3,430 sales
outlets all over the country.
We have a
300 square meter sales hall on the first floor of our office building, 5 direct
sales stores and over 43 franchised stores in Heilongjiang Province. We provide
sales consultants to the stores and offer advisory services and recommendations
to farmers.
In March,
2010, the Company started its reformation of existing sales channels by creating
a branded store network. There will be two types of branded stores: wholly owned
stores and franchised stores. The franchised stores should be decorated
according to our unified customer image design and provide unified brand
information to farmers. We set sales targets with each franchise store before
each sales period. We will provide product to our franchised stores with lower
prices, which are determined by our sales department. By April 2010, we had
established 43 franchised stores.
Franchise
Stores
In the
past, distribution channels of agricultural materials in China were mainly
Supply and Marketing Cooperatives set up by the government. After 1980s, these
supply and marketing enterprises
were gradually privatized. As a number of
private enterprises began
to do business in this area, market competition was intense and
disorganized. In the past 10 years, fake seeds and fake fertilizers that did
harm to farmers frequently appeared. In addition, as the distribution channels
of agricultural materials are in chaos and the products they sell are of all
shapes and colors, farmers are not able to accurately select quality
agricultural materials. In addition, we estimate that the channel cost is
greater than 40% of the sales price to our end users.
7
The
Company launched its branded store program in March, 2010, aiming at enhancing
channel efficiency and brand awareness by downward integration of sales
channels. Under the program, we will establish direct sales stores in the most
important sales region, and convert our distributors into our franchise store
cooperators. At the preliminary stage of our branded store program, we sold our
products to the franchised stores at lower prices. The franchised stores are
required to concentrate their marketing efforts only on our product, and report
its inventory level timely to the Company. We believe our stores will enhance
our profitability by reducing cost of sales channel. We will be able to control
the terminal sales of our product, and provide a unified product price to our
customers. With unified store decoration and integrated marketing efforts, we
will be able to attract farmers to join our membership, so as to enhance our
brand awareness and loyalty, and maintain a customer database which will enable
us to provide post sales services to our target customers.
We have
set up 5 direct stores and 43 franchise stores in Heilongjiang Province. We
planned to expand our branded stores in Northeastern China.
Target
Customers
The
Company’s major customer groups for seed products are located in Heilongjiang,
Jilin and Northeast Inner Mongolia. These customers primarily plant corn, rice
and soybean. These farmers are scattered in various towns and villages. They
usually own tens of hectares of contracted land, suitable for using modern
farming methods. For these farmers, seed quality is the most important factor in
choosing seeds. They are able to afford relatively higher prices. These farmers
will also purchase high quality humic acid fertilizers and cold-resistant
regulators to increase yields and reduce losses caused by cold snaps in
spring.
Farmers
usually distinguish seeds quality by indices like germination rate and per-acre
yield. But these indices may be easily affected by various natural factors,
farming levels and abrupt natural disasters, so farmers mainly rely on products
brands, planting results of the previous year and promotions to choose seeds.
Farmers are very cautious in selecting crop varieties, so they will not change
to other varieties easily. Usually, they will make comparisons between different
varieties by trial planting and use the trial results to make planting plans for
the next year.
Since
2003, the Company has been providing high quality products and has established a
reputation and brand loyalty in Northeastern China. We will continue to extend
market reach in bordering provinces and cities with our brand and product
advantages.
Pricing
We
usually determine our product prices in December and January. When the yearly
pricing begins, salespersons from our sales department gather prices of
competing products. The Company then established trail prices and sell seeds at
the trial prices. The final selling prices will be set after several rounds of
trial selling. Usually, once the prices are set, they will not be easily
changed.
The
Company determines prices of products sold to distributors and at our branded
stores. When there are significant changes in supply and demand of seeds,
fertilizers and pesticides, the Sales Department will work out a price
adjustment plan and implement it with approval of our General Manager for
approval.
Seasonality
Winter in
the provinces of Heilongjiang, Jilin and Northeast Inner Mongolia is long and
cold. Temperature drops to below 0 centigrade from September to
October and will not rise to above 0°C until April to May of the next
year. Farmers can only plant crops once a year. They usually plant seeds in May
and harvest from July to September.
Subject to the cultivation seasonality,
we purchases raw seeds from our contracted seed breeders from late November till
next January, and produce our seed product in the same period. Sales of the seed
product to our
distributors are from late
December until the next March or April. Generally, we render our
distributors with credit
periods of 30
days.
8
Our
fertilizer, pesticides, germicides and herbicides products are sold from late
March until June. We start our production of fertilizers and forward our orders
for pesticides, germicides and herbicides one month before the sales
period.
Post-Sales
Support
Our
salespersons and technical staff regularly promote advanced production
management methods, fertilizers and pesticides using strategic communications
with product users, help them improve yields. There are two regular professional
staffs working on our sales supporting hotline. In peak season, the Research and
Development Department will send 5 to 8 technical staff to work on the hotline
24 hours a day. Meanwhile, these service staffs also help users by
answering all types of questions on our website.
Advertising & Promotion
Strategies
We make
advertising and publicity plans, and on-site marketing plans for the coming year
in November. We launch marketing campaigns shortly before our sales period
begins.
Send Publicity Materials - We
make tailored publicity newspapers, books and periodicals to different markets,
building Fuer Brand by promoting advanced agricultural philosophy. Our
Publishing Department is responsible for collecting or writing articles on
agricultural information and techniques, and spreading Fuer’s advanced
agricultural concepts to consumers. We publish newspapers, books and periodicals
every November. Leaflets will be directly sent to local farmers by salespersons,
while newspapers and periodicals will be sent to sales outlets through
distributors for farmers to read.
Advertisement - We usually
launch large-scale advertising campaigns in “golden hours”, which is generally
from 19:00 to 22:00 in each day, on local television channels of key sales areas
from November to June. We invite well-known rural actors as our products
spokesperson and have received good market feedback. As of December 31, 2009,
our advertising expenses accounted for 0.54% of total sales revenue of the
year.
Conference Marketing - The
Sales Department regularly sends a professional team to attend key exhibitions
of the industry, and establish relations with national large-scale enterprises
and key clients. In 2009, we attended many seeds exhibition and selling
meetings.
Activity Marketing - The
Company holds marketing activities in key areas every sales season. The
activities will be planned and carried out by local business managers.
Activities include discounts, professional lectures and outdoor
exhibitions.
Research &
Development
Fuer has
cooperative relationships with a number of research academies and institutes and
has a priority to purchase their research achievements involving seeds. We
cooperate with over 10 agricultural academies and institutes, including
Heilongjiang Academy of Agricultural Sciences, Qiqihar University and Heihe Agricultural Institute. Meanwhile, we
have invited Professor Su Jun, Deputy Dean of the
Heilongjiang Academy of Agricultural Sciences, and Mr. Ding Dong, Head of
Heilongjiang Inspection Center of Fertilizers, Pesticides, Germicides, and
Herbicides, to serve as our technology consultant for research on new seed
varieties and fertilizers.
So far,
Fuer has set up a sound process for purchasing seed variety rights. Every
quarter, our Research and Development Center
regularly communicates with the aforesaid academies and institutes to keep
abreast of new seeds development projects and obtain firsthand lab data. The
Vice Manager of the Research and Development Center
will then carry out evaluations on seeds that will pass assessment on provincial
level, and submit a detailed Seed Variety Purchase Plan to the Assessment
Committee based on the Seed Variety Rights Purchase Plan made by the General
Manager. The detailed purchase plan shall be strictly carried out after approval
by the General Manager.
9
In 2005, Fuer began to conduct research
and development on hybrid corn by optimization of seed-parent line development. In the following two
years, we developed our Fudan No. I, II, III Corn, which
have been examined and approved in Heilongjiang Province and recognized in
neighboring provinces. Our independent research and development of hybrid seeds
is conducted in accordance with traditional hybrid procedures, with the parent
plant provided by the national or local seeds reserve centers.
We modify humic fertilizer formulas for crops of different production conditions in
different stages. Our
Marketing Department and Fertilizers Production Department screen potential
market opportunities and set Research and Development targets based on feedback from our sales person; the Fertilizer Technique Division will
be in charge of preliminary research and development. New fertilizer
varieties will be put into trial production after examination; we will start
large-scale distribution after the field test. Limited by plant growth
periods, the whole process
can be finished within 6 to 8 months.
Production
Seeds
We adopt
the “Company + Farmer” Mode and conduct production through farmers who have
signed contracts with us. When we sign contracts with these farmers, we
introduce them to purchase seeds for breeding from qualified agricultural
institutes. When the crops are mature, we will make arrangements to purchase
seeds they have produced. Farmers will bear the delivery cost. We process the
raw seeds for sale in accordance with our production plan. During growth period
and flowering period, we regularly send technical staffs to monitor the growing
situations of crops in each production field, and provide timely technical
guidance to farmers. We require our technical staffs to provide timely guidance
to farmers on problems appearing during crop growth and recommend our fertilizer
and pesticide products to farmers. In 2009, our contracted production fields reached 16,474 acres, together with a production capacity of approximately 16,087 tons.
Fertilizers
Our
production line can produce 3,000 tons of liquid fertilizers and 50,000 tons of
solid fertilizers every year. By establishing and implementing strict operating
rules, we have reduced impact of human factor on products quality. Key
production processes are monitored closely by our technicians.
The
Market
Grain Supply Pressure
Challenges China’s Strategic Security
Decreasing
Arable Land and Increasing Population Threatens China’s Grain
Supply
China has
the largest population in the world. As of July, 2009, China’s population
reached 1.339 billion (excluding the population of the Hong Kong and Macao
Special Administrative Regions and the Taiwan Province), or 22% of the world’s
population. China’s overall population density is 139 persons per square
kilometer, far higher than that of the USA, whose overall population density is
33 persons per square kilometer.
According
to data provided by relevant government authorities, China’s population
increased by 54 million or 4.21% from 2002 to 2008. The 11th
Five-Year Plan shows: China’s total population will be controlled at 1.37
billion in 2010 and 1.46 billion in 2020; and China’s population will reached
the peak of about 1.5 billion in around 2033. By then arable land per capita in
China will decrease to 0.21 acre.
In the
past five years, China's annual grain consumption was about 500 million tons.
China’s grain consumption in 2009 is estimated to be 525 million tons. It is
forecasted that annual grain consumption will surge to 580 million tons in 2033,
when gain production will be 501.6 million tons. In recent years, the increasing
speed of grain output is slower than that of grain consumption.
.
10
China’s
arable land is only 7% of the world’s arable land. According to statistics,
China’s arable land stood at 321.4 million acres in 1996, ranking fourth in the
world, only lower to the United States, Russia and India. However, according to
the FAO, China’s arable land per capita is only 0.23 acre, which is 19.83% of
the United States and 85.57% of India, ranking 110 among more than 190
nations in the world. Due to agricultural restructuring, returning cultivated
land into forest and grass projects, damages from natural disasters and
nonagricultural construction purposes, arable land is decreasing each year. As
per the National Statistic Bureau of China, the total arable land in 2007 had
decreased to 300.8 million acres, with annualized rate of 0.6%. Arable
land per capita decreased to 0.22 acre, only 40% of the world
average.
Increase
in Grain Output relies on extensive use of fertilizers and improvement of hybrid
seeds.
China has
been relying on extensive consumption of resources to sustain its grain supply.
In 2007, fertilizer consumption per hectare reached 0.34 ton, a 26.83% increase
as compared with 2000 and 192.03% increase as compared with 1990. It is
estimated rice production consumed over 50% of water resources in China. As
fertilizers are made from fossil energy and other minerals that are not
renewable, supply of fertilizers is threatened by decreasing resources, which
will fundamentally strike China’s grain supply. Due to fertilizer residues
accumulation, soil condition deteriorated year by year. The extensive use of
fertilizers also results in contamination of river and lakes, causing serious
ecology disasters.
According
to FAO, the world average of 25% increase in grain output per acre was
contributed to by improved seeds, while this ratio reached 40% in certain
developed countries. Therefore introducing new seed varieties is the only way
for China to sustain its food supply.
Seeds market ranked
2nd in the world, but still has
great potential
Scale of
China’s seed market fluctuated around 12.5 million tons or $4.39 billion, which
is 200% of US seed market in terms of volume but 50% in terms of dollar amount
of market scale. Compared with developed countries, China’s seed market is
promising because:
Consumption of commercial seed
products is still far below world average - According to FAO, over 70% of
seeds used in the world were commercial seed products. In the developed
countries, this rate would even surpass 90%. In China, however, only 38.5% of
seeds used were provided by commercial seeds producing companies, while the
remaining 61.5% was satisfied by seeds bred by the individual farmers, which is
inferior as compared with commercial seeds.
Low seed price – Low seed
prices were primarily resulted from out of date hybrid seed products. As patent
of such products expire, small seed companies are willing to produce such
product and then compete with low prices. In contrast, with its exclusive
product line, Fuer provides its quality seed products at price higher than
industry average. We believe it is quality rather than price that is the most
important feature in competition.
Staled production method – Low
seed prices also result from staled seed processing techniques. At present, few
companies in China are able to control quality of every single kernel of its
products. The processing technique directly leads to lower germination rate as
compared with production from the world’s leading seed companies.
Barrier of entry for foreign seed
giants – According to the legislation of PRC, a foreign entity or
person is only approved to hold 49% of any field seed provider. New seeds
introduced from foreign enterprises are subject to trial test for 5 to 8
cultivation periods, which is about 3 to 4 years.
Summary of China’s Field
Crops Production
Farmers
with cultivation rights are the main forces in China’s agricultural industry.
According to statistics given by National Bureau of Statistics of the PRC, the
planting area of grain crops in China was 245.62 million acres with rice, wheat,
corn and soybean taking up 26.67%, 22.13%, 24.21% and 12.98%
respectively.
11
From 2003
to 2007, the planting areas of all major grains increased. The planting area of
corn increased the most. As corn is widely used as food and feed and has vast
application prospect in bio-diesel, the planting area of corn increased 22.48%
from 2003 to 2007. Increased due to the increasing domestic demand for grain,
the planting area of rice and wheat grew by 9.10% and 7.84%, respectively. As
China’s population keeps growing and demand for grain keeps increasing, the
planting areas of the aforesaid crops will continue to increase.
Our major
seeds include corn, rice, soybean and vegetables, primarily distributed in
Heilongjiang and Jilin Province. According to the State Bureau of Statistics,
the planting areas in these two provinces are:
Planting
Areas of Major Grain Crops in Heilongjiang & Jilin in 2007（Unit：thousand
acres）
|
Rice
|
Wheat
|
Corn
|
Soybean
|
|||||
|
Jilin
|
1,628
|
14
|
7,222
|
1,529
|
||||
|
Heilongjiang
|
|
5,908
|
|
590
|
|
8,881
|
|
10,686
|
Corn
Corn is
the second largest grain in China. Its planting area in 2007 is 29.48 million
hectare and its annual production volume has reached 150 million tons. Both the
planting area and production volume rank No. 2 in the world. The main production
areas of corn in China are Heilongjiang, Jilin, Liaoning, Inner Mongolia, Hebei,
Henan and Shandong Provinces. The downstream industry chain of corn is long,
covering planting, breeding, food, chemical engineering and pharmaceuticals. FAO
statistics shows that about 69% of corn in China is used as livestock feed in
2007. In developed countries, this can be as high as 80%. Corn is essential in
development of the livestock industry. In recent years, the total volumes of
corn for food and corn for feed have been growing steadily, thanks to the
prevalence of bio-diesel techniques and other corn deep-processing technologies.
In the past ten years, corn price in China increased continuously as the
application area of corn gradually grew and market demand for corn has steadily
increased.
Farmers
in Northeast China plant crop once a year. The planting area in Heilongjiang,
Jilin, Liaoning and Inner Mongolia totaled 10,748,300 hectare, 36.46% of the
national area in 2007. Corn yields were 55,651,400 tons, 36.54% of the national
volume.
Rice
The
planting area of rice takes up approximately 26.67% of the total planting area
for grains in China. The volume of rice production takes up 50% of the total
production volume of grains. Rice accounts for more than 50% of commodity
grains. In 2007, the planting area of rice reached 28,918,800 hectare,
production volume reached 186 million tons. The consumption of rice was about
178 million tons, among which 147 million tons was used for feed. The Chinese
government purchases rice from farmers every year and sets minimum purchase
price. With growing prices and increasing incomes, the government has raised the
selling price for rice for several times in the last six year. Farmers have more
and more enthusiasm for planting rice.
Heilongjiang
Province is one of the important and best quality rice planting areas in China.
Farmers plant late rice once a year. Farmers in Jilin and Liaoning also plant
rice. The plant area of rice in the three northeastern provinces was 3,583,700
hectare, 12.39% of the total planting area in China. The production volume in
these three provinces was 22,420,200 tons, 13.02% of the national
volume.
Soybean
Soybean
is a traditional Chinese food, usually used for making various soybean products,
soybean oil, sauce and protein. Soybean residue or powder can also be used as
feed for livestock. In 2007, the total volume of soybean production in China was
17,200,000 tons. China’s soybean industry is threatened by low-priced
genetically modified soybeans from the United States. According to statistics
provided by the General Administration of Customs, the soybean import volume was
30,820,000 tons, which was 1.79 times the total domestic production volume in
2007. The soybean import volume surged to 42,550,000. As the soybean planting
and processing industry has been controlled by foreign enterprises, the China
Soybean Industry Association applied to the State Council for protecting
domestic soybean planting industry. If the government passes policies to protect
soybean industry, soybean production volume will steadily recover.
12
Heilongjiang
Province is the main soybean production area in China. In the northern part of
Heilongjiang and Inner Mongolia Province, soybean is the only applicable field
crop. Farmers plant soybean once a year. In 2007, the planting area of soybean
reached 4,099,400 hectare and the total production volume was 4,426,700 tons,
25.73% of the national volume.
Industry Policy &
Regulation
Agricultural
Material Industry Policy
The Chinese government pointed out in
the
National Grain Security Program for
Medium and Long-Term (2008-2020) to guide and encourage agriculture-related
enterprises and farmers cooperative economic organizations to conduct
technological innovation and promotion activities, actively providing technology
services to farmers. The
government also put forward the “Seed Project” to enhance the improvement of seed
varieties and increase efforts in breeding quality seeds, vigorously promoting the development
of seed Industry. The government will provide subsidies to large seed companies through tax preference
and policy-related loans to improve their competitiveness in competing with international seed
giants.
In addition, the Ministry of Agriculture
made it clear in the Opinion on Deepening the
Promotion of Rural Reform and Innovation of
Agricultural Operation System that the government will encourage the
development of new agricultural materials distribution model, i.e. chain store
retailing system. The Opinion clearly points that China will develop
agricultural chain stores
with great efforts to change the chaotic situation in agricultural materials
distribution channels, reduce prices of agricultural materials, ensure quality
of agricultural materials, and enhance government’s supervising abilities in the
circulation link of agricultural
materials.
New
Seed Varieties Approval Policy
The
Chinese government has been implementing strict control over the seed industry.
Every new seed variety has to be examined and approved by relevant state or
provincial government authority before it is approved to be sold in the market.
A seed variety which has been approved in one province can only be sold within
that province. Seed products must gain approval from other provinces before it
can be sold in these provinces. A seed variety can be sold nationwide after it
gains state-level approval. The examining and approval process usually takes 5
to 8 crop-growth periods.
Genetically
modified crops not only need to obtain the aforesaid approval, but also need to
get production approvals from the Security Management Office of Gene
Modification of the Ministry of Agriculture.
Chinese
distributors of seed products from other countries have to apply to the Ministry
of Agriculture for approvals. The examination and approval process is the same
as that of seeds.
Summary of Humic Fertilizers
Market in China
According
to the National Bureau of Statistic of China, in the past three decades, China
relied greatly on fertilizers to boost grain yields. In 2005, the production
volume of fertilizers in China reached 48,300,000 tons, accounting for 33% of
the world’s volume. It is predicted that the total production volume of
fertilizers in China will surge to 50 million tons by 2015. From 1980 to 2007,
annual consumption of fertilizers increased from 12,694,000 tons to 51,078,000
tons, representing a growth rate of 302.38% and a compound annual growth rate of
5.10%.
Compared
with traditional fertilizers, compound fertilizers contain more nutrients and
little accessory constituents and own fine physical properties, which are very
important in balancing fertilization, improving fertilizer use efficiency, and
ensuring high and stable yields. From 1980 to 2007, annual consumption of
compound fertilizers increased from 272,000 tons to 15,030,000 tons,
representing a compound annual growth rate of 15.41%. Currently, compound
fertilizers consumption accounts for 29.43% of all fertilizers consumption. It
is predicted that demand for compound fertilizers will reach 25 million tons in
2015. We estimated that the market scale of compound fertilizers would reach $50
billion in 2009.
13
Because
traditional fertilizers have been used for a long time, the quality of arable
land in China keeps declining. Soil crust and decrease in soil quality have
become key factors that restrict grain yields growth in China (National Grain Security Program for
Medium and Long-Term (2008-2020)). According to information provided by
the Organization for Economic Co-operation and Development in 2006, China’s
government invested 1.6% of the Gross Domestic Product into environmental
protection, including improving agricultural environment. The government was
also considering providing subsidies to farmers in order to encourage farmers to
adopt advanced agricultural production materials and improve farming
techniques.
Humic
acid compound fertilizer, humic acid and its related products have multiple
functions. Farmers can increase crop yields with small amounts of foliar
fertilizer and water flush fertilizer, both based on humic acid. Foliar
fertilizer and water flush fertilizer can effectively reduce consumption of
traditional fertilizers, alleviate soil crust, decrease the remaining amount of
unused Nitrogen, Phosphorus and Potassium in soil, and meanwhile improve
fertilizers efficiency, crops’ drought resistance ability, as well as products
quality.
Industry
Overview:
Seed Industry in China is
Highly Fragmented
China’s
seed industry is extremely fragmented. According to statistics, there are over
9,000 licensed seed companies. But less than 100 of them are deemed as scaled
seed companies with registered capital greater than $4.3 million. The seed
providers can be divided as:
Small seed companies
distribute their products within cities. Such companies control few
seed patents and a regional distribution network. Such companies are not able to
maintain sufficient control of product quality, and they are mostly low priced
competitors. In 2006, the government enhanced entrance barrier to the seed
industry by raising registered capital of existing companies and new companies
to $73,000. We expect this trend will be continued in the future.
Scaled seed enterprises in
China mainly sell seeds which have been improved by using hybrid techniques.
Especially in the field crops, most seeds used for planting are seeds improved
through hybrid. These large-scale enterprises, such as Fuer have the ability to
obtain new hybrid seed patents, and effectively control product
quality.
International seed
companies are only
permitted to control 49% interest in any entity that engages in production
of field seeds. Their selling of seeds is conducted mainly through joint
ventures with the scaled seed companies. They are only competing with hybrid
products, as China prohibits sales and distribution of genetically modified field crop
seeds.
Disintegration
of research and distribution
At present, most improvement and research on new seeds
is conducted by state owned
institutions. The institutions were targeted at inventing plants that fit for
local agricultural
conditions. Few Chinese companies are able to research on
their own. Generally all
product patents in China are purchased form research institutions. The companies
purchase such patent by auction or provide cash support to the researchers. The
barrier between research
and distribution hampers conversion from patent to product, as well as
improvement of the seed industry.
The Company has maintained steady
cooperation with local institutions, such as Heilongjiang Academy of Agriculture
Science and Heihe Institution of Agriculture. We will
subsidize the research program if feasibility is established, in exchange for preemptive and price
rebates of the patent or
long term exclusive franchise rights over the new seed
variety.
14
Field Seed
Market of northeastern
China
Agriculture production in northeastern
China differs greatly from other regions. Crops are planted and harvested once a
year. The region is divided into different zones according to temperature and
rainfalls. Heilongjiang, the largest and the most important agricultural
province in the region, is
divided into 6 accumulated
temperature zones. Accumulated temperature is calculated by adding the average
temperatures of each day when the daily average temperature is higher than 15
centigrade. Zones 1-3
represents south part of the province, and are fit for corn and rice. Zone 4,
represents the north part of the province, and are
fit for growth of soybean and certain corn varieties. Zone 5-6, where
accumulated temperature is lower than 2,000 centigrade, is fit for growth of soybeans.
Temperature zones are not always the same. In some years, when the weather is
colder than average years, farmers in southern zones would be forced to
cultivate the crops which are applicable for higher temperature zones.
Companies that do not have a broad product
portfolio would be adversely affected by changes in climate, and fluctuation in
production of certain field crops.
Genetically
Modified Crops in China
At present, China prohibits production
and distribution of genetically modified crops. The Chinese
have been adverse toward genetically modified crops (“GM crops”). People are more suspicious about
safety of the GM crops
since 2 GM corn varieties were granted safety license in November,
2009. With regards to the short history of GM crops, there are no
clear results about safety of the GM crops to humans and nature. In the United
States and Europe, GM crops
are not allowed to be
made directly edible for
human consumption.
However, as China’s pressure for maintaining food supply and the diminishing
potential of hybrid technology continues, it is certain the government will open
a window for GM crops in the future, but have not in the recent past
years.
The
Humic
Fertilizer Industry
Producers of compound
fertilizers including
plant nutrition regulators are mainly traditional fertilizers producers.
China’s fertilizer industry is very fragmented. As of 2007, a total of 2,800
enterprises have reported to the Ministry of Agriculture for record, among which
164 are humic acid producers. The majority of these humic acid producers produce
fertilizers in traditional workshops, which cannot guarantee products quality.
Many companies even do not have compound fertilizer production licenses and
fertilizer registration certificates. We believe that most products in the
current market are not able to provide the targeted solutions for different
growth phases of crops, which is not effective in increasing yields. As China
strictly controls import and export of fertilizers, large international
fertilizer companies have not entered into China’s seed market.
Strategy
Enhancing Cooperative
Research and
Development and
Purchase of Seed Variety Rights:
We are
planning to intensify our communication and cooperation with our existing
partner agriculture research institutes and such institutes in other provinces.
We intend to become more active in participating in research programs of hybrid
seeds that fits our target market and the buyout of the outcomes as we expand to
other provinces in China. We are also determined to build our own research
team with the latest knowledge of breeding new field seeds.
Expanding Network of Our
Branded Stores
In the next 3 years, we intend to focus
our sales channel on our new direct stores and enroll more franchised stores in
our market, so as to enhance our profitability and customer loyalty. We will
establish customer membership and databases to trace the habit of each customer
for more accurate marketing efforts and improve customer service. We believe
this business will make use of our existing advantages in quality products and
well known brands, and create advantages in integrated and controlling sales
network.
15
Participating in Research of
GM Crops and Build our Own Research Team
The Company has been aware of the
future trends that GM crops will be accepted by the Chinese government. As
current efforts of GM seeds are concentrated on the seeds for southern part of
China, we will seek opportunities to cooperate with universities and institutes
to develop GM crops that adapt to the climate in northeastern China, especially
in the Heilongjiang Province to solidify our leadership in this
market.
Acquiring Quality Seed and
Fertilizer Enterprises
We believe seed patent and brand
awareness are the only important factors for us to solidify our market share and
enter into new provincial markets. We will seek to acquire companies with
product patent or distribution channels that fit our expansion plans. We are
also seeking to privatize local agricultural research institutes to enhance our
research and development
capabilities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
Certain
statements made in this report may constitute “forward-looking statements on our current expectations and
projections about future events.” These forward-looking statements
involve known or unknown risks, uncertainties and other factors that may cause
our actual results, performance, or achievements to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. In
some cases you can identify forward-looking statements by terminology such as
“may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,”
“plans,” “believes,” “estimates,” and similar expressions. These
statements are based on our current beliefs, expectations, and assumptions and
are subject to a number of risks and uncertainties. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. These forward-looking statements are made as of the date of this
report, and we assume no obligation to update these forward-looking statements
whether as a result of new information, future events, or otherwise, other than
as required by law. In light of these assumptions, risks, and uncertainties, the
forward-looking events discussed in this report might not occur and actual
results and events may vary significantly from those discussed in the
forward-looking statements.
Overview
We are a
leading Chinese agricultural material company providing quality hybrid corn
seeds, soybean seeds, rice seeds and fertilizer product to farmers in the
northeastern China, which is the most important agriculture region in the
country. Through our 1,094 distributors and 3,430 outlets, we distribute our
products to 58 million farmers located in Heilongjiang, Jilin, and northeastern
Inner Mongolia and to the rest of China. Our seed products are breed with our
exclusively contracted breeders in Heilongjiang, Jilin, and northeastern Inner
Mongolia.
Historical
Developments
Since
establishment, we have endeavored to develop new products. In 2005, we purchased
a humic fertilizer patent from China Institute of Agriculture, and have
developed a series of products based on the patent that adapt to different
environment and soil conditions in different area of northeastern China. In
2007, we participated in the China Spark Program, a plan for developing new
agricultural techniques and product lead by the Ministry of Science and
Technology of PRC, and invented cold proof additives for seeds. The additive
will be launched in 2010.
During
the past 7 years, Fuer has been diligent on product quality and successfully
elevated our brand reputation and attained a solid customer base. We were
granted “the Most Respect Enterprise Award” in 2007 by the China Academy of
Humic Acid Industry. In 2008, we were certified under ISO 9001 and
14001.
In Jan
2010, the Company was recognized as a “High-tech Enterprise” by the state
government, which entitled us to favor upon enterprise income tax.
16
Factors
Affecting our Results of Operations
Shrinking Arable Land and
Growing Population
China is
facing great stress upon its food supply. Arable land in China is shrinking as a
result of construction of buildings and basic facilities, desertification, soil
pollution, and urbanization. Nevertheless, Chinese population is expecting to
keep rising until 2033, reaching 1.5 billion people. China has to lean on
extensive use of fertilizer and high yield hybrid grain seeds to maintain
sufficient food supply.
Great Potential in the Seeds
Market
Farmers
in China use a great portion of seeds from the output of previous year for the
need in the next year. According to National Bureau of Statistics of China, in
2008, only 38.5% of seeds used were supplied by seeds companies, compared to
world average of 70% and over 90% in developed countries, which creates a market
of $4 billion. Additionally, seeds price in China are generally 5 to 8 times the
grain price, compared to 15 to 25 times in the developed countries.
Low Industry Concentration
and Abundant Acquisition Opportunities
At
present, the seed products are supplied by over 7,000 seeds providers, a great
majority of which are low scale and do not control up to date seed patents.
Seeds market concentration is far below the developed countries. Historically,
the government of China has raised entrance barrier for seeds companies by means
of registered capital threshold. The movement has created great merger and
acquisition opportunities. We believe this trend will continue in the
future.
Adverse Attitude Toward
Genetically Modified Seeds
Though
years have passed since genetic modification technique were adopted in seed
production, safety of genetically modified grain is still unproved. It is
estimated that cultivation of genetically modified plant would impact gene
stability of surrounding natural plants, and the health of creatures that eat
them. At present, both the EU and the United States have not approved
genetically modified crops edible for humans. Though 2 varieties of genetically
modified corn seed was granted Safety Certificates from Committee of food safety
of the Ministry of Agriculture of the PRC, they still await for further
approvals for commercial selling, as clarified by the state authority. It still
takes years for genetically modified grain to be accepted by
customers.
Ongoing Urbanization and
Growing Disposable Income Boost Demand For Meat and Corn.
In China,
urban residents consume more meat products than rural residents per capita. With
urbanization in the past decade, meat output has increased with compound annual
growth rate of 1.17% from 2000 to 2007. Corn is the most widely used among
grains for feeding poultry and livestock, for it accumulates more carbohydrate
with more efficient photosynthesis process. Therefore grain production increased
with compound annual growth rate of 4.63% in the same period. It is reasonable
that corn cultivation will continue growing in the future as China’s
urbanization rate and disposable income grow.
Results
of Operations
The
following table sets forth certain information regarding our results of
operations.
|
For the Quarters Ended
March 31,
|
For the
Years Ended December 31,
|
|||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
Unaudited
|
Unaudited
|
Audited
|
Audited
|
|||||||||||||
|
($ in thousands)
|
($ in thousands)
|
|||||||||||||||
|
Statements of Operations
Data
|
||||||||||||||||
|
Sales
|
$
|
15,307
|
$
|
12,208
|
$
|
16,168
|
$
|
11,626
|
||||||||
|
Cost of goods
sold
|
8,990
|
7,102
|
9,469
|
6,865
|
||||||||||||
|
Gross
profit
|
6,317
|
5,106
|
6,699
|
4,761
|
||||||||||||
|
General and
administrative
|
285
|
178
|
1,342
|
833
|
||||||||||||
|
Sales and
marketing
|
123
|
60
|
1,346
|
1,119
|
||||||||||||
|
Operating and administrative
expenses
|
408
|
238
|
2,688
|
1,952
|
||||||||||||
|
Income from continuing
operations
|
5,909
|
4,868
|
4,011
|
2,809
|
||||||||||||
|
Other income
(expenses)
|
10
|
(33
|
)
|
(78
|
)
|
(63
|
)
|
|||||||||
|
Income tax
expenses
|
887
|
1,209
|
995
|
693
|
||||||||||||
|
Net income
|
$
|
5,032
|
$
|
3,626
|
$
|
2,938
|
$
|
2,053
|
||||||||
17
Year
Ended December 31, 2009 compared to December 31, 2008
Sales
Our sales
consist primarily of revenues generated from sales of corn seeds, rice seeds,
soybean seeds, fertilizers and agricultural chemical products. Sales increased
by approximately $4.54 million, or 39.07%, from approximately $11.63 million in
2008 to approximately $16.17 million in 2009. This increase was primarily
attributable to expanding our market areas and distribution network throughout
Northeastern China, increased demand for our corn seed products and strong
market acceptance of our products. In addition, our inventories increased
approximately $1.26 million, or approximately 19.52%, from approximately $6.46
million as of December 31, 2008 to approximately $7.72 million as of December
31, 2009. This increase was primarily attributable to increased production in
accordance with the seed breeding plan made in the second quarter of 2009 and
production plan of fertilizer and germicides, pesticides, and herbicides to meet
the growing demand for our products.
The
following table sets forth information regarding the sales of our principal
products during the fiscal years ended December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||||||||||||||||||
|
Product name
|
Quantity
|
Amount
|
% of
|
Quantity
|
Amount
|
% of
|
||||||||||||||||||
|
(Kg’000)
|
($’000)
|
Sales
|
(Kg’000)
|
($’000)
|
Sales
|
|||||||||||||||||||
|
Corn Seeds
|
10,758 | 10,544 | 65.22 | % | 6,600 | 6,232 | 53.60 | % | ||||||||||||||||
|
Soybean
Seeds
|
1,418 | 1,287 | 7.96 | % | 1,775 | 1,825 | 15.70 | % | ||||||||||||||||
|
Rice Seeds
|
1,402 | 1,062 | 6.57 | % | 1,672 | 1,317 | 11.33 | % | ||||||||||||||||
|
Vegetable
Seeds
|
293 | 419 | 2.59 | % | 31 | 101 | 0.87 | % | ||||||||||||||||
|
Fertilizers
|
4,142 | 2,309 | 14.28 | % | 3,664 | 1,625 | 13.98 | % | ||||||||||||||||
|
Plant Regulators
|
574 | 300 | 1.85 | % | 516 | 254 | 2.18 | % | ||||||||||||||||
|
Germicides, Pesticides and
Germicides
|
418 | 247 | 1.53 | % | 605 | 272 | 2.34 | % | ||||||||||||||||
The
fluctuation in average sales price per kilogram of corn seeds, soybean seeds and
rice seeds, as reflected in the table, is relatively small and primarily
attributable to the market competition and demand for the products. As
vegetable seeds differ greatly from each other, average selling price decreased
drastically as more vegetable seeds product with low unit price was
sold during 2009. Average selling prices of fertilizers, plant additives,
germicides, pesticide and herbicides are generally caused by increase in sales
of high margin product. The following table shows sales price per kilogram by
product for 2009 and 2008 and the percentage change in the sales price per
kilogram.
|
Average Price
Per Kilogram
|
Percentage
Change
|
|||||||||||
|
Product
|
2009
|
2008
|
||||||||||
|
Corn Seeds
|
$
|
0.98
|
$
|
0.94
|
3.80
|
%
|
||||||
|
Soybean
Seeds
|
0.91
|
1.03
|
(11.72
|
)%
|
||||||||
|
Rice Seeds
|
0.76
|
0.79
|
(3.83
|
)%
|
||||||||
|
Vegetable
Seeds
|
1.43
|
3.26
|
(56.11
|
)%
|
||||||||
|
Fertilizers
|
0.56
|
0.44
|
25.69
|
%
|
||||||||
|
Plant
Regulators
|
0.52
|
0.49
|
6.18
|
%
|
||||||||
|
Germicides, Pesticides and
Germicides
|
$
|
0.59
|
$
|
0.45
|
31.43
|
%
|
||||||
18
Cost of Goods
Sold
Our costs
of goods sold consist primarily of direct and indirect manufacturing costs,
including production overhead costs, shipping and handling costs for the
products sold. Cost of goods sold increased approximately $2.60 million,
or 37.93%, from approximately $6.87 million in 2008 to approximately $9.47
million in 2009. This increase was primarily attributable to the increase
in sales volume, as we enhanced sales promotion in the form of price
rebates.
Operating and Administrative
Expenses
Our total
operating expenses consist primarily of sales and marketing expenses and general
and administrative expenses. Our total operating expenses increased by
approximately $0.74 million, or 37.70%, from approximately $1.95 million in 2008
to approximately $2.69 million in 2009.
Sales and Marketing.
Our sales and marketing expenses consist primarily of transportation expenses,
advertising expenses, year-end bonus for sales team, and other overhead expenses
incurred by the Company’s sales and marketing personnel. Sales and
marketing expenses increased approximately $0.23 million, or 20.26%, from
approximately $1.12 million for 2008 to approximately $1.35 million for
2009. This increase was primarily attributable to (i) an increase of
approximately $0.18 million, or 51.03%, in transportation cost as volume of
product sold to distant area increased, (ii) a decrease of approximately $0.13
million, or 59.36% in advertisement expenses as we eased advertisement campaigns
in Heilongjiang province and increased in spending for advertisement in Jilin
Province, while we provide lower product prices to our Heilongjiang
distributors, and (iii) an 0.10 million increase, or 22.56%, in year-end bonus
for our sales team as our net income grows. Sales and marketing expenses are
likely to increase as we continue expanding our distribution network throughout
northeastern China, and commencement of our chain retailing business, and more
advertisement campaign seeking to increase our market share and awareness of our
high quality products.
General and Administrative.
Our general and administrative expenses consist primarily of salary, and
allowances for receivables, and professional service fees. General and
administrative expenses increased approximately $0.51 million, or 61.24%, from
approximately $0.83 million for 2008 to approximately $1.34 million for
2009. This increase was primarily attributable to and an increase of
approximately $0.32 million in allowance for receivables. General and
administrative expenses are likely to increase as we continue to expand our
production, sourcing capacity, and distribution capacity throughout northeastern
China.
Allowances for
Receivables
We
evaluate balances of account receivables and other receivables at the end of
each quarter, and make allowances. Allowances for receivables increased by
approximately $ 0.32 million, which results from our extension of a longer
credit period with our distributors to promote our sales,
Income from Continuing
Operations
As a
result of the foregoing, our income from operations increased by approximately
$1.20 million, or 42.79%, from approximately $2.81 million in 2008 to
approximately $4.01 million in 2009.
Other Income
(Expenses)
Our other
income (expenses) consists primarily of interest income, interest and finance
costs, and other income and expense accounts. Other expenses increased
approximately by $0.02 million, or 24.05%, from other expense of approximately
$0.06 million for 2008 to other expenses of approximately $0.08 million for
2009, which is attribute to the loss of disposal of assets recorded in 2009
which is approximately $0.01million.
19
Income Tax
Expenses
We are
subject to PRC enterprise income taxes. Our income tax expenses
increased by approximately $0.30 million, or 43.61%, from approximately $0.69
million in 2008 to approximately $1.00 million in 2009. The increase was
primarily attributable to increases in our income subject to PRC tax, and bad
debt appropriation of $ 0.32 million which is nondeductible before tax under the
PRC tax laws.
Cumulative Currency
Translation Adjustments
Our
principal country of operations is the PRC and our functional currency is the
Renminbi, but our reporting currency is the U.S. dollar. All translation
adjustments resulting from the translation of our financial statements into U.S.
dollars are reported as cumulative currency translation adjustments.
For
the Quarters Ended March 31, 2010 compared to March 31, 2009
Sales
As
compared with the quarter ended March 31, 2009, sales increased by approximately
$3.10 million, or 25.39%, from approximately $12.21 million in the first quarter
of 2009 to approximately $15.31 million in the same quarter of 2010. This
increase was primarily attributable to expansion of our market areas and
distribution network throughout Northeastern China, increased demand for our
corn seed products and strong market acceptance of our products. In addition,
our trade receivables increased approximately $4.30 million, or approximately
208.16%, from approximately $2.07 million as of December 31, 2009 to
approximately $6.37 million as of March 31, 2010. This increase was primarily
attributable to cold weather in northeastern China that postponed our terminal
sales period and collection of our trade receivables.
Cost of Goods
Sold
Our costs
of goods sold consist primarily of direct and indirect manufacturing costs,
including production overhead costs shipping and handling costs for the products
sold. Cost of goods sold increased approximately $1.89 million, or 26.59%,
from approximately $7.10 million in the first quarter of 2009 to approximately
$8.99 million in the same period of 2010. This increase was primarily
attributable to an increase in sales volume, as we enhanced sales promotion in
form of price debates.
Operating and Administrative
Expenses
Our total
operating expenses consist primarily of sales and marketing expenses and general
and administrative expenses. Our total operating expenses increased by
approximately $0.17 million, or 71.49%, from approximately $0.24 million in the
first quarter of 2009 to approximately $0.41 million in the same period of
2010.
Sales and Marketing.
Our sales and marketing expenses consist primarily of transportation expenses,
advertising expenses, year-end bonus for sales team, and other overhead expenses
incurred by the Company’s sales and marketing personnel. Sales and
marketing expenses increased approximately $0.06 million, or 106.75%, from
approximately $0.06 million in the first quarter of 2009 to approximately $0.12
million in the same period of 2010. This increase was primarily
attributable to (i) an increase of approximately $0.02 million, or 83.66%, in
transportation cost as the volume of distributed product increased, (ii) an
increase of approximately $0.03 million, or in advertisement expenses as we
launched advertisement campaign in Heilongjiang province to promote product
sales, and (iii) approximately 0.03 million establish expenses paid for our 5
direct stores in 2010. Sales and marketing expenses are likely to increase as we
continue expanding our distribution network throughout northeastern China,
commencement of our chain retailing business, more advertisement campaign
seeking to increase our market share and awareness of our high quality products,
and opening more direct stores.
20
General and Administrative.
Our general and administrative expenses consist primarily of salary, and
allowances for receivables, and professional service fees. General and
administrative expenses increased approximately $0.11 million, or 59.73%, from
approximately $0.18 million in the first quarter of 2009 to approximately $0.29
million in the same period of 2010. This increase was primarily
attributable to $ 0.07 million paid for auditing service. General and
administrative expenses are likely to increase as we continue to expand our
production, sourcing capacity, and distribution capacity throughout northeastern
China, and our compliance with required securities filings and listing
requirements.
Income from Continuing
Operations
As a
result of the foregoing, our income from continuing operations increased by
approximately $1.08 million, or 22.43%, from approximately $4.83 million in the
first quarter of 2009 to approximately $5.92 million in the same period of
2010.
Income Tax
Expenses
We are
subject to U.S. federal and state income taxes, and our subsidiaries
incorporated in the PRC are subject to enterprise income taxes in the PRC.
Our income tax expenses decreased by approximately $0.32 million, or 26.62%,
from approximately $1.20 million in the first quarter of 2009 to approximately
$0.89 million in the same period of 2010. The decrease was primarily
attributable to our obtaining a 15% favored enterprise income tax rate in 2010
by obtaining the “High Tech Enterprise” certification from the
government.
Liquidity
and Capital Resources
Our
summary cash flow information is as follows:
|
For the Quarters
Ended March 31,
|
For the Years
Ended December 31,
|
|||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
Unaudited
|
Unaudited
|
Audited
|
Audited
|
|||||||||||||
|
Net cash provided by (used in):
|
($ in thousands)
|
($ in thousands)
|
||||||||||||||
|
Operating
activities
|
$
|
9,654
|
$
|
8,649
|
$
|
(2,655
|
)
|
$
|
(345
|
)
|
||||||
|
Investing
activities
|
(41
|
)
|
(1
|
)
|
(163
|
)
|
(110
|
)
|
||||||||
|
Financing
activities
|
-
|
(511
|
)
|
196
|
977
|
|||||||||||
Net Cash Provided By
Operating Activities
We had
retained earnings of approximately $5.80 million and $3.17 million as of
December 31, 2009 and 2008, respectively. As of December 31, 2009, we
had cash and cash equivalents of approximately $0.16 million, total current
assets of approximately $16.19 million, and a working capital surplus of
approximately $9.62 million. We have financed our activities to date principally
from cash derived from the previous year. We maintain a large balance of
non-cash current assets because spring in the Northeastern China arrives later
than in other parts of China, which postpones the sales season of seeds product
and collection process of our receivables and advances to customers. Most of the
receivables and advances to customers as of December 31, 2009 were collected in
the first quarter of 2010, and the cash flow provided by operating activities in
the same period will be sufficient to sustain our operation.
We had
retained earnings of approximately $10.83 million and $5.80 million as of March
31, 2010 and December 31, 2009, respectively. As of March 31, 2010,
we had cash and cash equivalents of approximately $9.77 million, total current
assets of approximately $19.07 million, and a working capital surplus of
approximately $14.64 million. We have financed our activities to date
principally from the collection of our trade receivables. We maintain a large
balance of non-cash current assets because spring in the northeastern China
arrives later than in other parts of China, which postpones the sales season of
seeds products and collection process of our receivables and advances to
customers. We believe the receivables and advances to customers as of March 31,
2010 will be mostly received in the second quarter of 2010, which will be
sufficient to sustain our operations.
21
Net Cash
Used in Investing Activities
Net cash
used in investing activities increased approximately $0.05 million, from
approximately $0.11 million in 2008 to approximately $0.16 million in
2009. This increase was primarily attributable to $0.13 million paid in
2009 for seed patents Net cash used in investing activities primarily
relates to expenditures associated with our construction and acquisition of new
facilities for the year 2008, and purchase of a new product patent during the
year 2009.
As
compared with the first quarter of 2009, net cash used in investing activities
increased approximately $0.04 million in the same period of 2010, which was
primarily attributable to the purchase of property and equipment of 0.04
million.
Net
Cash Provided by Financing Activities
Net cash
provided by financing activities decreased by approximately $0.78 million, from
approximately $0.98 million in 2008 to approximately $0.20 million in
2009. This decrease was primarily attributable to a $0.71 million decrease
in proceeds from short term borrowings. We will improve our cash flow by
obtaining interest free loans from Agriculture Development Bank of China, as
described in “Subsidy and Tax Favors” hereafter, and obtaining financing from
capital markets.
During
the first quarter of 2009, net cash used in financing activities was
approximately $0.51 million, which was due to repayment of our short-term loans
in the first quarter of 2009, while no repayments were made during the same
period of 2010. We will improve our cash flow by obtaining interest free loans
from Agriculture Development Bank of China, as described in “Subsidy and Tax
Favors” hereafter, and obtaining financing from capital markets.
Subsidy
and Tax Favor
In
January 2010, we were nominated as a High-tech Enterprise by the PRC Government.
This honor entitled us to a favored enterprise income tax rate of 15% for the
years 2010 and 2011. At the same time, we were granted an exemption from
interest on the loans we borrowed from Heilongjiang Branch, Agriculture
Development Bank of China for 3 years. We believe the subsidy and tax favor will
enhance our profitability and cash flow, which will boost our expansion. We are
now applying for a refund of tax paid in 2009 under such tax favor.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be disclosed. Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
22
In August
2008, we were accused selling fake seeds to a farmer in Heilongjiang, with low
germination rate. Both parties had submitted the case to local authorities for
arbitration. The result of this inspection revealed our product was qualified
under the national standards, and the low germination rate was due to improper
cultivation procedures adopted by the farmer. Subject to arbitration of the
government, we settled the dispute with a subsidy of $4,308 paid to the farmer
in September 2008.
Critical
Accounting Policies
The
consolidated financial statements include the financial statements of us and our
subsidiaries. All transactions and balances among us and our subsidiaries
have been eliminated upon consolidation. Certain amounts included in or
affecting our consolidated financial statements and related disclosures must be
estimated, requiring us to make certain assumptions with respect to values or
conditions that cannot be known with certainty at the time the financial
statements are prepared. These estimates and assumptions affect the amounts we
report for assets and liabilities and our disclosure of contingent assets and
liabilities at the date of our financial statements. We routinely evaluate these
estimates, utilizing historical experience, consulting with experts and other
methods we consider reasonable in the particular circumstances. Nevertheless,
actual results may differ significantly from our estimates. Any effects on our
business, financial position or results of operations resulting from revisions
to these estimates are recorded in the period in which the facts that give rise
to the revision become known.
Estimates of allowances for
receivables – We must periodically review our trade and other receivables
to determine if all are collectible or whether an allowance is required for
possible uncollectible balances. A number of factors are considered when
determining the allowances, including the length of time the receivable is past
due, past loss history, the counter party’s current ability to pay and the
general condition of the economy and industry. We perform this review
semi-annually, events could occur that would require us to increase our
allowance in the future.
Estimate of the useful lives of
property and equipment and biological assets – We must estimate the
useful lives and residual values of our property and equipment. We must also
review property and equipment and biological assets for possible impairment
whenever events and circumstances indicate that the carrying value of those
assets may not be recovered from the estimated future cash flows expected to
result from their use and eventual disposition. We recognized no
impairments in the years ended December 31, 2009 and 2008.
Estimate of the useful lives of
intangible assets - Intangible assets, which are purchased seeds variety
rights, are amortized using the straight-line method over their estimated period
of benefit, normally 10 years. We must review the marketability of the seed
varieties for possible impairment whenever events and circumstances imply that
carrying value of such assets may not be recovered from the estimated future
cash flow result from sales of such seeds products or possible disposition. We
recognized no impairments in the years ended December 31, 2009 and
2008.
Inventory – We value
inventories at the lower of cost or market value. We determine the cost of
inventories using the weighted average cost method and include any related
production overhead costs incurred in bringing the inventories to their present
location and condition. We must determine whether we have any excessive,
slow moving, obsolete or impaired inventory. We perform this review
quarterly, which requires management to estimate the future demand of our
products and market conditions. We make provisions on the value of
inventories at period end equal to the difference between the cost and the
estimated market value. If actual market conditions change, additional
provisions may be required. In addition, we may write off some provisions
if we later sell some of the subject inventory.
Revenue recognition – Revenue
from the sale of goods is recognized on the transfer of risks and rewards of
ownership, which generally coincides with the time when the goods are shipped to
customers and the title has passed. We render neither sales returns nor
rebates to our customers, thus revenue would reflect the actual sales we are
entitled to.
Please
refer to the notes to the financial statements included elsewhere in this filing
for a more complete listing of all of our critical accounting
policies.
23
Recently
Adopted Accounting Pronouncement
The FASB Accounting
Standards Codification
In June
2009, the Financial Accounting Standards Board (“FASB”) established the FASB
Accounting Standards Codification (“Codification”) as the source of
authoritative GAAP recognized by the FASB. The Codification was effective for
financial statements for interim or annual reporting periods ending after
September 15, 2009. This guidance did not change GAAP therefore it did not
have an impact on our consolidated financial statements. References within this
note and throughout our financial statements to authoritative guidance issued by
the FASB are in reference to the codification.
Variable Interest
Entities
In June
2009, the FASB amended guidance regarding the consolidation of variable interest
entities, by altering how a company determines when an entity that is
insufficiently capitalized or not controlled through voting should be
consolidated. A company has to determine whether it should consolidate an entity
based upon the entity’s purpose and design and the parent company’s ability to
direct the entity’s actions. We are required to adopt this guidance starting on
January 1, 2010. Early adoption is prohibited. We have evaluated this
guidance and do not believe it will have an effect on our consolidated financial
statements upon adoption.
Business
Combinations
In
December 2007, the FASB issued authoritative guidance on the accounting for
business combinations. Under the new guidance, an entity is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair values on the acquisition date. In
April 2009, the FASB issued additional literature on the accounting for business
combinations. This literature addresses issues related to initial recognition
and measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business combination. We adopted
both of these pieces of authoritative guidance on January 1, 2009. There
was no impact to our consolidated financial statements upon adoption of this
literature. All acquisitions, subsequent to January 1, 2009, have and will
be accounted for under this new guidance.
Noncontrolling Interests in
Consolidated Financial Statements
In
December 2007, the FASB issued authoritative guidance on noncontrolling
interests in consolidated financial statements. This guidance applies to the
accounting for noncontrolling interests and transactions with noncontrolling
interest holders in consolidated financial statements. This new literature
changes the accounting and reporting for minority interests, which has been
recharacterized as noncontrolling interests and classified as a component of
equity. Additionally, the literature provides guidance on the treatment of net
income attributable to noncontrolling interests and requires additional
disclosures that identify and distinguish between the interests of the
controlling and noncontrolling owners. Other than the new presentation and
disclosure requirements, there was no impact to our consolidated financial
statements upon adoption of this guidance.
Fair Value Reporting for
Non-Financial Assets and Non-Financial Liabilities
In
February 2008, the FASB delayed its effective date by one year related to the
fair value reporting requirements for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. We adopted these requirements for
non-financial assets and liabilities on January 1, 2009. Other than new
disclosure, there was no impact to our consolidated financial statements upon
adoption of this guidance.
Accounting for Defensive
Intangible Assets
In
November 2008, the FASB issued authoritative guidance with respect to
accounting for defensive intangible assets. The guidance applies to acquire
intangible assets in situations in which an entity does not intend to actively
use the asset but intends to hold the asset to prevent others from obtaining
access to the asset (a defensive intangible asset). These assets should be
accounted for as separate identifiable defensive intangible assets and should be
assigned a useful life that reflects the entity’s consumption of the expected
benefits related to that asset. We adopted this guidance on January 1,
2009. There was no impact to our consolidated financial statements upon
adoption.
24
STATUTORY
RESERVE
In
accordance with the laws and regulations of the PRC, after payments of the
PRC income taxes, a wholly-owned Foreign Invested Enterprises income, shall be
allocated to the statutory reserves since January 1, 2006. The public welfare
fund reserve was limited to 50 percent of the registered capital. Statutory
Reserve funds are restricted for offset against losses, expansion of production
and operation or increase in registered capital of the respective company, which
is made by the end of each calendar year. This reserve is not transferable to
the Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation. As of December
31, 2009 and December 31, 2008, the Company had allocated $1,112,119 and
$797,844, respectively, to these non-distributable reserve funds.
RISK
FACTORS
If
we do not manage our growth successfully, our growth and chances for
profitability may be hindered or impeded.
We have
expanded our operations during the last several years, and we plan further
expansion with new products and increased and enhanced distribution channels and
expansion into existing or new markets and new lines of business. Our planned
expansion is expected to create significant demands on our corporate
administrative, operational and financial personnel and other human resources
and on our cash flow needs and the requirement for additional working capital.
Our current resources may not be adequate to support further expansion and
diversification. These demands and ongoing industry factors such as
overproduction or governmental policy changes may hinder our cash flow as our
margins and sales may be adversely affected.
We
may require short-term financing to fund our working capital, especially due to
the seasonal nature of our business.
The
nature of the agricultural material production industry involves expenses and
revenue cycles that are seasonal in nature. In our fiscal year third and fourth
quarter, we may face costs that are in excess of our cash flow sources. The
advance payments made to our seed producing farmers may exceed the amount of
deposits received from our customers. The exact timing of these deposit payments
is dependent on the Chinese lunar calendar, which varies from one calendar year
to the next. As a result, we may have to rely upon short term bridge loans to
cover our expenses pending receipt of cash payment from farmers at the time of
purchases of seeds and raw materials for our fertilizer and plant regulator
products. Although we have access to sufficient financing to manage these cash
flow cycles, we cannot be certain that we will be able to obtain sufficient debt
financing on terms that are satisfactory to us to maintain consistent operating
results given changing credit conditions worldwide. Downgrades in our credit
rating, tightening of related financing markets or other limitations on our
ability to access short-term financing would increase our interest costs and
adversely affect our operating results.
Our
future performance will likely fluctuate because our revenues and operating
results change significantly from period to period due in part to the nature of
our business.
Our
operating results will likely fluctuate due to a number of factors, many of
which are beyond our control. Our quarterly and annual revenues and costs and
expenses as a percentage of our revenues may be significantly different from our
historical rates. Our operating results in future quarters may fall below
expectations. The industry in which we operate is seasonal in nature. The sales
season of field seeds lasts from December to April; the sales season of
fertilizers, plant regulators and other products lasts from March to June. We
generally do not have significant sales revenue from July to November,
which results in cyclical changes of our cash flow and operating activities. As
a result, if we may be unable to generate sufficient working capital from cash
flow from operations and working capital facilities, we may encounter liquidity
difficulties from the period of December through March, which may harm our
operations. The seasonal nature of our business causes our operating results to
fluctuate from quarter to quarter. Any unexpected seasonal or other fluctuations
could cause the price of our common stock to fall. As a result, reliance on
comparisons of our quarterly operating results as an indication of our future
performance may not occur.
25
In
addition, the future achievement and growth of our profits depends on our
ability to secure sufficient orders from customers. An adverse change in market
conditions may have material and adverse effects on our operating results if we
cannot adjust our operating and marketing strategy to respond to such changes.
Our results of operations may be adversely affected by reduced orders and profit
margins might be affected in the event of a slowdown in market demand, an
increase in business competition, a decrease in government subsidies to farmers,
increased costs, or for any unforeseen reasons. As such, there is a risk that we
will not be able to achieve or maintain profitability or our historical
results.
If
we are unable to match our production requirement to the demand of our direct
customers, our business, financial condition and results of operations may be
adversely affected.
We
normally produce our products according to a production plan that estimates
customer demand that is developed before we sell and deliver our products to
distributors, which are our direct customers. Chinese farmers, our end users
generally make purchasing decisions for our products based on market prices,
economic and weather conditions and other factors that we and our distributors
may not be able to fully anticipate accurately in advance. If we fail to
accurately estimate the volume and types of products sought by farmers and
otherwise adequately manage production amounts, we may produce more products
than we are able to sell resulting in excess inventory and aged seeds. In the
event we decide not to sell the aged seeds due to our concerns about their
quality, the aged inventory could eventually be sold for other uses at greatly
reduced prices. Aged inventory could result in asset impairment, in which case
we would suffer a loss and incur an increase in our operating expenses. On the
other hand, if we underestimate demand, we may not be able to satisfy demand for
our field seeds, and thus damage our customer relations and end-user loyalty.
Our failure to estimate farmers’ future needs and to match our production to the
demand of our direct customers may adversely affect our business, financial
condition and results of operations. In addition, inadequate distributor
liquidity could affect distributors’ ability to pay for our products and,
therefore, affect our sales or our ability to collect on our
receivables.
The
global competition in biotechnology will affect our business.
If and
when multinational corporations engaged in the field seed business expand into
the agricultural market in China in the future, they may have more advanced
technology or may market genetically modified seed more successfully than us.
The major multinational competitors have a long operating history in the
research and commercialization of the genetically modified field seeds and have
strong intellectual property estates supporting the use of biotechnology to
enhance products. They are making considerable investments in new biotechnology
products. These significant competitive advantages could cause our existing or
candidate products to become less competitive, and adversely affecting our
operations.
Our
success depends to a large extent upon the continued service of a few executive
officers and key employees, including Mr. Zhang Li, our Chairman of Board of
Directors
The loss
of the services of one or more of these key employees would have an adverse
effect on us and our PRC operating subsidiaries, as each of these individuals
played and continues to play a significant role in developing and executing our
overall business plan and maintaining customer relationships and proprietary
technology systems. While none of these key personnel is irreplaceable, the loss
of the services of any of these individuals would be disruptive to our business.
We believe that our overall future success depends in large part upon our
ability to attract and retain highly skilled managerial and marketing personnel.
There is no assurance that we will be successful in attracting and retaining
such personnel on terms acceptable to them. Inadequate personnel will limit our
growth, and will be seen as a detriment to our prospects, leading potentially to
a loss in value for investors.
26
Intellectual
property rights are important to our business. We endeavor to obtain and protect
our intellectual property rights where our products are produced. However, we
may be unable to obtain protection for our intellectual property. Even if
protection is obtained, competitors, growers or others in the chain of commerce
may raise legal challenges to our rights or illegally infringe on our rights,
including through means that may be difficult to prevent, detect or defend. In
addition, because of the rapid pace of technological change and the
confidentiality of patent applications in some jurisdictions, competitors may be
issued patents from applications that were unknown to us prior to issuance.
These patents could reduce the value of our commercial or pipeline products or,
to the extent they cover key technologies on which we have unknowingly relied,
require that we seek to obtain licenses at a financial cost to us or cease using
the technology, no matter how valuable the patents may be to our business. We
cannot assure you we would be able to obtain such licenses on acceptable terms.
Also, litigation may be necessary to enforce our intellectual property rights,
protect our trade secrets or determine the validity and scope of the proprietary
rights of others. There is a risk that the outcome of such potential litigation
will not be in our favor. Such litigation may be costly and may divert
management attention as well as expend other resources which could otherwise
have been devoted to our business. An adverse determination in any such
litigation will impair our intellectual property rights and may harm our
business, prospects and reputation. In addition, we have no insurance coverage
against litigation costs and would have to bear all costs arising from such
litigation to the extent we are unable to recover such costs from other parties.
The occurrence of any of the foregoing may harm our business, results of
operations and financial condition.
Finally,
implementation of PRC intellectual property-related laws has historically been
lacking, primarily because of ambiguities in the PRC laws and difficulties in
enforcement. Accordingly, intellectual property rights and confidentiality
protections in China may not be as effective as in the United States or other
countries, which increases the risk that we may not be able to adequately
protect our intellectual property.
Our
business will not be able to be profitable if we do not continue to find and
market products considered valuable by our customers.
The
ability of our field seed business to be profitable depends on recurring and
sustained reorders by farmers in China. Reorder rates are inherently uncertain
due to several factors, many of which are outside our control. These include
changing customer preferences, competitive price pressures, failure to develop
acceptable new products, development of higher quality products by competitors
and general economic conditions.
We
are particularly dependent on revenue from our seed products and, therefore, our
operating results could be disproportionately and negatively impacted if we are
unable to sell a sufficient amount of seeds at satisfactory
margins.
For the
fiscal year ended December 31, 2009, sales of our seed products constituted
approximately 79.74% of our revenues, as compared to 80.26% for the year ended
December 31, 2008. Our dependence on the field seed market makes us particularly
vulnerable to negative market changes that may occur in this product line. In
particular, if demand for our corn seed products generally decreases or if
industry supply exceeds demand, prices will be driven downward and our margins
will be negatively impacted, which would have an adverse effect on our business,
results of operations and financial condition.
27
Failure
to develop and market new products could impact the company’s competitive
position and have an adverse effect on the company’s financial
results.
The
Company’s operating results are largely dependent on its ability to renew its
pipeline of new products and services and to bring those products and services
to market. This ability could be adversely affected by difficulties or delays in
product development such as the inability to identify viable new products,
greater than anticipated development costs, technical difficulties, regulatory
obstacles, competition, lack of demand, insufficient intellectual property
protection, or lack of market acceptance of new products and services. Due to
the lengthy development process, technological challenges and intense
competition, there can be no assurance that any of the products The Company is
currently developing, or could begin to develop in the future, will achieve
substantial commercial success. Consequently, if we are not able to fund
extensive research and development activities and deliver new products to the
markets we serve on a timely basis, our growth and operations will be harmed. In
addition, sales of The Company’s new products could replace sales of some of its
current products, offsetting the benefit of even a successful product
introduction.
If
we fail to introduce and commercialize new field seed varieties, we will not be
able to recover research, development and cover our other costs.
We cannot
guarantee the development and performance of new field seed varieties, whether
licensed or proprietary, or that they will meet our and our customers’
expectations. Farmers generally need time to learn about new seed
varieties and how to plant and tend them. Their traditional planting experience
may make it difficult for them to adapt to the new varieties. The process for
new products to gain market recognition and acceptance is long and has
uncertainties. If we fail to introduce and commercialize a new seed variety that
meets the demand of farmers in China and provide the proper education about them
to the distributors, farmers and public, we may not be able to generate
sufficient sales to cover our costs.
One
or more of our distributors could engage in activities that are harmful to our
brand and to our business.
Our field
seed products are sold primarily through distributors. The distributors
are responsible for ensuring that our products have the appropriate licenses to
be sold to farmers in the PRC provinces. If the distributors do not apply for
and receive the appropriate licenses, their sales of our products in those
provinces may be illegal, and we may be subject to government sanctions,
including confiscation of illegal revenues and a fine of between two and three
times the amount of such illegal revenues. Unlicensed sales in a province may
also cause a delay for our other distributors in receiving a license from the
authorities for that province, which could further adversely impact our sales in
that province. In addition, distributors may sell our products under another
brand that is licensed in a particular province if our product is not licensed
there. If our products are sold under another brand, the purchasers will not be
aware of our brand name, and we will be unable to cross-market other field seed
varieties or other products as effectively to these purchasers. Moreover, our
ability to provide appropriate customer service to these purchasers will be
negatively affected, and we may be unable to develop our local knowledge of the
needs of these purchasers and their environment. If any of our distributors sell
inferior field seeds produced by other companies under our brand name, our brand
and reputation could be harmed, which could make marketing of our branded field
seeds more difficult.
The
performance of our seeds depends on climate, geographical areas, cultivation
method, farmers’ degree of knowledge and other factors in addition to genetic
traits and the quality of our seeds. Natural disasters may also affect the
performance of our seeds, particularly when farmers are not able to timely and
effectively respond to those disasters. Furthermore, the cultivability of some
farmland is deteriorating because of toxic and hazardous materials resulting
from farmers’ overuse of chemical herbicides. These factors generally cause
underproduction, but farmers generally attribute underproduction to seed
quality. We may be subject to legal proceedings and claims from time to time
relating to our seed quality. The defense of these proceedings and claims can be
both costly and time consuming and may significantly divert efforts and
resources of our management personnel. An adverse determination in any such
proceeding could subject us to significant liability and damage our market
reputation and prevent us from achieving increased sales and market share.
Protracted litigation could also result in our customers or potential customers
deferring or limiting their purchase of our products.
28
Fluctuations
in commodity prices can increase our costs and decrease our sales.
We
purchase our seed inventories from production growers at market prices and
retain the seed in inventory until it is sold. These purchases constitute a
significant portion of the manufacturing costs for our seeds. We use hedging
strategies to mitigate the risk of short-term changes in these prices, but we
are unable to avoid the risk of medium and long-term changes. Accordingly,
increases in commodity prices may negatively affect our cost of goods sold or
cause us to increase seed prices, which could adversely affect our sales.
Farmers’ incomes are also affected by commodity prices; as a result, commodity
prices could have a negative effect on their ability to purchase
our products.
Price
increases for energy costs and raw materials could have a significant impact on
our ability to sustain and grow earnings.
Our
production and distribution processes consume significant amounts of energy and
raw materials, the costs of which are subject to worldwide supply and demand and
other factors beyond the control of The Company. Significant variations in the
cost of energy, which primarily reflect market prices for oil and raw materials,
affect The Company’s operating results from period to period. When possible, The
Company purchases raw materials through negotiated long-term contracts to
minimize the impact of price fluctuations. The Company has taken actions to
offset the effects of higher energy and raw material costs through selling price
increases, productivity improvements and cost reduction programs. Success in
offsetting higher raw material costs with price increases is largely influenced
by competitive and economic conditions and could vary significantly depending on
the market served. If The Company is not able to fully offset the effects of
higher energy and raw material costs, it could have a significant impact on The
Company’s financial results.
We
have limited business insurance coverage in China.
PRC
insurance companies do not offer extensive business insurance products. As a
result, we have very limited business liability, business disruption insurance,
or product liability coverage for our operations in China. We have determined
that the difficulties associated with acquiring such insurance on commercially
acceptable terms make it impractical for us to obtain such coverage. Any
business disruption, litigation or natural disaster could result in our
incurring substantial costs and the diversion of our resources, and could
adversely affect our operations and financial condition.
Agreements
between our subsidiaries may not reflect terms that would have resulted from
arm’s length negotiations among unaffiliated third parties.
Agreements
between our subsidiaries that have been entered into may not reflect terms that
would have resulted from arm’s-length negotiations among unaffiliated third
parties. These agreements relate to, among other things, the transfer of
intellectual property rights and the provision of technical research, production
and distribution services.
If
our rights to lease land from farmers were subject to a dispute, or if their
legality or validity were challenged, our operations could be
disrupted.
PRC law
provides for the registration of land ownership and land-use rights and for the
issuance of certificates evidencing land ownership or the right to use land.
However, the administrative system for registration of land ownership and
land-use rights is not well-developed in rural areas where most of our field
seed production bases are located. As a result, we are generally not able to
verify through the land registry system the ownership or land-use rights of the
parties from whom we have leased land. Despite our efforts to obtain
representations from the farmers that they own the land, possess land-use rights
or have the right to sub-contract the land-use right on behalf of the holder of
such rights, there is nevertheless a risk that they have not legally and validly
granted the right to use the land to us. Moreover, there is a risk that farmers
may, in breach of the terms of the applicable leases, enter into leases with
other third parties in respect of land-use rights which they have previously
granted to us, or that they have not entered into leases with third parties
before entering into leases with us.
29
There is
a risk that the legality or validity of our leases will be subject to dispute or
challenge in the future. If our leases become subject to a dispute or challenge,
our operations on such land, especially our research and development on crop
breeding, could be suspended and we could lose our rights to use such land which
could adversely affect our business, financial condition and results of
operations.
Any diversion of
management attention to matters related to acquisitions or any delays or
difficulties encountered in connection with integrating acquired operations may
have an adverse effect on our business, results of operations, and/or financial
condition.
Acquisitions
present challenges, including geographical coordination, personnel integration
and retention of key management personnel, systems integration and the
reconciliation of corporate cultures. Those operations could divert management’s
attention from our business or cause a temporary interruption of or loss of
momentum in our business and the loss of key personnel from the acquired
companies. In addition, proposed acquisitions which are not consummated will
cause us to incur substantial costs, none of which are generally
recoverable.
Risks
relating to our industry
The
Chinese agricultural market is highly competitive and our growth and results of
operations may be adversely affected if we are unable to compete
effectively.
The
agricultural market in China is highly fragmented, largely regional and
competitive and we expect competition to increase and intensify within the
sector. We face significant competition in our field seed business. Our
competitors may have greater financial, research and development resources than
we have. Competition may also result from consolidation or other market forces
within the field seed industry in China and the privatized field seed producers
that were operated by the local governments in China. Our competitors may be
better able to take advantage of industry consolidation and acquisition
opportunities than us. The reform and restructuring of the previously
state-owned equity in seed enterprises will likely lead to the reallocation of
market share in the seed industry, and our competitors may increase their market
share by participating in the restructuring of the state-owned seed companies.
Privatization will likely mean that these producers will need to develop more
efficient and commercially viable business models in order to survive. In
addition, the PRC government currently restricts foreign ownership of any
domestic seed development and production business to no more than 49%. When and
if such restrictions are lifted, multinational corporations engaged in the seed
business may expand into the agricultural market in China. These companies have
significantly greater financial, technological and other resources than us and
may become our major competitors in China. In particular, our industry was
affected by a widespread overproduction during 2007. As a result, supply of
certain of our products exceeded demand for those products and, as a result,
market prices were reduced and our margins and revenues were negatively impacted
in 2007 and 2008. If this trend continues, we may be unable to successfully
compete in our industry, especially if our competitors can produce and
distribute seeds at a lower cost than us. As competition intensifies, our
margins may continue to be compressed by more competitive pricing in the short
term and may also to be compressed in the long term and we may lose our market
share and experience a negative impact on our margins, revenues and results of
operations.
China’s
commitments to the World Trade Organization may intensify
competition.
In
connection with its accession to the World Trade Organization, China made many
commitments including opening its markets to foreign products, allowing foreign
companies to conduct distribution businesses within China, and reducing customs
duties. Foreign manufacturers may begin to manufacture competing seeds; both
non-genetically modified and genetically modified and ship their products or
establish manufacturing facilities in China. Competition from foreign companies
may reduce our current profit margins, and hence our business results may
suffer.
Natural
or man-made disasters could damage seed production, which would cause us to
suffer production losses and material reduction of revenues.
We
produce our seeds with farmers who possess land totaling 16,474 acres in
aggregate. To produce seeds, crops are planted 9~12 month in advance of
distribution of seeds. As a result, the source of supply for our seeds is
subject to all of the risks associated with any agricultural enterprise,
including natural disasters such as widespread drought, flood, snowstorm,
pestilence, plant diseases and insect pests, and man-made disasters such as
environmental contamination. Other man-made incidents may damage our products,
such as arson or other acts that may adversely affect our field seed inventory
in the winter storage season. Furthermore, natural or man-made disasters may
cause farmers to migrate from the farmland, which would decrease the number of
end users of our products. We have attempted to manage this risk by obligating
ourselves to pay the farmers who produce our seeds only for the quantity of
seeds that they produce, thus limiting our expenses somewhat. We have also set
up a storage system attempting to manage this risk. However, in the event of a
widespread failure of the field seed, we would likely sustain substantial
operating losses, due to both the fact that a significant portion of our
expenses are fixed overhead and that the loss of a large portion of a field seed
would limit our revenues significantly.
30
Field
seed prices and sales volumes may decrease in any given year with a
corresponding reduction in sales, margins and results of
operations.
In the
recent past, there have been some elements of instability as a result of the
privatization of state field seed producers and because of the worldwide
economic situation. There may be other periods of instability in the future
during which commodity prices and sales volumes might fluctuate greatly.
Commodities can be affected by general economic conditions, weather, disease and
aspects of demand such as financing, competition and trade restrictions.
Although we follow a branded product strategy to differentiate our products from
those of other field seed producers, the field seed market continues to behave
as a commodity market. As a result, the price that we are able to demand for our
seeds is somewhat dependent on the size of the supply of our seeds and the seeds
of other producers. Therefore, the potential exists for fluctuation in supply
and, consequently, in price, in our own markets, even in the absence of
significant external events that might cause volatility. As a result, the amount
of revenue that we receive in any given year is subject to change. Because
decisions are made regarding the level of production prior to the time that the
volume of orders and the market price for those orders is known, it is possible
that we will have too much or not enough product available, each with the
attendant impact on revenues, margins and results of operations.
Technological
change in creating seed hybrids could harm our business, causing a shift in
business opportunities, market share, and revenues.
We
currently rely upon traditional methods of creating field seed hybrids to
develop new products. While these methods are highly effective, there has been
an increase in the development of genetically modified agricultural products in
an effort to increase the quality and quantity of crop yields of which we
currently engage in as well. This new genetic technology is controversial, and
it has not been widely accepted in many regions of the world, including the PRC.
However, as the ability to use genetic modification to produce seeds that are
superior to or less costly than those that we produce by traditional methods
increases, the threat of competition from this source becomes more realistic. A
number of factors those are currently difficult to predict, including a shift in
farmer and consumer attitudes regarding the acceptability of genetic technology
affect the extent to which this potential threat could affect our business
prospects.
Risks
relating to our business organization and structure
Our
PRC operating subsidiaries are controlled subsidiaries through Share Pledge
Agreement rather than by direct ownership of shares, the terms of which may have
to be enforced, which would require us to incur extra costs, create uncertainty
as to ownership of the operating businesses involved and risk the possible loss
of rights.
Under PRC
law, foreign entities are not currently permitted to own more than 49% of a seed
production company. In order to address those restrictions, China Golden, a
non-Chinese entity that cannot directly or indirectly own all the shares of
certain of our PRC operating subsidiaries, namely, Fuer, will instead hold
the right to control such shares in all respects, including voting, dividends,
nomination of directors, and corporate management, through stock consignment
agreements executed by the owners of the stock of these companies. In addition,
if we engage in the sale of genetically modified seed products, then foreign
entities are not currently permitted to own any portion of the seed production
company. .
31
There is
the risk, however, that a consigning shareholder will not fulfill its
obligations under the Share Pledge Agreement. In that event, we may need to
resort to the PRC courts to have our rights under the applicable agreement
enforced. Such enforcement will cause us to incur legal expenses. In addition,
while a case is pending there will be uncertainty regarding our rights as to the
PRC operating subsidiaries involved. In addition, a PRC court may decide not to
enforce the agreements in whole or in part. To the extent these agreements are
neither observed nor enforced as intended, the three PRC operating subsidiaries
will not be controlled by us as intended, which will affect our enterprise value
and restrict our ability to obtain the income and other rights of ownership
associated with the consigned stock. It may also prevent the consolidation of
our financial statements with the PRC operating subsidiaries, which would reduce
the reported earnings of the consolidated companies. The uncertainty of
ownership may also adversely affect the market value of our ordinary
shares.
If
we do not comply with PRC regulations, we may not be able to operate our
business or we may be fined, both of which would adversely affect our business,
operations and revenues.
The PRC
has many regulations relating to the seed business, including obtaining and
maintaining operating licenses and permits. Seed products must be licensed and
undergo a stringent review process before they may be sold in the PRC. We
believe we currently have all the necessary licenses for our business, and that
we are in compliance with applicable laws and regulations. If we are not in
compliance, we may be fined or lose the ability to sell a particular seed or
operate our business altogether. If the fines are substantial or if our ability
to sell or operate is withdrawn, this will result in additional costs or the
loss of revenues and could prevent us from continuing as an operating
business.
If
we do not comply with applicable government regulations, we may be prohibited
from continuing some or all of our operations, resulting in a reduction of
growth and ultimately market share due to loss of competitive
position.
Our
revenue depends on receiving approval from the PRC government to market new seed
hybrids that we are developing and will develop. In addition, there may be
circumstances under which the governmental approvals granted are subject to
change without substantial advance notice, and it is possible that we could fail
to obtain the approvals that we require to expand our business as we intend to
do. The failure to obtain or to maintain such approvals would limit the number
and quality of products that we would be able to offer. This reduction in
product offerings would cause a reduction in the growth previously experienced
and over time would result in the loss of market share from the competitive
pressures of seeds developed by others that would likely be better than our
products.
The
technical services agreements with our operating subsidiaries may be subject to
scrutiny by the PRC tax authorities for transfer pricing
adjustments.
We could
face adverse tax consequences if the PRC tax authorities determine that our
technical service agreements with our PRC operating subsidiaries were not
entered into based on arm’s length negotiations. If the PRC tax authorities
determine that these agreements were not entered into on an arm’s length basis,
they may adjust our income and expenses for PRC tax purposes in the form of a
transfer pricing adjustment. A transfer pricing adjustment could result in a
reduction, for PRC tax purposes, of deductions recorded by our PRC
operating subsidiaries, namely Deli and Fuer, which could adversely affect us
by:
|
o
|
increasing
the PRC operating subsidiaries’ tax liability without reducing our tax
liability, which could further result in late payment fees and other
penalties to our PRC operating subsidiaries for under-paid taxes;
or
|
|
o
|
limiting
our ability to maintain preferential tax treatment and government
financial incentives, which, if the transfer pricing adjustment is
significant, could result in our failing to qualify for those preferential
tax treatments and government financial
incentives.
|
As a
result, any transfer pricing adjustment could have an adverse impact on our
financial condition.
32
Our
business benefits from certain PRC government subsidies. Expiration of, or
changes to, these incentives could have a material adverse effect on our
operating results.
The PRC
government has in recent years reduced taxes and increased subsidies and other
support across the agricultural industry. For instance, the government
subsidizes farmers for their seed purchases, and has increased spending on rural
infrastructure. Sales of agricultural products from producers to intermediaries
or to farmers are exempt from PRC value-added tax. The discontinuance of
preferential treatments granted by the Chinese government to the seed industry,
could adversely affect our earnings.
In
addition, subsidy policies may have an adverse effect on our ability to market
our products. Farmers can buy field seeds designated as “high-quality” at
subsidized prices, but the designation of seeds as “high-quality” is at the
discretion of the local government, companies owned by the local government and
local private seed companies. It is possible that this policy could result in
preferential treatment for local seed producers, with locally produced seeds
being designated as “high-quality” while ours are not designated as such. If
such preferential treatment were to occur, the price for our seeds to farmers in
those provinces would be higher than the subsidized local seeds, and our sales
in that province could suffer, which could adversely affect our results of
operations.
The
discontinuation of any of the preferential tax treatments currently available to
our PRC subsidiaries could materially increase our tax liabilities.
Prior to
January 1, 2008, under applicable PRC tax laws, companies established in China
were generally subject to a state and local enterprise income tax, or EIT, at
rates of 30% and 3%, respectively . In addition, an enterprise qualified as a
“High Tech Enterprise”, including agricultural companies will be entitled to a
preferential state EIT rate of 15% for three years. The qualification of a “High
Tech Enterprise” was subject to evaluation every third year by the relevant
government authority in China. For example, Qiqihar Fuer is entitled to a
preferential tax rate of 15% as a new technology company for 2009 through
2011.
In March
2007, the National People’s Congress, enacted the Enterprise Income Tax Law, or
the EIT Law, and in December 2007, the State Council promulgated the
implementing rules of the New EIT Law, both of which became effective on January
1, 2008. The New EIT Law significantly curtails tax incentives granted to
foreign-invested enterprises under the previous tax law. The New EIT Law,
however, (i) reduces the top rate of enterprise income tax to 25%, (ii) permits
companies to continue to enjoy their existing tax incentives, subject to certain
transitional phase-out rules, and (iii) introduces new tax incentives, subject
to various qualification criteria. Under the phase-out rules, enterprises
established before the promulgation date of the New EIT Law and which were
granted preferential EIT treatment under the then effective tax laws or
regulations may continue to enjoy their tax holidays until their expiration and
will gradually transition to the uniform 25% EIT rate over a five-year
transition period. In addition, the new technology enterprise qualification of
our PRC subsidiaries is subject to a biennial re-assessment by the relevant PRC
government authority. In the event the preferential tax treatment for our PRC
subsidiaries is discontinued, the affected entity will become subject to the
standard PRC enterprise income tax rate. There is no assurance that the local
tax authorities will not, in the future, change their position and discontinue
any of our preferential tax treatments, potentially with retroactive effect. The
discontinuation of any of our preferential tax treatments could materially
increase our tax obligations.
Under the
New Enterprise Income Tax Law, or the New 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 New 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. However, it is unclear how
tax authorities will determine tax residency based on the facts of each case. If
the PRC tax authorities determine that our British Virgin Islands holding
company is a “resident enterprise” for PRC enterprise income tax purposes, a
number of unfavorable PRC tax consequences could follow. First, we may be
subject to enterprise income tax at a rate of 25% on our worldwide taxable
income as well as PRC enterprise income tax reporting obligations. Second, under
the New EIT Law and its implementing rules dividends paid to holding companies
outside of China which are resident enterprises will be
subject to a 10% withholding tax. It is possible that future guidance issued
with respect to the new “resident enterprise” classification could be applied to
our British Virgin Islands sub-holding company with similar consequences.
Therefore, any dividends paid by our PRC subsidiaries may be subject to a 10%
withholding obligation.
33
In
addition to the uncertainty in how the new “resident enterprise” classification
could apply, it is also possible that the rules may change in the future,
possibly with retroactive effect. We are actively monitoring the possibility of
“resident enterprise” treatment for the 2010 and 2011 tax years and are
evaluating appropriate organizational changes to avoid this
treatment.
Adverse
changes in political and economic policies of the PRC, including its policy of
reforming its economic system, could have an adverse effect on the growth of
private businesses in the PRC such as ours.
Since the
late 1970’s, the PRC has been reforming its economic system and changing from a
planned economy based on governmental dictates and priorities to one that uses
market forces to influence deployment of economic resources, labor and capital
and to determine business endeavors. We cannot predict whether or not the
government will continue to encourage economic liberalization and further
release its control over the economy and encourage private enterprise. We also
cannot predict the timing or extent of future economic reforms that may be
proposed. Any re-imposition of planned economy regulation or similar kinds of
restrictions could reduce the freedom of private businesses to operate in a
profitable manner, restrict inflows of capital or stifle investor willingness to
participate in the PRC economy. To the extent we need additional capital; any
restrictions on foreign ownership, foreign investment and repatriation of
profits will hamper our ability to find capital outside of the PRC.
In recent years, the economy of China
has experienced unprecedented growth. As a result of the global financial
crisis, this growth has slowed in the last six months, and if the growth of the
economy continues to slow or if the economy contracts, our business will suffer
a reduction in sales growth and expansion opportunities.
The rapid
growth of the PRC economy has historically resulted in widespread growth
opportunities in industries across China. As a result of the global financial
crisis and the inability of enterprises to gain comparable access to the same
amounts of capital available in past years, there may be an adverse effect on
the business climate and growth of private enterprise in the PRC. Such a
described economic slowdown could have an adverse effect on our sales and may
increase our costs and efficiency. Conversely if economic growth slows, and if,
in conjunction, inflation is allowed to proceed unchecked, our costs would
likely increase, and there can be no assurance that we would be able to increase
our prices to an extent that would offset the increase in our
expenses.
PRC law
allows enterprises owned by foreign investors to remit their profits, dividends
and bonuses earned in the PRC to other countries, and the remittance does not
require prior approval by the State Administration of Foreign Exchange, or SAFE.
SAFE regulations require extensive documentation and reporting, some of which is
burdensome and slows payments. If there is a return to payment restrictions and
reporting, the ability of a PRC company to attract investors will be
reduced.
Also, our
investors may not be able to obtain the benefits of the profits of the business
generated in the PRC for other reasons. Relevant PRC laws and regulations permit
payment of dividends only from accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. Each of our
subsidiaries and our affiliated entities in China is required to set aside at
least 10% of its after-tax profits each year, if any, to fund a statutory
reserve until such reserve reaches 50% of its registered capital, and to further
set aside a portion of its after-tax profits to fund the employee welfare fund
at the discretion of the shareholders’ meeting or the board. These reserves are
not distributable as cash dividends. In addition, the PRC tax authorities may
require us to adjust our taxable income under the contractual arrangements we
currently have in place in a manner that would materially and adversely affect
our subsidiary’s ability to pay dividends and other distributions to us. Any
limitation on the ability of our subsidiary and our affiliated entity to
distribute dividends or other payments to us could materially limit our ability
to grow, make investments or acquisitions that could be beneficial to our
businesses or otherwise fund and conduct our business.
34
Pursuant
to the new PRC enterprise income tax law effective on January 1, 2008,
dividends payable by a foreign-invested enterprise, or FIE, including Qiqihar
Deli to its foreign investors is subject to a 10% withholding tax, unless any
such foreign investor’s jurisdiction of incorporation has a tax treaty with
China that provides for a different withholding arrangement. No such treaty
currently exists with the British Virgin Islands or the United States.
Prior to 2008, dividend payments to foreign investors made by FIEs were exempted
from PRC withholding tax.
Any
fluctuations in exchange rates may adversely affect your
investment.
The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in political and economic
conditions. Because our earnings and cash from operations are denominated in
Renminbi, fluctuations in exchange rates between U.S. dollars and Renminbi will
affect our balance sheet and earnings per share when stated in U.S. dollars. In
addition, appreciation or depreciation in the value of the Renminbi relative to
the U.S. dollar would affect our financial results when reported in U.S. dollar
terms without giving effect to any underlying change in our business or results
of operations. The People’s Bank of China sets and publishes a daily based
exchange rate. Prior to July 21, 2005, the People’s Bank of China set this rate
with reference primarily to the supply and demand of Renminbi against the U.S.
dollar in the market during the prior day. Effective from July 21, 2005, the
Renminbi is no longer pegged solely to the U.S. dollar. Instead, it continues to
be pegged to a basket of currencies determined by the People’s Bank of China,
against which it can rise or fall by as much as 0.3% each day. For example, on
July 21, 2005, the Renminbi was revalued against the US dollar to approximately
RMB8.11 to the US dollar, representing an upward revaluation of 2.1% of the
Renminbi against the US dollar, as compared to the exchange rate on the previous
day. On September 23, 2005, the PRC government widened the daily trading band
for Renminbi against non-US dollar currencies from 1.5% to 3% to improve the
flexibility of the new foreign exchange system. The exchange rate may become
volatile, the Renminbi may be revalued further against the US dollar or other
currencies or the Renminbi may be permitted to enter into a full or limited free
float, which may result in an appreciation or depreciation in the value of the
Renminbi against the US dollar or other currencies. Fluctuations in the
exchange rate will affect the relative value of any dividend we issue which will
be exchanged into U.S. dollars, the value of any U.S. dollar denominated
investments we make in the future and any earnings on such
investments.
There are
government regulations that limit or prohibit foreign investment in the PRC,
which may restrict our growth.
Notwithstanding
the general restriction on foreign investment in the seed industry in the PRC,
our corporate structure currently enables us to receive foreign investment. Our
continued ability to receive foreign investment may be important to our ability
to continue to expand our business rapidly and to manage that expansion
effectively. We cannot be certain that a change in the regulations allowing us
to receive foreign investment will not occur. In the event of such a change, our
plan to expand our business could be disrupted.
Restrictions on currency exchange may limit our ability to
receive and use our revenues effectively.
Substantially
all our revenues and expenses are denominated in Renminbi. We may need to
convert a portion of our revenues into other currencies to meet our foreign
currency obligations, including, among others, payment of dividends declared, if
any, in respect of our ordinary shares. Under China’s existing foreign exchange
regulations, the PRC Operating Companies may not pay dividends in foreign
currencies, without prior approval from SAFE, unless they comply with certain
procedural requirements. The PRC government may also take measures in the future
to restrict access to foreign currencies for current account
transactions.
Foreign
exchange transactions under the capital account continue to be subject to
significant foreign exchange controls and require the approval of PRC
governmental authorities, including the SAFE. If the PRC Operating Companies
borrow in foreign currency from us or other foreign lenders, these loans must be
registered with the SAFE, and if we finance the PRC Operating Companies by means
of additional capital contributions, these capital contributions must be
approved by certain government authorities, including the Ministry of Commerce
or its local counterparts. These limitations could adversely affect the ability
of the PRC Operating Companies to obtain foreign exchange through debt or equity
financing, which could harm our ability to fund our operations or cause us to
seek additional financing on terms that may not be favorable.
35
PRC
regulations relating to offshore investment activities by PRC residents may
increase the administrative burden we face and create regulatory uncertainties
that could restrict our overseas and cross-border investment activity. Failure
by our shareholders who are PRC residents to make any required applications and
filings pursuant to such regulations may prevent us from being able to
distribute profits, if any, and could expose us and our PRC resident
shareholders to liability under PRC law.
In
October 2005, SAFE promulgated regulations that require registration with local
SAFE offices in connection with direct or indirect offshore investment by PRC
residents, including PRC individual residents and PRC corporate entities. These
regulations apply to our shareholders who are PRC residents and also apply to
our prior and future offshore acquisitions. In particular, the SAFE regulations
require PRC residents to file with competent SAFE offices information about
offshore companies in which they have directly or indirectly invested and to
make follow-up filings in connection with certain material transactions
involving such offshore companies, such as increases or decreases in investment
amount, transfers or exchanges of shares, mergers or divisions, long-term equity
or debt investments, or external guarantees or other material events that do not
involve return investment.
The SAFE
regulations required registration by March 31, 2006 of direct or indirect
investments previously made by PRC residents in offshore companies. If a PRC
resident with a direct or indirect stake in an offshore parent company fails to
make the required SAFE registration, the PRC subsidiaries of such offshore
parent company may be prohibited from making distributions of profit to the
offshore parent and from paying the offshore parent proceeds from any reduction
in capital, share transfer or liquidation in respect of the PRC subsidiaries.
Further, failure to comply with various SAFE registration requirements described
above could result in liability under PRC law for foreign exchange
evasion.
We
believe our major shareholders who are PRC residents, or whose shares are
beneficially owned by PRC residents, have completed foreign exchange
registration with the local foreign exchange bureau according to these SAFE
regulations. However, as these regulations are relatively new and there is
uncertainty concerning the reconciliation of the new regulations with other
approval requirements, it is unclear how the regulations, and any future
legislation concerning offshore or cross-border transactions, will be
interpreted, amended and implemented by the relevant government authorities. We
cannot assure you that all of our shareholders who are PRC residents will comply
with our request to make or obtain any applicable registrations or approvals
required by the regulations or other related legislation. The failure or
inability of our PRC resident shareholders to receive any required approvals or
make any required registrations may subject us to fines and legal sanctions,
restrict our overseas or cross-border investment activities, limit our PRC
subsidiary to make distributions or pay dividends or affect our ownership
structure. As a result, our business operations and our ability to distribute a
dividend to you could be adversely affected.
The
PRC legal system has inherent uncertainties that could limit the legal
protections available to you.
Nearly
all of our assets and all of our operations are in the PRC. The PRC legal system
is based on written statutes. Prior court decisions may be cited for reference
but are not binding on subsequent cases and have limited precedential value.
Since 1979, the PRC legislative bodies have promulgated laws and regulations
dealing with such economic matters as foreign investment, corporate organization
and governance, commerce, taxation and trade. However, because these laws and
regulations are relatively new, and because of the limited volume of published
decisions and their non-binding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties. The laws in the PRC differ
from the laws in the United States and may afford less protection to our non-PRC
shareholders.
36
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in the PRC based on United States
judgments against us, our subsidiaries, officers and directors.
We are
incorporated in Nevada and our PRC operating subsidiaries are formed under PRC
law. Substantially all of our assets are located in the PRC. In addition, most
of our directors and executive officers reside within the PRC, and substantially
all of the assets of these persons are located within the PRC. It may not be
possible to affect service of process within the United States or elsewhere
outside the PRC upon our directors, or executive officers and experts, including
effecting service of process with respect to matters arising under United States
federal securities laws or applicable state securities laws. The PRC does not
have treaties providing for the reciprocal recognition and enforcement of
judgments of courts with the United States and many other countries. As a
result, recognition and enforcement in the PRC of judgments of a court in the
United States or many other jurisdictions in relation to any matter, including
securities laws, may be difficult or impossible. Furthermore, an original action
may be brought in the PRC against our assets and our subsidiaries, our directors
and executive officers and experts only if the actions are not required to be
arbitrated by PRC law and only if the facts alleged in the complaint give rise
to a cause of action under PRC law. In connection with any such original action,
a PRC court may award civil liability, including monetary damages.
Risks
related to our shares
Certain
provisions in our organizational documents may discourage our acquisition by a
third party, which could limit your opportunity to sell your shares at a
premium.
Our
memorandum and articles of association include provisions that could limit the
ability of others to acquire control of us. Under those provisions, our board of
directors has the power to issue preferred shares with such rights attaching to
them as they decide and this power could be used in a manner that would delay,
defer or prevent a change of control of us. These provisions could have the
effect of depriving you of an opportunity to sell your shares at a premium over
prevailing market prices by discouraging third parties from seeking to acquire
control of us in a tender offer or similar transactions.
Certain
insiders and major shareholders have substantial control over the company, and
they could delay or prevent a change in our corporate control, even if our other
shareholders wanted such a change to occur which may limit your ability to
influence shareholder matters.
As of
Closing of the merger and share issuance, which is stated in Item 2.01”Enter
into Material Definitive Agreements” , our executive officers, directors and
principal shareholders and their affiliates beneficially would own 7,700,093
common shares, or 59.42% of the outstanding shares of the Company’s ordinary
stock. These shareholders will be able to exercise significant control over all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may have the effect of delaying, deferring or preventing a change in control of
our company and some transactions may be more difficult or impossible without
the support of these shareholders. Furthermore, the interests of these major
shareholders may conflict with those of other shareholders. We also conduct
transactions with businesses in which our principal shareholders maintain
interests. We believe that these transactions have been conducted on an arm’s
length basis, but we cannot assure you that these transactions would have the
same terms if conducted with unrelated third parties.
Future
sales by us or our existing shareholders could depress the market price of our
ordinary shares.
If we or
our existing shareholders sell a large number of shares of our ordinary stock,
or if we sell additional securities that are convertible into ordinary stock,
the market price of our ordinary stock could decline significantly. Further,
even the perception in the public market that we or our existing shareholders
might sell shares of ordinary stock could depress the market price of our
ordinary stock.
DESCRIPTION
OF PROPERTIES
We have
offices at all operational locations. The facilities were added to with the
expansion of our facilities...
37
Under the
PRC law, most land is owned by the government, which grants a "land use right"
to an individual or entity after a purchase price for such “land use right” is
paid to the government. The “land use right” allows the holder the right to use
the land for a specified long-term period of time and enjoys all the ownership
incidents to the land. In the case of land used for industrial purposes,
the land use rights are generally granted for a period of fifty years.
This period may be renewed at the expiration of the term. These land use rights
are transferable and may be used as security for borrowings under loans and
other obligations. The Company currently
holds land use rights for two parcels of land registered under its name, and
lease land use rights for additional parcels of land from third parties that are
used for its seed breeding business.
Set forth
below is the detailed information regarding these land use rights registered
under the names of Qiqihar Fuer or its subsidiaries:
|
Registered owner of
land use right
|
Location & certificate
of
land use right
|
Usage
|
(approximate)
square meters
|
Date of
issuance
or grant
|
Expiration
Date
|
|||||
|
Qiqihar
Fuer Agronomy Inc
|
West,
NianBei Road, Fulaerji, Qiqihar, Heilongjiang Province
|
Industrial
use
|
16,
518.90
|
2007
|
2055
|
|||||
|
Qiqihar
Fuer Agronomy Inc
|
West,
NianBei Road, Fulaerji, Qiqihar, Heilongjiang Province
|
Industrial
use
|
33,314.90
|
2007
|
2055
|
As of
March 31, 2010, the Company owned and operated one office building, and 8
workshops and warehouses.
SECURITY
OWNERSHIP
Beneficial
Ownership of Securities
The
following table sets forth information regarding the beneficial ownership of the
Company’s common stock as of June 17 2010 by:
|
|
•
|
each person known by the Company
to be the beneficial owner of more than 5% of Company’s outstanding shares
of common stock;
|
|
|
•
|
each of the Company’s officers
and directors; and
|
|
|
•
|
all of the Company’s officers and
directors as a group.
|
Unless
otherwise indicated, Ardent believes that all persons named in the table have
sole voting and investment power with respect to all shares of common stock
beneficially owned by them
38
|
Name and Address of Beneficial Owner
|
Amount and Nature of
Beneficial Ownership
|
Percent of
Class*
|
||||
|
Oriental
Agriculture
P.O. Box 957, Offshore
Incorporations Center,
Road Town, Tortola, British Virgin
Islands
|
7,327,749 Common
shares
|
56.55 | % | |||
|
Faith Origin
Limited
Quastisky Building,P.O.
Box,4389,
Road Town, Tortola, British Virgin
Islands
|
1,243,968 Common
shares
|
9.60 | % | |||
|
Trade Ever
Holdings
P.O. Box 957, Offshore
Incorporations Center,
Road Town, Tortola, British Virgin
Islands
|
1,269,884 Common
shares
|
9.80 | % | |||
|
Virtue World
Quastisky Building,P.O. Box
4389,
Road Town, Tortola, British Virgin
Islands
|
763,922 Common
shares
|
5.90 | % | |||
|
Allied Merit International Investment
Inc.
802, 8/F Eton Tower Hysan
Ave
Causeway Bay, Hong
Kong
|
1,018,868 Common
shares
|
7.86 | % | |||
|
Capital
Soldier Limited
c/o
Cui Xiaowei, Director
Quastisky
Building
P.O.
Box 4389, Road Town, Tortola
British
Virgin Islands
|
372,344 Common
Shares
|
2.87 | % | |||
|
Other
Shareholders
|
1,333,609 Common
shares
|
10.29 | % | |||
*
Beneficial ownership and percentage has been determined in
accordance with Rule 13d-3 under the Securities Exchange Act of
1934.
PER
SHARE MARKET PRICE INFORMATION
The
shares of the Company common stock are currently quoted on the Over-the-Counter
Bulletin Board under the symbol “FRXT”. On June 21, 2010, the last quoted sale
price of FRXT was $0.10.
There is
no established public trading market for the shares of common stock of China
Golden because it was a private company prior to the acquisition.
Holder
As of
June 16, 2010, there were 553 holders of record of the Company common
stock.
Dividends
The
Company has not paid any cash dividends on its common stock to date. The payment
of dividends in the future will be contingent upon the Company’s revenues and
earnings, if any, capital requirements and general financial condition
subsequent to a business combination will be within the discretion of the
Company’s then board of directors. It is the present intention of the Company’s
Board of Directors to retain all earnings, if any, for use in the Company’s
business operations and, accordingly, the Company’s Board of Directors does not
anticipate declaring any dividends in the foreseeable future.
Legal
Proceedings.
None
Securities
Authorized for Issuance Under Compensation Plans
None
39
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities.
Please
see Item 3.02 above.
Financial
Statements
Reference
is made to the disclosure set forth under Item 9.01 of this current report
on Form 8-K concerning the financial statements and supplementary data of the
Company, which is incorporated herein by reference.
|
Item
5.02
|
Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers.
|
In
connection with the change of control pursuant to the Share Exchange described
in Item 5.01 of this Current Report, the following persons were appointed
executive officers of the Company. Each of our current Directors and executive
officers is a resident of the PRC. As a result, it may be difficult for
investors to effect service of process within the United States or British
Virgin Islands upon them, or to enforce court judgments obtained against them in
the United States courts or British Virgin Islands’ courts.
|
Names of Anticipated Officers and
Directors
|
|
Age
|
|
Position
|
|
Cui
Xiaowei
|
28
|
Director
|
||
|
Zhang
Li
|
46
|
Chairman
of the Board and Chief Executive Officer
|
||
|
Wan
Lipeng
|
35
|
Vice
President of Sales and Marketing
|
||
|
Li
Baojin
|
60
|
Vice
President of Production
|
||
|
Li
Haitao
|
33
|
Chief
Technology
Officer
|
There are
no family relationships among our directors or executive officers.
All of
our directors will hold office until the next annual meeting of our
stockholders, and until their successors have been qualified after being elected
or appointed. Officers serve at the discretion of our Board of
Directors.
Set forth
below is the biographical information about our directors and executive
officers:
Cui Xiaowei is a
Director. Cui Xiaowei has been a director since April 9. 2010. From
2009 to the present, Cui Xiaowei has been studying political economics in
Nanjing, but he has not earned any college degrees. From December 2000 to
November 2008, Cui Xiaowei served in the Chinese Army.
Zhang Li is a Chairman of the
Board and CEO. Since 2003, Mr. Zhang has been Chairman of the Board and
CEO of Qiqihar Fuer Agronomy Inc. Mr. Zhang has over 15 years of
experience in business management and operation of seeds breading and retailing
businesses and was the founder of Qiqihar Fuer Agronomy Inc. Since 2006, Mr.
Zhang had been elected as deputy of the provincial people’s congress of
Heilongjiang. Mr. Zhang completed his MBA from Tsinghua University in
2007.
Wan Lipeng is a Vice President
of Sales and Marketing. Mr. Wan served as Vice President of Sales and Marketing
of Fuer Agronomy Inc. since 2006, and served as regional sales manager since the
inception of Fuer Agronomy. Mr. Wan has over 12 years in sales and marketing of
agricultural material products in Northeastern China.
Li Baojin is a Vice President
of Production. Mr. Li served as Vice president of Production since the
establishment of Qiqihar Fuer Agronomy Inc. in 2003. Before join in the Company,
Mr. Li served as mayor of Fulaerji District, Qiqihar, Heilongjiang Province, PRC
for 4 years since 1996. From 1983 to 1996, Mr. Li served as leader of many
authorities of the People’s Government of Fulaerji, Qiqihar. From 1967 to 1983,
Mr. Li had been the general manager of Qiqihar Vehicle Company. Mr. Li has over
40 years experience in business and government administration. Mr. Li received
his BS in business administration from Northeast Academy of Heavy Mechanics in
1967.
40
Li Haitao is Chief Technology
Officer. Mr. Li served as Vice president of technology since the establishment
of Qiqihar Fuer Agronomy Inc. During his employment in Fuer Agronomy, Mr. Li has
lead 8 hybrid seeds research project, which generated 3 corn seeds patent. Mr.
Li was granted 5 second awards of “Award on Technology Advancement” from the
provincial government of Heilongjiang. Mr. Li has over 15 years experiences in
research and development on hybrid field seeds. Mr. Li received his BS in seed
breeding from Heilongjiang Academy of Agriculture in 1999.
To our
knowledge, during the last five years, none of our directors and executive
officers (including those of our subsidiaries) has:
|
|
o
|
Had
a bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that
time.
|
|
o
|
Been
convicted in a criminal proceeding or been subject to a pending criminal
proceeding, excluding traffic violations and other minor
offenses.
|
|
o
|
Been
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking
activities.
|
|
o
|
Been
found by a court of competent jurisdiction (in a civil action), the SEC,
or the Commodities Futures Trading Commission to have violated a federal
or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
|
Audit
Committee Financial Expert
Our board
of directors currently acts as our audit committee. Because we only recently
consummated the Share Exchange and appointed the current members of our board of
directors, our board of directors has not yet determined whether we have a
member who qualifies as an "audit committee financial expert" as defined in Item
401(e) of Regulation S-B, and is "independent" as the term is used in Item
7(d)(3)(iv) of Schedule 14A under the Exchange Act. Our board of directors is in
the process of searching for a suitable candidate for this
position.
Audit
Committee
We have
not yet appointed an audit committee, and our board of directors currently acts
as our audit committee. At the present time, we believe that the members of
board of directors are collectively capable of analyzing and evaluating our
financial statements and understanding internal controls and procedures for
financial reporting. Our Company, however, recognizes the importance of good
corporate governance and intends to appoint an audit committee comprised
entirely of independent directors, including at least one financial expert,
during our 2010 fiscal year.
41
EXECUTIVE
COMPENSATION
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Overview
The
following is a discussion of our program for compensating our named executive
officers and director. Currently, we do not have a compensation committee, and
as such, our board of directors is responsible for determining the compensation
of our named executive officers.
Compensation Program
Objectives and Philosophy
The
primary goals of our policy of executive compensation are to attract and retain
the most talented and dedicated executives possible, to assure that our
executives are compensated effectively in a manner consistent with our strategy
and competitive practice and to align executives compensation with the
achievement of our short- and long-term business objectives.
The board
of directors considers a variety of factors in determining compensation of
executives, including their particular background and circumstances, such as
their training and prior relevant work experience, their success in attracting
and retaining savvy and technically proficient managers and employees,
increasing our revenues, broadening our product line offerings, managing our
costs and otherwise helping to lead our company through a period of rapid
growth.
In the
near future, we expect that our board of directors will form a compensation
committee charged with the oversight of executive compensation plans, policies
and programs of our company and with the full authority to determine and approve
the compensation of our chief executive officer and make recommendations with
respect to the compensation of our other executive officers. We expect that our
compensation committee will continue to follow the general approach to executive
compensation that we have followed to date, rewarding superior individual and
company performance with commensurate cash compensation.
Elements
of Compensation
Our
compensation program for the named executive officers consists of two elements:
base salary and bonus. The base salary we provide is intended to equitably
compensate the named executive officers based upon their level of
responsibility, complexity and importance of role, leadership and growth
potential, and experience. We offer bonuses as a vehicle by which the named
executive officers can earn additional compensation depending on individual,
business unit and Company performance. The Company did not provide any other
type of compensation to our named executive officers in 2009.
Base Salary. Our
named executive officers receive base salaries commensurate with their roles and
responsibilities. Subject to any applicable employment agreements, base salaries
and subsequent adjustments, if any, are reviewed and approved by our board of
directors annually, based on an informal review of relevant market data and each
executive’s performance for the prior year, as well as each executive’s
experience, expertise and position. The base salaries paid to our named
executive officers in 2009 are reflected in the Summary Compensation Table
below.
Incentive Bonus. Our
named executive officers are eligible for an annual performance-based cash bonus
in accordance with the Company’s unwritten incentive bonus plan. We provide this
bonus opportunity as a way to attract and retain highly skilled and experienced
executive officers and to motivate them to achieve annual corporate,
departmental and individual goals which consist of various revenue, cost and
operational targets established by the board of directors. The bonus amounts are
determined following the end of the fiscal year based on our performance and the
performance of our executives. The bonus amounts paid to our named executive
officers in 2009 are reflected in the Summary Compensation Table
below.
42
Stock-Based
Awards under the Equity Incentive Plan.
Historically,
we have not granted equity awards as a component of compensation, and we
presently do not have an equity-based incentive program. In the future, we will
likely adopt and establish an equity incentive plan pursuant to which equity
awards may be granted to eligible employees, including each of our named
executive officers, if our board of directors determines that it is in the best
interest of the Company and our stockholders to do so.
Retirement
Benefits
Currently,
we do not provide any Company sponsored retirement benefits to any employee,
including the named executive officers.
Perquisites
Historically,
we have provided certain of our named executive officers with minimal
perquisites and other personal benefits. We do not view perquisites as a
significant element of our compensation structure, but do believe that
perquisites can be useful in attracting, motivating and retaining the executive
talent for which we compete. It is expected that our historical practices
regarding perquisites will continue and will be subject to periodic review by
our by our board of directors.
SUMMARY
COMPENSATION TABLE
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the following persons for services
performed for us and our subsidiaries during 2009 in all capacities. No
executive officers received compensation of $100,000 or more in
2009
|
[
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity
Incentive Plan
Compensation
Earnings ($)
|
Non-
qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||
|
Cui
Xiaowei
Chairman
of Board of Directors
|
2009
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Zhang
Li, Chief Executive Officer(1)
|
2009
|
2,361
|
43,854
|
—
|
—
|
—
|
—
|
—
|
46,485
|
|||||||||||||||
|
Wan
Lipeng, Vice-president of sales (2)
|
2009
|
2,361
|
21,927
|
—
|
—
|
—
|
—
|
—
|
24,558
|
|||||||||||||||
|
Li
Baojin, Vice President of Production (3)
|
2009
|
2,361
|
14,618
|
—
|
—
|
—
|
—
|
—
|
17,249
|
|||||||||||||||
|
Li
Haitao, Chief Technology Officer (4)
|
2009
|
2,361
|
14,618
|
—
|
—
|
—
|
—
|
—
|
17,249
|
|||||||||||||||
|
|
|
(1)
|
On June 16, 2010, we acquired
China Golden in a reverse acquisition transaction that was structured as a
share exchange and in connection with that transaction;
Mr. Zhang became our chief executive
officer. Prior to the effective date of the reverse acquisition, Mr. Zhang
served as the President of
Fuer.
|
|
(2)
|
Mr. Wan Lipeng, served Qiqihar
Fuer as Marketing Chief, was appointed as our Vice President of Marketing
and Sales subsequent to the Share
Exchange.
|
43
|
(3)
|
Mr. Li Baojin, served Qiqihar
Fuer as Production Chief, was appointed as our Vice President of
Production subsequent to the Share
Exchange.
|
|
(4)
|
Mr. Li Haitao, served Qiqihar
Fuer as Research Chief, was appointed as our Chief Technology Officer
subsequent to the Share
Exchange.
|
|
Item
5.03
|
Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year
|
On June 9, 2010, the Registrant’s
Articles of Incorporation were amended to effect a 1 for 64 reverse stock split
and so that the authorized shares of common stock shall remain at 200,000,000
and the authorized shares of blank check preferred stock shall remain at
10,000,000 with a par value of $.001 per share. The Registrant effected the
amendments in connection with the consummation of the transactions contemplated
by that certain Share Exchange Agreement pursuant to which the Registrant
acquired all of the issued and outstanding shares of stock of China Golden
Holdings, Ltd., as previously described in Item 5.01.
On June 16, 2010, the Board of
Directors of the Registrant approved a change in our fiscal year end from June
30 to December 31, which is the fiscal year end of China Golden. This
change is being effectuated in connection with the transactions described in
Item 1.01 and Item 5.01 above.
|
Item
5.06
|
Change
in Shell Company Status
|
As
described in Item 1.01 of this Form 8-K, on June 16, 2010, we entered into the
Exchange Agreement and consummated the Share Exchange, pursuant to which we
acquired all of the issued and outstanding ordinary shares of China Golden
Holdings, Ltd. in exchange for the issuance of the Shares to the Shareholders of
China Golden Holdings, Ltd..
As a
result of the Share Exchange, China Golden Holdings, Ltd. became our
wholly-owned operating subsidiary and, upon the issuance of the Shares, the
shareholders owned in the aggregate 11,550,392, approximately 96.74% of all of
our issued and outstanding stock. We currently have a total of 11,939,132 issued
and outstanding shares of Common Stock, and 11,939,132 shares outstanding on a
fully diluted basis including shares of Common Stock issuable upon the exercise
of warrants.
As the
result of the consummation of the Share Exchange, we are no longer a shell
company as that term is defined in Rule 12b-2 of the Securities Exchange Act of
1934, as amended.
|
Item
8.01
|
Other
Events.
|
On June
22, 2010, we issued a press release announcing the consummation of the
transactions contemplated by the Share Exchange Agreement. The press
release is annexed hereto as Exhibit 99.1.
|
Item
9.01
|
Financial
Statements and Exhibits.
|
(a)
Financial Statements of business acquired
(i)
Audited financial statements of China Golden Holdings, Ltd. as of, and for the
quarter ended March 31, 2010 and the years ended December 31, 2009 and 2008, and
related notes thereto.
Pro forma
financial information.
(i) Unaudited pro forma financial
statements of China Golden Holdings Ltd.
(ii) Notes to Unaudited pro forma
financial statements of China Golden Holdings Ltd.
44
(b)
Exhibits.
|
Exhibit
Number
|
Exhibit
Description
|
|
|
2.1
|
Share
Exchange Agreement between the Forex365, Inc., China Golden Holdings Ltd
and the shareholders of China Golden Holdings Ltd.
|
|
|
2.2
|
Securities
Purchase Agreement between Forex365, Inc. and Allied Merit International
Investment Inc.
|
|
|
3.1*
|
Amended
and Restated Articles of Incorporation filed with the State of Nevada on
August 14, 2008
|
|
|
3.2*
|
Amended
and Restated By-laws adopted August 12, 2008
|
|
|
4.1**
|
Revolving
Loan Agreement by and between the Company and Vero Management, L.L.C.
dated January 9, 2009
|
|
|
4.2**
|
Revolving
Loan Agreement by and between the Company and Lionsridge Capital, LLC
dated January 9, 2009
|
|
|
4.3***
|
Amendment
to Revolving Loan Agreement by and between the Company and Vero
Management, L.L.C. dated June 30, 2009
|
|
|
4.4***
|
Amendment
to Revolving Loan Agreement by and between the Company and Lionsridge
Capital, LLC dated June 30, 2009
|
|
|
4.5
|
Certificate
of Change filed with the Secretary of State of the State of Nevada on June
8, 2010
|
|
|
4.6
|
Warrant
Agreement between Forex365, Inc. and Allied Merit International
Investment, Inc.
|
|
|
10.1*
|
Securities
Purchase Agreement between KIG Investors II, LLC and the Company dated
November 14, 2007
|
|
|
10.2*
|
First
Amendment to Securities Purchase Agreement between KIG Investors II, LLC
and the Company dated June 19, 2008
|
|
|
10.3*
|
Assignment
of Amended Securities Purchase Agreement by KIG Investors II, LLC to
Lionsridge Capital, LLC dated June 20, 2008
|
|
|
10.4*
|
Assignment
of Amended Securities Purchase Agreement by KIG Investors II, LLC to Kevin
R. Keating dated June 20, 2008
|
|
|
10.5*
|
Registration Rights Agreement
between Kevin R. Keating and the Company dated June 23,
2008
|
|
|
10.6*
|
Registration
Rights Agreement between Lionsridge Capital, LLC and the Company dated
June 23, 2008
|
|
|
10.7*
|
Registration
Rights Agreement between Garisch Financial, Inc. and the Company dated
June 26,
2008
|
45
|
10.8*
|
Settlement
and Release Agreement between Leon Leibovich and the Company dated
November 14, 2007
|
|
|
10.9*
|
Revolving
Loan Agreement between Keating Investments, LLC and the Company dated
November 17, 2007
|
|
10.10*
|
Revolving
Loan Agreement between Vero Management L.L.C. and the Company dated May 5,
2008
|
|
10.11*
|
Consulting
Agreement between Garisch Financial, Inc. and the Company dated June 26,
2008
|
|
10.12*
|
Agreement
between the Company and Vero Management, L.L.C., dated as of July 1,
2008
|
|
10.13****
|
Amendment
to Agreement between the Company and Vero Management, L.L.C., dated as of
July 1, 2009
|
|
10.14
|
Exclusive
Option Agreement among Qiqihar Deli Enterprise Management Consulting Co.,
Ltd. and Zhang Li and Qiqihar Fuer Agronomy Inc.
|
|
10.15
|
Loan
Agreement among Qiqihar Deli Enterprise Management Consulting Co., Ltd.
and Zhang Li
|
|
10.16
|
Share
Pledge Agreement among Qiqihar Deli Enterprise Management Consulting Co,
Ltd., Zhang Li and Qiqihar Fuer Agronomy Inc.
|
|
10.17
|
Qiqihar
Deli Enterprise Management Consulting Co., Ltd. and Qiqihar Fuer Agronomy
Inc.
|
|
10.18
|
Registration
Rights Agreement between Forex365, Inc. and Allied Merit International
Investment, Inc.
|
|
99.1
|
Press
Release announcing the Share Exchange Agreement and the related
transactions
|
* Filed
as an exhibit to the Company's Registration Statement on Form 10, as filed with
the Securities and Exchange Commission on September 22, 2008 and incorporated
herein by this reference.
** Filed
as an exhibit to the Company's Form 8-K, as filed with the Securities and
Exchange Commission on January 12, 2009 and incorporated herein by this
reference.
*** Filed
as an exhibit to the Company’s Form 10-K, as filed with the Securities and
Exchange Commission on August 19, 2009.
****
Filed as an exhibit to the Company’s Form 10-Q, as filed with the Securities and
Exchange Commission on October 29, 2009
46
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
Forex365,
Inc.
|
||
|
Date:
June 22, 2010
|
By:
|
/s// Zhang Li
|
|
Name:
Zhang Li
|
||
|
Title:
Chief Executive Officer
|
||
47
CHINA
GOLDEN HOLDINGS, LTD. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Financial Statements:
|
|
|
Consolidated
Balance Sheets
|
|
|
As
of March 31, 2010 (unaudited) and,
|
|
|
As
of December 31, 2009 and 2008(audited)
|
F-3
|
|
Consolidated
Statements of Income and Comprehensive Income
|
|
|
For
the three months ended March 31, 2010 and 2009 (unaudited)
and,
|
|
|
For
the Years Ended December 31, 2009 and 2008 (audited)
|
F-4
|
|
Consolidated
Statements of Changes in Members’ Equity
|
|
|
For
the Three Month Ended March 31, 2010 (unaudited) and,
|
|
|
For
the Years Ended December 31, 2009 and 2008(audited)
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
|
|
For
the Three Month Ended March 31, 2010 and 2009 (unaudited)
and,
|
|
|
For
the Years Ended December 31, 2009 and 2008 (audited)
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
to F-21
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of
China
Golden Holdings Ltd.
We have
audited the accompanying consolidated balance sheets of China Golden Holding Ltd., (referred to
as the “Company”) as of December 31, 2009 and 2008 and the related
consolidated statements of income, stockholder’s equity, and cash flows for the
years ended December 31, 2009 and 2008. These consolidated financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining on a test basis, evidence supporting the amount and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of China Golden Holding Ltd., as of
December 31, 2009 and 2008, and the results of their operations and their cash
flows for the years ended December 31, 2009 and 2008, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Sherb & Co.,
LLP
Sherb & Co., LLP
Certified
Public Accountants
New York,
New York
June 21,
2010
F-2
|
CHINA
GOLDEN HOLDING INC.
|
|||||||||||||
|
CONSOLIDATED
BALANCE SHEET
|
|
As
of March 31,
|
As
of December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
(Audited)
|
(Audited)
|
||||||||||
|
ASSETS
|
||||||||||||
|
Current
Assets
|
|
|
|
|||||||||
|
Cash
and Cash Equivalents
|
$ | 9,768,705 | $ | 155,425 | $ | 2,772,020 | ||||||
|
Restricted
cash
|
219,813 | 219,580 | 434,140 | |||||||||
|
Trade
receivables, net
|
6,367,834 | 2,066,430 | 413,626 | |||||||||
|
Other
receivables, net
|
145,439 | 383,817 | 35,380 | |||||||||
|
Inventories
|
2,101,724 | 7,721,554 | 6,460,321 | |||||||||
|
Advances
to suppliers
|
460,150 | 2,670,374 | - | |||||||||
|
Current
Portion of prepaid leases
|
7,337 |
|
|
|||||||||
|
Total
Current Assets
|
19,071,002 | 13,217,180 | 10,115,487 | |||||||||
| - | ||||||||||||
|
Property,
plant and equipment, net
|
2,729,463 | 2,739,385 | 2,921,828 | |||||||||
|
Intangibles,
net
|
176,014 | 181,909 | 61,337 | |||||||||
|
Prepaid
leases
|
29,347 | - | - | |||||||||
|
Total
Assets
|
$ | 22,005,826 | $ | 16,138,474 | $ | 13,098,652 | ||||||
|
|
|
|
|
|||||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||
|
Liabilities
|
|
|
|
|||||||||
|
Short
term loans
|
$ | 2,194,234 | $ | 2,193,881 | $ | 2,042,543 | ||||||
|
Accounts
payable and accrued expenses
|
718,032 | 504,965 | 881,146 | |||||||||
|
Advances
from customers
|
36,608 | 303,669 | 316,933 | |||||||||
|
Income
tax payable
|
1,483,071 | 596,026 | 331,563 | |||||||||
|
Total
Liabilities
|
4,431,945 | 3,598,541 | 3,572,185 | |||||||||
|
|
|
|
|
|||||||||
|
STOCKHOLDERS'
EQUITY
|
||||||||||||
|
Common
stock; $1 par value; 50,000 authorized, 50,000 issued and
outstanding
|
50,000 | 50,000 | - | |||||||||
|
Additional
paid in capital
|
4,509,453 | 4,509,453 | 4,509,453 | |||||||||
|
Statutory
reserves
|
1,112,119 | 1,112,119 | 797,844 | |||||||||
|
Retained
earnings
|
10,829,817 | 5,797,827 | 3,173,904 | |||||||||
|
Accumulated
other comprehensive
|
1,072,492 | 1,070,534 | 1,045,266 | |||||||||
|
Total
Stockholders' Equity
|
17,573,881 | 12,539,933 | 9,526,467 | |||||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 22,005,826 | $ | 16,138,474 | $ | 13,098,652 | ||||||
The
accompanying notes are an integral part of these statements.
F-3
|
CHINA
GOLDEN HOLDINGS, LTD
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
For
Three Months Ended March 31,
|
For
the Years Ended December 31,
|
||||||||||||||
|
|
2010
|
2009
|
2009
|
2008
|
||||||||||||
|
|
(Unaudited)
|
(Unaudited)
|
(Audited)
|
(Audited)
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Sales
|
$ | 15,307,410 | $ | 12,208,167 | $ | 16,168,421 | $ | 11,626,071 | ||||||||
|
Cost
of goods sold
|
8,990,729 | 7,102,111 | 9,469,206 | 6,865,447 | ||||||||||||
|
Gross
profit
|
6,316,681 | 5,106,056 | 6,699,215 | 4,760,624 | ||||||||||||
|
Operating
and administrative expenses:
|
|
|
|
|
||||||||||||
|
Sales
and marketing
|
123,055 | 59,519 | 1,345,927 | 1,119,204 | ||||||||||||
|
General
and administrative
|
285,041 | 178,454 | 1,342,509 | 832,641 | ||||||||||||
|
Total
operating expenses
|
408,096 | 237,973 | 2,688,436 | 1,951,845 | ||||||||||||
|
Income
from operations
|
5,908,585 | 4,868,083 | 4,010,779 | 2,808,779 | ||||||||||||
|
|
|
|
|
|||||||||||||
|
Other
income (expenses):
|
|
|
|
|
||||||||||||
|
Interest
income
|
1,766 | 5,222 | 20,713 | 16,090 | ||||||||||||
|
Interest
expense
|
(27,973 | ) | (33,777 | ) | (76,623 | ) | (76,133 | ) | ||||||||
|
Other
income, net
|
- | - | (14,810 | ) | (6,487 | ) | ||||||||||
|
Non
operating Income (expenses)
|
36,571 | (4,936 | (7,009 | ) | 3,873 | |||||||||||
|
Other
income (expenses), total
|
10,364 | (33,491 | ) | (77,729 | ) | (62,658 | ) | |||||||||
|
Income
before income tax
|
5,918,949 | 4,834,592 | 3,933,050 | 2,746,121 | ||||||||||||
|
Income
tax expenses
|
886,959 | 1,208,648 | 994,852 | 692,744 | ||||||||||||
|
Net
income
|
5,031,990 | 3,625,944 | 2,938,198 | 2,053,378 | ||||||||||||
|
Other
comprehensive income:
|
|
|
|
|
||||||||||||
|
Foreign
currency translation adjustments
|
1,958 | 12,498 | 25,268 | 500,245 | ||||||||||||
|
Comprehensive
income
|
$ | 5,033,948 | $ | 3,638,442 | $ | 2,963,466 | $ | 2,553,623 | ||||||||
The
accompanying notes are an integral part of these statements.
F-4
|
CHINA
GOLDEN HOLDING, INC.
|
||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHARESHOLDERS' EQUITY
|
|
Common
Stock
|
Additional
|
Accumulated
Other
|
||||||||||||||||||||||||||
|
Number of Shares
|
Amount
|
Paid In Capital
|
Statutory Reserves
|
Retained Earnings
|
Comprehensive Income
|
Total Equity
|
||||||||||||||||||||||
|
Balance
as of January 1, 2008
|
- | $ | - | $ | 4,509,453 | $ | 593,865 | $ | 1,324,505 | $ | 545,021 | $ | 6,972,844 | |||||||||||||||
|
Net
income
|
- | - | - | - | 2,053,378 | - | 2,053,378 | |||||||||||||||||||||
|
Appropriation
to statutory reserves
|
- | - | - | 203,979 | (203,979 | ) | - | - | ||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | - | 500,245 | 500,245 | |||||||||||||||||||||
|
Balance
as of December 31, 2008
|
- | - | 4,509,453 | 797,844 | 3,173,904 | 1,045,266 | 9,526,467 | |||||||||||||||||||||
|
Net
income
|
- | - | - | - | 2,938,198 | - | 2,938,198 | |||||||||||||||||||||
|
Appropriation
to statutory reserves
|
- | - | - | 314,275 | (314,275 | ) | - | - | ||||||||||||||||||||
|
Capital
Contribution
|
50,000 | 50,000 | - | - | - | - | 50,000 | |||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | - | 25,268 | 25,268 | |||||||||||||||||||||
|
Balance
as of December 31, 2009
|
50,000 | 50,000 | 4,509,453 | 1,112,119 | 5,797,827 | 1,070,534 | 12,539,933 | |||||||||||||||||||||
|
Net
income, (Unaudited)
|
- | - | - | - | 5,031,990 | - | 5,031,990 | |||||||||||||||||||||
|
Foreign
currency translation adjustments (Unaudited)
|
- | - | - | - | - | 1,958 | 1,958 | |||||||||||||||||||||
|
Balance
as of March 31, 2010, (Unaudited)
|
50,000 | $ | 50,000 | $ | 4,509,453 | $ | 1,112,119 | $ | 10,829,817 | $ | 1,072,492 | $ | 17,573,881 | |||||||||||||||
The
accompanying notes are an integral part of these statements.
F-5
|
CHINA
GOLDEN HOLDINGS, LTD.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
For
Three Months Ended March 31,
|
For
the Years Ended December 31,
|
|||||||||||||
|
|
2010
|
2009
|
2009
|
2008
|
|||||||||||
|
|
(Unaudited)
|
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||||||
|
Cash
flow from operating activities:
|
|
|
|
||||||||||||
|
Net
income
|
$ | 5,031,990 | $ | 3,625,944 | $ | 2,938,198 | $ | 2,053,378 | |||||||
|
Adjustments
to reconcile net income to net cash
provided
by (used in) operating activities
|
|
|
|
|
|||||||||||
|
Depreciation
|
51,636 | 54,272 | 213,260 | 215,956 | |||||||||||
|
Amortization
|
5,924 | 2,556 | 14,131 | 10,054 | |||||||||||
|
Loss
from disposal of long term assets
|
- | 4,878 | 4,882 | 12,523 | |||||||||||
|
Allowances
for trade receivables
|
- | - | 323,231 | (16,607 | ) | ||||||||||
|
Changes
in current assets and liabilities
|
|
|
|
|
|||||||||||
|
Restricted
cash
|
(198 | ) | (181 | ) | 215,524 | (290,950 | ) | ||||||||
|
Trade
receivables
|
(4,301,116 | ) | (768,892 | ) | (1,974,117 | ) | 830,333 | ||||||||
|
Other
receivables
|
238,443 | (125,343 | ) | (348,163 | ) | (15,846 | ) | ||||||||
|
Inventories
|
5,621,131 | 4,372,517 | (1,244,500 | ) | (1,049,935 | ) | |||||||||
|
Prepaid
leases
|
(36,684 | ) | - | - | - | ||||||||||
|
Advances
to suppliers
|
2,210,676 | (379,865 | ) | (2,668,938 | ) | 65,356 | |||||||||
|
Accounts
payable and accrued expenses
|
212,988 | 499,089 | (378,168 | ) | (1,288,909 | ) | |||||||||
|
Advances
from customers
|
(267,114 | ) | 447,957 | (14,131 | ) | (681,617 | ) | ||||||||
|
Income
tax payables
|
886,959 | 916,077 | 263,497 | (175,724 | ) | ||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 9,654,635 | $ | 8,649,009 | $ | (2,655,294 | $ | (331,988 | |||||||
|
|
|
|
|
|
|||||||||||
|
Cash
flow from investing activities:
|
|
|
|
|
|||||||||||
|
Purchase
of property plant and equipment
|
(41,274 | ) | (1,157 | ) | (28,828 | ) | (111,129 | ) | |||||||
|
Proceeds
from disposal of equipment
|
- | 292 | 292 | 1,005 | ) | ||||||||||
|
Purchase
of intangible assets
|
- | - | (134,486 | - | |||||||||||
|
Net
cash used in investing activities
|
(41,274 | ) | (865 | ) | (163,022 | ) | (110,124 | ||||||||
|
|
|
|
|
|
|||||||||||
|
Cash
flow from financing activities:
|
|
|
|
|
|||||||||||
|
Capital
Contribution
|
- | - | 50,000 | - | |||||||||||
|
Proceeds
from short term loans
|
- | - | 2,192,700 | 2,901,340 | |||||||||||
|
Repayment
of short term loans
|
- | (511,203 | ) | (2,046,520 | ) | (1,924,651 | ) | ||||||||
|
Net
cash provided by (used in) financing activities
|
- | (511,203 | ) | 196,180 | 976,689 | ||||||||||
|
|
|
|
|
|
|||||||||||
|
Currency
translation adjustment
|
(81 | ) | 4,672 | 5,541 | 148,588 | ||||||||||
|
Net
Increase (Decrease) in cash and cash equivalents
|
9,613,280 | 8,141,613 | (2,616,595 | ) | 683,165 | ||||||||||
|
Cash
and cash equivalents - beginning balance
|
155,425 | 2,772,020 | 2,772,020 | 2,088,855 | |||||||||||
|
Cash
and cash equivalents - ending balance
|
$ | 9,768,705 | $ | 10,913,633 | $ | 155,425 | $ | 2,772,020 | |||||||
|
|
|
|
|
|
|||||||||||
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|||||||||||
|
Interest paid
|
$ | 27,873 | $ | 33,765 | $ | 76,596 | $ | 24,853 | |||||||
|
Income taxes paid
|
886,959 | 1,208,648 | 994,852 | 692,744 | |||||||||||
|
|
$ | 914,832 | $ | 1,242,413 | $ | 807,951 | $ | 944,568 | |||||||
The
accompanying notes are an integral part of these statements.
F-6
NOTE
1 – ORGANIZATION AND
NATURE OF OPERATION
The
consolidated financial statements include the financial statements of China
Golden Holdings, Ltd. (“China Golden”), its subsidiaries, and variable interest
entity (“VIE”), where China Golden Holdings, Ltd. is deemed the primary
beneficiary. China Golden, its consolidated subsidiaries and VIEs are
collectively referred to herein as the “Company”, “we” and “us”.
China
Golden was incorporated in the British Virgin Island on November 30, 2009 as a
limited liability company (a BVI company). The Company is engaged in the
business of production and distribution of corn seeds, rice seeds, soybean
seeds, humic fertilizer and plant additives. It’s wholly owned subsidiary,
Qiqihar Deli Enterprise Management Consultancy Co., Ltd. (“Deli”) was
incorporated in Heilongjiang, People’s Republic of China (“PRC”) on February 10,
2010 as a limited liability company. Other than the equity interest in Deli,
China Golden does not own any assets or conduct any operations.
Qiqihar
Fuer Agronomy Inc. (“Fuer”) was incorporated in the Heilongjiang Province, in
the PRC on March 18, 2003. Fuer is a provider of corn seeds, rice seeds, soybean
seeds, humic fertilizer and plant additives that distribute products through
1094 distributors to farmers located primarily in the PRC provinces of
Heilongjiang, Jilin, Inner Mongolia and other provinces of PRC. Fuer breeds its
proprietary seeds through farmers under contractual agreements. Fuer also sells
to their customers of humic fertilizer, plant additives as well as pesticides,
germicides and herbicides. Deli through a series of contractual arrangements has
the ability to substantially influence the daily operations and financial
affairs of Fuer, in addition to being able to appoint Fuer’s senior executives
and approve all matters requiring stockholder approval. The structure of the
contractual arrangements are such that Fuer is effectively a variable interest
entities (“VIE’s”) of Deli. Accordingly, China Golden through its wholly-owned
subsidiary Deli consolidates Fuer’s results of operation, assets and liabilities
in their financial statements.. Hereafter, China Golden, Deli and Fuer are
collectively referred to as the “Company” unless specific reference is made to
an individual entity)
|
Name
|
Domicile and
Date of
Incorporation
|
Paid-in Capital
|
Percentage of Effective
Ownership
|
Principal
Activities
|
|||||
|
China
Golden
Holdings,
Ltd.
|
November
30,
2009,
British
Virgin
Island
|
USD
|
50,000
|
56.55%
owned by Oriental Agriculture Co., Ltd, which beneficially owned by
He Xiuhong.
43.45%
owned by 16 entities and individuals
|
Investment
Holding
|
||||
|
Qiqihar
Deli
Enterprise
Management Consultancy Co., Ltd.
|
February
10,
2010,
PRC
|
USD
|
2,100,000
|
100%
owned by China Golden Holdings, Ltd.
|
Advisory
|
||||
|
Qiqihar
Fuer
Agronomy
Inc.
|
March
18,
2003,
PRC
|
RMB
|
35,100,000
|
100%
owned
by
Zhang Li
and
Liu Yuhua
|
Production
and distribution of seeds, fertilizers and distribution of pesticides,
germicides and
herbicides
|
||||
On March
25, 2010, the Company entered into certain contractual agreements (the
Contractual Agreements) with Fuer, which entitles Deli to receive all of the
residual returns of Fuer. An Exclusive Business Cooperation Agreement provides
full guarantee for the performance of such contracts, agreements or transactions
entered into by Fuer. As a result of the agreement, Deli will absorb 100% of the
expected losses and gains of Fuer, which results in Deli being the primary
beneficiary of Fuer.
F-7
Chinese
laws and regulations currently restrict foreign ownership in a seed producing
company. The Company entered into the Contractual Agreements on March 25, 2010
in the anticipation that this will protect the Company’s shareholders from
foreign ownership restrictions.
Based on
these exclusive agreements, the Company consolidates the variable interest
entity (“VIE”), Fuer, as required by generally accepted accounting principles in
the United States (“US GAAP”), because the Company is the primary beneficiary of
the VIE. The profits and losses of the Company are allocated based upon the
Exclusive Business Cooperation Agreement
The
followings are brief description of the Contractual Agreements entered between
Deli and Fuer:
|
1.
|
Exclusive Business Cooperation
Agreement. Pursuant to the exclusive business cooperation agreement
between Deli and Fuer, Deli has the exclusive right to provide to Fuer
general business operation services, including advice and strategic
planning, as well as consulting services related to the technological
research and development of the Fuer’s products (the “Services”). Under
this agreement, Deli owns the intellectual property rights developed or
discovered through research and development, in the course of providing
the Services, or derived from the provision of the Services. Fuer shall
pay consulting service fees in Renminbi (“RMB”) to Deli that is equal to
all of Fuer’s profits as defined in the Share Pledge Agreement. The
Agreement is valid for 10 years. Termination or renewal of the agreement
is determined by Deli and shall have binding force upon
Fuer.
|
|
2.
|
Equity Pledge Agreement.
Under the equity pledge agreement between Fuer’s shareholders and
Deli, Fuer’s Shareholders pledged all of their equity interests in Fuer to
Deli to guarantee Fuer’s performance of its obligations under the
consulting services agreement. If Fuer or Fuer’s Shareholders breaches
their respective contractual obligations, Deli, as pledgee, will be
entitled to certain rights, including the right to sell the pledged equity
interests. Fuer’s Shareholders also agreed that upon occurrence of any
event of default, Deli shall be granted an exclusive, irrevocable power of
attorney to take actions in the place and stead of the Fuer’s Shareholders
to carry out the security provisions of the equity pledge agreement and
take any action and execute any instrument that Deli may deem necessary or
advisable to accomplish the purposes of the equity pledge agreement.
Fuer’s Shareholders agreed not to dispose of the pledged equity interests
or take any actions that would undermine Deli’s interest. The equity
pledge agreement will expire unless all payments due under the Exclusive
Business Cooperation Agreement have been
fulfilled.
|
|
3.
|
Option
Agreement. Under the option agreement between Fuer’s
Shareholders and Deli, Fuer’s Shareholders irrevocably granted Deli or its
designated person an exclusive option to purchase, to the extent permitted
under PRC law, all or part of the equity interests in Fuer for the cost of
the initial contributions to the registered capital of Fuer or the minimum
amount of consideration permitted by applicable PRC law. Deli or its
designated person has sole discretion to decide when to exercise the
option, whether in part or in full. The term of this agreement shall last
for 10 years, and shall be renewed at Deli’s election, unless terminated
in accordance with this
agreement.
|
|
4.
|
Loan Agreement. Under
the Loan Agreement, the shareholders of Fuer shall borrow RMB 10,000,000
from Deli, only for purpose of increasing the paid-in capital of Fuer. In
addition, shareholders of Fuer agree to (1) enter into the aforementioned
contractual agreements with Deli; (2) appoint directors as nominated by
Deli; (3) keep the value of its assets. Also included in this agreement,
unless consented by Deli, Fuer should not: (1) purchase and dispose of any
assets; enter into any material agreements with any third party within its
operating activities; (3) declare any dividends to its
shareholders.
|
The
accounts of Fuer are consolidated in the accompanying consolidated financial
statements pursuant to Accounting Standards Codification Topic 810,
“Consolidation” As a VIE, Fuer’s sales are included in the Company’s total
sales, its income from operations is consolidated with the Company’s, and the
Company’s net income includes all of Fuer’s net income. The Company does not
have any non-controlling interest and accordingly, did not subtract any net
income in calculating the net income attributable to the
Company.
F-8
NOTE 2 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Basis
of presentation
|
Management
acknowledges its responsibility for the preparation of the accompanying
consolidated financial statements which reflect all adjustments, consisting of
normal recurring adjustments, considered necessary in its opinion for a fair
statement of its financial position and the results of its operations for the
years presented. The accompanying financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). This basis differs from that used in the statutory
accounts in the PRC, which are prepared in accordance with the accounting
principles and relevant financial regulations applicable to enterprises in the
PRC. All significant intercompany accounts and transactions have been eliminated
in consolidation. All necessary adjustments have been made to present the
consolidated financial statements in accordance with U.S. GAAP. The
Company’s functional currency is the Chinese Renminbi (“RMB”); however the
accompanying consolidated financial statements have been translated and
presented in United States Dollars (“USD”). All significant inter-company
transactions and balances have been eliminated. The financial statements include
all adjustments that, in the opinion of management, are necessary to make the
financial statements not misleading.
|
(b)
|
Unaudited
Financial Statements
|
The
accompanying consolidated financial statements as of March 31, 2010 and for
three months ended March 31, 2010 and 2009 are unaudited. In the opinion of
management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position, results of
operations and cash flows for the periods presented. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. However, The Company believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the year ended
December 31, 2009 and 2008 financial statements. The results of operations for
the three month period ended March 31, 2010 and 2009 are not necessarily
indicative of the operating results to be expected for the full year ended
December 31, 2010, or that have been achieved in the year ended December 31,
2009.
|
(c)
|
Principles
of consolidation
|
Pursuant
to US GAAP, Fuer is a VIE of the China Golden and the Company is the primary
beneficiary of the VIE. Accordingly, Fuer have been consolidated in China
Golden’s financial statements.
Based on
various VIE agreements, the Company is able to excise control over the Fuer; and
have the exclusive right to obtain full of the financial interests such as
obtaining periodic income through Exclusive Business Cooperation Agreements and
obtaining the net assets of Fuer through purchase of their equities at
essentially no cost basis. The amount of noncontrolling interest of the original
shareholders of Fuer holding shares of both Fuer for the Company is
zero.
|
(d)
|
Use
of estimates
|
The
preparation of the combined financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and the related disclosures at the date of the
financial statements and during the reporting period. Actual results could
materially differ from these estimates. Significant estimates in 2009 and 2008
include the allowance for doubtful accounts and the useful life of property and
equipment.
F-9
|
(e)
|
Foreign
currency translation
|
The
Company’ primarily operates in the PRC. The financial position and results of
operations of the subsidiaries are determined using the local currency
(“Renminbi” or “RMB”) as the functional currency.
Translation
from RMB into United States dollars (“USD” or “$”) for reporting purposes is
performed by translating the results of operations denominated in foreign
currency at the weighted average rates of exchange during the reporting periods.
Assets and liabilities denominated in foreign currencies at the balance sheet
dates are translated at the market rate of exchange in effect at that date. The
registered equity capital denominated in the functional currency is translated
at the historical rate of exchange at the time of capital contribution. All
translation adjustments resulting from the translation of the financial
statements into USD are reported as a component of accumulated other
comprehensive income in shareholders’ equity. The exchange rates used in
translation from RMB to USD amount was published by People’s Bank of the
People’s Republic of China.
|
March 31,
|
December 31,
|
||||||
|
2010
|
2009
|
2009
|
2008
|
||||
|
(unaudited)
|
(unaudited)
|
(audited)
|
(audited)
|
||||
|
Exchange
Rate at Period End
|
US$1=RMB6.8361
|
US$1=RMB
6.8466
|
US$1=RMB6.8282
|
US$1=RMB6.8346
|
|||
|
Average
Exchange rate for the Period
|
US$1=RMB6.8360
|
US$1=RMB
6.8456
|
US$1=RMB6.8321
|
US$1=RMB6.9351
|
|||
For the
years ended December 31, 2009 and 2008, foreign currency translation adjustments
of $25,268 and $500,245, respectively, have been reported as comprehensive
(loss) or income in the consolidated statement of shareholders’ equity. For
the three months ended March 31, 2010 and 2009, foreign currency
translation adjustments of $1,959 and $12,498, respectively, have been
reported as comprehensive income in the consolidated statement of shareholders’
equity.
|
(f)
|
Fair
value of financial
instruments
|
The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820
”Fair Value Measurement and Disclosure ” for fair value measurements which
clarifies the definition of fair value, prescribes methods for measuring fair
value, and establishes a fair value hierarchy to classify the inputs used in
measuring fair value as follows:
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities available at the measurement date.
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other then quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The
carrying amounts reported in the balance sheets for cash, accounts receivable,
other receivable, accounts payable, other payable, and amounts due from related
parties approximate their fair market value based on the short-term maturity of
these instruments. As of March 31, 2010, the Company did not identify any assets
or liabilities that are required to be presented on the balance sheets at fair
value in accordance with the new accounting guidance.
ASC
825-10 “Financial
Instruments”, allows entities to voluntarily choose to measure certain
financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is
elected for an instrument, unrealized gains and losses for that instrument
should be reported in earnings at each subsequent reporting date. The Company
did not elect to apply the fair value option to any outstanding
instruments.
F-10
|
(g)
|
Cash
and cash equivalents
|
For
purposes of the combined statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents. The Company maintains cash and
cash equivalents with various financial institutions in the PRC
and balances are uninsured.
|
(h)
|
Concentrations
of credit risk
|
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America. The Company's results may be adversely affected by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. Substantially
all of the Company’s cash is maintained with state-owned banks within the PRC,
and no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any risks on its cash
in bank accounts.
|
(i)
|
Restricted
Cash
|
Restricted
cash are amounts held in a special bank account which are kept as guarantees to
the short term debts, not covered by insurance. As of December 31, 2009 and
2008, balances of restricted cash were $219,580 and $434,140
respectively. As of March 31, 2010, the balance of restricted cash was
$219,813.
|
(j)
|
Trade
receivables
|
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company
maintains allowances for doubtful accounts for estimated losses. The Company
reviews the accounts receivable on a periodic basis and makes general and
specific allowances when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, customer’s
historical payment history, its current credit-worthiness and current economic
trends. Accounts are written off after exhaustive efforts at collection. As
of December 31, 2009 and 2008, the Company had an allowance for doubtful
accounts of $331,867 and $8,441, respectively. As of March 31,
2010, the Company had an allowance for doubtful accounts of
$331,921.
|
(k)
|
Other
receivable, net
|
Other
receivables are travel and business advances to employees. The amounts advanced
under such arrangements totaled $383,817 and $35,380 as of December 31, 2009 and
2008, respectively. As of March 31, 2010, total advances under such
arrangement were $145,439
|
(l)
|
Inventories
|
Inventories,
consisting of raw materials and finished goods acquired from third party
vendors, are stated at the lower of cost, determined on a weighted average
basis, or net realizable value. Costs of finished goods are composed of direct
materials, direct labor and an attributable portion of manufacturing overhead.
Net realizable value is the estimated selling price, in the ordinary course of
business, less estimated costs to complete and dispose. The management also
regularly evaluates the composition of its inventories to identify slow-moving
and obsolete inventories to determine if valuation allowance is required. The
Company has not recorded an inventory reserve at March 31, 2010, December 31,
2009 and December 31, 2008, respectively.
F-11
On
certain occasions the Company ships product to their customers on consignment.
These inventories are not recognized into revenue until such time as the
customer approves of the goods and accepts them.
|
(m)
|
Advance
to suppliers
|
Advances
to suppliers represent the cash paid in advance for purchasing of inventory
items from suppliers. The advance payments are meant to ensure preferential
pricing and delivery. The amounts advanced under such arrangements totaled
$2,670,375 and $0 as of December 31, 2009 and 2008, respectively. The
amounts advanced under such arrangements totaled $460,150 as of March 31,
2010.
|
(n)
|
Property,
plant and equipment
|
Property,
plant and equipment are carried at cost and are depreciated on a straight-line
basis over the estimated useful lives of the assets. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized. When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition. The Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may not
be recoverable.
Depreciation
of property and equipment is provided using the straight-line method for
substantially all assets with estimated lives as follows:
|
Buildings
|
20
years
|
|
Operating
equipment
|
5
-10 years
|
|
Office
equipment
|
3
years
|
|
Vehicles
|
4
years
|
|
(o)
|
Land
use right
|
Intangible
assets include the land use rights. According to the laws of PRC, the government
owns all the land in PRC. Companies or individuals are authorized to possess and
use the land only through land use rights granted by the Chinese government.
Land use rights are being amortized using the straight-line method over the
lease term of 50 years.
In
accordance with US GAAP, the Company examines the possibility of decreases in
the value of land use rights when events or changes in circumstances reflect the
fact that their recorded value may not be recoverable. The Company computes
amortization using the straight-line method over the approved lives of the land
use rights. No land use right was independently recognized and no amortization
occurred for the years ended December 31, 2009 and 2008, and the three
months ended March 31, 2010 and 2009.
|
(p)
|
Intangible
assets
|
The
Company states intangible assets at cost less accumulated amortization. The
Company’s intangible assets as of December 31, 2009 and 2008 are only seed
patents purchased from local or state universities or institutions of
agriculture. The patents are amortized on straight line method over 10 years.
The amortization expense for the years ended December 31, 2009 and 2008
amounted to $14,131 and $10,054, respectively. For the three months ended
March 31, 2010 and 2009 amortization expenses amounted to $5,924 and
$2,556, respectively.
F-12
|
(q)
|
Impairment
of long-lived assets
|
The
Company reviews, long-lived assets for impairment on an annual basis, or
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. The Company recognizes an impairment
loss when the sum of expected undiscounted future cash flows is less than the
carrying amount of the asset. The amount of impairment is measured as the
difference between the asset’s estimated fair value and its book value. The
Company did not record any impairment charges for the years ended December 31,
2009 and 2008, and the three months ended March 31, 2010 and 2009.
|
(r)
|
Income
taxes
|
The
Company is governed by the Income Tax Law and associated legislations of the
People’s Republic of China. Income taxes are accounted for under
Accounting Standard Codification Topic 740 (ASC 740), “Income Taxes”, which is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
ASC 740 additionally requires the establishment of a valuation allowance
to reflect the likelihood of realization of deferred tax assets. Realization of
deferred tax assets is dependent upon future earnings, if any, of which the
timing and amount are uncertain.
According
to ASC 740, the evaluation of a tax position is a two-step process. The first
step is to determine whether it is more likely than not that a tax position will
be sustained upon examination, including the resolution of any related appeals
or litigation based on the technical merits of that position. The second step is
to measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. ASC 740 also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition.
|
(s)
|
Revenue
Recognition
|
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the purchase price is
fixed or determinable and collectability is reasonably assured. The Company
recognizes revenues from the sale of seeds, fertilizers, pesticides, germicides
and herbicides upon shipment and transfer of title.
|
(t)
|
Advances
from customers
|
Advances
from customers represent prepayments by customers for the Company’s product
during the peak season from November till July. The Company does not require
advances during months other than the peak season, which is from November to
July.
|
(u)
|
Shipping
expense
|
Shipping
costs are included in selling and marketing expenses and totaled $539,989 and
$351,306 for the years ended December 31, 2009 and 2008, respectively, and was
$29,475 and $10,375 for the three months ended March 31, 2010 and 2009,
respectively.
|
(v)
|
Employee
benefits
|
The
Company’s operations and employees are all located in the PRC. The
Company makes mandatory contributions to the PRC government’s health, retirement
benefit and unemployment funds in accordance with the relevant Chinese social
security laws, which is approximately 25% of salaries. For the years ended
December 31, 2009 and 2008, the costs of these payments are charged to general
and administrative expenses in the same period as the related salary costs and
amounted to $197,652 and $186,874, respectively. For the three months ended
March 31, 2010 and 2009, the costs of these payments are charged to general and
administrative expenses in the same period as the related salary costs and
amounted to $56,614 and $47,198, respectively.
F-13
|
(w)
|
Advertising
|
Advertising
is expensed as incurred and is included in selling and marketing expenses on the
accompanying consolidated statement of operations. For the years ended December
31, 2009 and 2008, advertising expense amounted to $86,842 and $209,953,
respectively. For the three months ended March 31, 2010 and 2009, advertising
expense amounted to $28,771 and $387, respectively.
|
(x)
|
Accumulated
other comprehensive income
|
Comprehensive
income is comprised of net income and all changes to the statements of
shareholders’ equity, except those due to investments by shareholders, changes
in paid-in capital and distributions to shareholders. For the Company,
comprehensive income for the years ended December 31, 2009 and 2008, and
the three months ended March 31, 2010 and 2009 included net income and
unrealized gains from foreign currency translation adjustments.
|
(y)
|
Related
parties
|
Parties
are considered to be related to the Company if the parties that, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties
with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own
separate interests. The Company discloses all related party transactions. All
transactions are recorded at fair value of the goods or services exchanged.
Property purchased from a related party is recorded at the cost to the related
party and any payment to or on behalf of the related party in excess of the cost
is reflected as a distribution to related party.
|
(z)
|
Subsequent
events
|
For
purposes of determining whether a post-balance sheet event should be evaluated
to determine whether it has an effect on the financial statements for the three
month ended March 31, 2010, subsequent events were evaluated by the Company as
of the date on which the consolidated financial statements at and for the three
month ended March 31, 2010, were available to be issued on June 17,
2010.
|
(aa)
|
Recent
adopted accounting
pronouncements
|
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification. Following the Codification, the Board will
not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (“ASU”) which will serve to update the Codification, provide
background information about the guidance and provide the basis for conclusions
on the changes to the Codification. The Codification is not intended to change
GAAP, but it will change the way GAAP is organized and presented. The
Codification was effective for the third-quarter 2009 financial statements and
the principal impact on the financial statements is limited to disclosures as
all references to authoritative accounting literature have been referenced in
accordance with the Codification.
F-14
In April
2009, the FASB issued ASC Topic 320-10-65, “Recognition and Presentation of
Other-Than-Temporary Impairments”. This update provides guidance for allocation
of charges for other-than-temporary impairments between earnings and other
comprehensive income. It also revises subsequent accounting for
other-than-temporary impairments and expands required disclosure. The update was
effective for interim and annual periods ending after June 15, 2009. The
adoption of ASC Topic 320-10-65 did not have a material impact on the results of
operations and financial condition.
In April
2009, the FASB issued ASC Topic 320-10-65, “Interim Disclosures About Fair Value
of Financial Instruments”. This update requires fair value disclosures for
financial instruments that are not currently reflected on the balance sheet at
fair value on a quarterly basis and is effective for interim periods ending
after June 15, 2009. The Company’s financial instruments include cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and notes payable. At December 31, 2009 and 2008, the carrying value
of the Companies financial instruments approximated fair value, due to their
short term nature.
In May
2009, the FASB issued (ASC Topic 855), “Subsequent Events” (ASC Topic 855). This
guidance is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. It is effective for
interim and annual reporting periods ending after June 15, 2009. The
adoption of this guidance did not have a material impact on the consolidated
financial statements.
In June
2009, the FASB issued ASC Topic 810-10, “Amendments to FASB Interpretation No.
46(R)”. This updated guidance requires a qualitative approach to identifying a
controlling financial interest in a variable interest entity (VIE), and requires
ongoing assessment of whether an entity is a VIE and whether an interest in a
VIE makes the holder the primary beneficiary of the VIE. It is effective for
annual reporting periods beginning after November 15, 2009. The adoption of ASC
Topic 810-10 didn’t have a material impact on the Company’s results of
operations or financial condition.
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements.” This ASU establishes the accounting and reporting guidance for
arrangements including multiple revenue-generating activities. This ASU provides
amendments to the criteria for separating deliverables, measuring and allocating
arrangement consideration to one or more units of accounting. The amendments in
this ASU also establish a selling price hierarchy for determining the selling
price of a deliverable. Significantly enhanced disclosures are also required to
provide information about a vendor’s multiple-deliverable revenue arrangements,
including information about the nature and terms, significant deliverables, and
its performance within arrangements. The amendments also require providing
information about the significant judgments made and changes to those judgments
and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating this new
ASU.
In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements
That Include Software Elements.” This ASU changes the accounting model for
revenue arrangements that include both tangible products and software elements
that are “essential to the functionality,” and scopes these products out of
current software revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered “essential to the
functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple-deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating this new
ASU.
Other
accounting standards that have been issued or proposed by FASB that do not
require adoption until a future date are not expected to have a material impact
on the consolidated financial statements upon adoption.
F-15
NOTE
3 – TRADE
RECEIVABLES
At
December 31, 2009 and 2008, and March 31, 2010 accounts receivable consisted of
the following:
|
March 31,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
Audited
|
Audited
|
||||||||||
|
Trade
receivables
|
$ | 6,699,754 | $ | 2,398,297 | $ | 422,067 | ||||||
|
Less:
Allowance for receivables
|
(331,921 | ) | (331,867 | ) | (8,441 | ) | ||||||
| $ | 6,367,833 | $ | 2,066,430 | $ | 413,626 | |||||||
NOTE
4 – INVENTORIES
At
December 31, 2009 and 2008, and March 31, 2010, the inventories consisted of the
following:
|
March 31,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
Audited
|
Audited
|
||||||||||
|
Raw
materials
|
$ | 780,647 | $ | 2,903,920 | $ | 2,068,663 | ||||||
|
Finished
goods
|
1,168,981 | 4,817,634 | 4,391,658 | |||||||||
|
Consigned
Goods
|
152,096 | - | - | |||||||||
| $ | 2,101,724 | $ | 7,721,554 | $ | 6,460,321 | |||||||
NOTE
5 – PROPERTY, PLANT
AND EQUIPMENT
At March
31, 2010 and December 31, 2009 and 2008, the following are the details of the
property and equipment:
|
March 31,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
Audited
|
Audited
|
||||||||||
|
Property
and Plant
|
$ | 2,713,984 | $ | 2,713,547 | $ | 2,706,817 | ||||||
|
Operation
Equipment
|
613,597 | 605,576 | 598,235 | |||||||||
|
Office
Equipment
|
59,374 | 54,684 | 62,912 | |||||||||
|
Vehicle
|
127,622 | 98,938 | 81,952 | |||||||||
|
|
3,514,577 | 3,472,745 | 3,449,916 | |||||||||
|
Accumulated
Depreciation
|
(785,114 | ) | (733,360 | ) | (528,088 | ) | ||||||
|
Total
|
$ | 2,729,463 | $ | 2,739,385 | $ | 2,921,828 | ||||||
Accumulated
depreciation as of December 31, 2009 and 2008 was 733,360 and 528,087,
respectively. Depreciation expense for the years ended December 31, 2009 and
2008 was $213,260 and $215,956, respectively. Loss from disposal of assets was
$4,882 and $12,523 as of December 31, 2009 and 2008,
respectively.
F-16
Accumulated
depreciation as of March 31, 2010 and 2009 was $785,114 and $573,627,
respectively. Depreciation expense for the three months ended March 31, 2010 and
2009 was $51,636 and $54,272, respectively. Loss from disposal of assets was nil
and $4,878 for the three months ended March 31, 2010 and 2009,
respectively.
F-17
NOTE
6 – INTANGIBLE ASSETS,
NET
The
Company's intangible assets are purchased intellectual property on seed
varieties. At December 31, 2009 and 2008, the balances of net intangible assets
were $181,909 and $61,337, respectively. Amortization expense for the years
ended December 31, 2009 and 2008 was $14,131 and $10,054 respectively. At March
31, 2010, the balance of net intangible assets was $176,014. Amortization
expense for the three months ended March 31, 2010 and 2009 was $5,924 and
$2,556, respectively.
Expected
future amortizations for intangible assets are as follows:
|
2010
|
$ | 23,694 | ||
|
2011
|
23,694 | |||
|
2012
|
23,694 | |||
|
2013
|
22,963 | |||
|
2014
|
19,306 | |||
|
Thereafter
|
68,558 | |||
| $ | 181,909 |
NOTE
7 – SHORT-TERM
LOANS
Short-term
loans included in the consolidated balance sheets as of March 31, 2010, December
31, 2009 and 2008 were:
|
March 31,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
5.31%
loan payable to Agriculture Development Bank of China for one year term,
maturing on November 5, 2010, collateralized with
buildings.
|
$ | 2,194,234 | $ | 2,193,881 | $ | - | ||||||
|
6.66%
loan payable to Agriculture Development Bank of China for one year term,
matured on Aug 25, 2009, collateralized with buildings.
|
- | - | 1,606,314 | |||||||||
|
6.66%
loan payable to Agriculture Development Bank of China for one year term,
matured on Aug 25, 2009, collateralized with buildings.
|
- | - | 436,229 | |||||||||
| $ | 2,194,234 | $ | 2,193,881 | $ | 2,042,543 | |||||||
F-18
NOTE
8 – ACCOUNTS PAYABLE
AND ACCRUED EXPENSES
Accounts
payable and accrued expense comprised of account payables, salary payables,
welfare payables and due to related parties. At March 31, 2010 and December 31,
2009 and 2008, details of accounts payables and accrued expenses
were:
|
March 31,
|
December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Unaudited)
|
Audited
|
Audited
|
||||||||||
|
Accounts
payable
|
$ | 611,884 | $ | 494,927 | $ | 880,445 | ||||||
|
Welfare
payable
|
56,613 | - | - | |||||||||
|
Other
payable
|
39,496 | - | - | |||||||||
|
Due
to related parties
|
10,039 | 10,038 | 701 | |||||||||
|
|
$ | 718,032 | $ | 504,965 | $ | 881,146 | ||||||
NOTE
9 – RELATED PARTY
TRANSACTIONS
Due to
related parties included in accounts payable is payable to Qingdao
Fuer Agronomy Biochemical Co., Ltd, a company that provides pesticides,
germicides, and herbicides to customers across China, which is controlled by Mr.
Zhang Li, General Manager of Deli and the largest share holder of Fuer. The due
to related parties as of December 31, 2009 and 2008 was of $10,038 and
$701, respectively, and was $10,039 for the three months ended March 31,
2010.
NOTE
10 – INCOME
TAXES
The
Company is governed by the Income Tax Law of the People’s Republic of China,
according to which enterprise income tax are paid within one month after each
calendar quarter. Balances of income tax payables as of the end of each
reporting period are the income tax expense that occurred for the preceding
quarter ended on the balance sheet dates. The Company has no deferred tax asset,
deferred tax liability, and loss carryforward as of December 31, 2009 and 2008
as of March 31, 2010.
Under the
Income Tax Laws of PRC, since January 2008, Chinese companies are generally
subject to an income tax at an effective rate of 25%, on income reported in the
statutory financial statements after appropriate tax adjustments.
In
January, 2010, the Company was certified as national high tech enterprise. As a
result, the Company will enjoy favorite enterprise income tax rate of 15% for 3
years, start from beginning of 2010.
The table
below summarizes the differences between the PRC statutory federal rate and the
Company’s effective tax rate and as follows for the years ended December 31,
2009 and 2008 and the three months ended March 31, 2010:
|
For the three
months ended
March
31,
|
For the years ended
December 31,
|
|||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
Unaudited
|
Unaudited
|
Audited
|
Audited
|
|||||||||||||
|
China
statutory rates
|
15 | % | 25 | % | 25 | % | 25 | % | ||||||||
|
Non-deductible
items
|
- | - | 0.3 | % | 0.3 | % | ||||||||||
|
Total
provision for income taxes
|
15 | % | 25 | % | 25.3 | % | 25.3 | % | ||||||||
F-19
NOTE
11 – STATUTORY
RESERVES
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve, statutory public welfare fund and discretionary
surplus reserve, based on after-tax net income determined in accordance with
generally accepted accounting principles of the PRC (the “PRC GAAP”).
Appropriation to the statutory surplus reserve should be at least 10% of the
after tax net income determined in accordance with the PRC GAAP until the
reserve is equal to 50% of the entities’ registered capital or members’ equity.
Appropriations to the statutory public welfare fund are at a minimum of 5% of
the after tax net income determined in accordance with PRC GAAP. Commencing on
January 1, 2006, the new PRC regulations waived the requirement for
appropriating retained earnings to the statutory public welfare fund. Fuer
elected not to made discretionary surplus reserves since its establishment. For
the years ended December 31, 2009 and 2008, appropriations to statutory
reserves were $314,275 and $203,979, respectively. The Company made no
appropriation to the reserves during the three months ended March 31, 2010 and
2009.
NOTE
12 – COMMITMENTS
The
Company has launched the Company’s Chain Store program in March, 2010, including
conversion of distributors into franchise store operators, and establishment of
the Company’s own stores. As of March, 31,2010, the Company has established 5
direct store, and 43 franchise stores.
The
Company entered into 5 lease agreements in March, 2010 for establishment of
its wholly owned stores, including 4 agreements for one year and 1 agreement for
2 year. Rentals were prepaid at commencement of the leasing period. The Company
has paid refundable security deposits of $439 for 2 stores. No such deposits
were required under the other 3 lease agreements. Commitment of rental for the
year ended December 31, 2010 and 2011 are be $16,969 and $2,926,
respectively.
On March
30, 2010, the Company entered into an agreement to lease farm land of 23.06
acres from local farmers for 5 years starting from March 30, 2010. Subject to
the agreement, 5 year future rent totaling $975,043 is
required upon the commencement of the lease, 2010. A total of $36,684 was paid
as of March 31, 2010 and is accounted for as prepaid lease. Additional
prepayments totaling $438,359 was paid in April, 2010.
NOTE
13 – SUBSEQUENT
EVENTS
On April
2, 2010, the Company entered into an agreement to rent land of 247.1 acres for
20 years, and prepaid $402,276 under this agreement. No additional rental
payment would be required in future.
On June
16, 2010, Forex365, Inc., (“Forex365”) a company incorporated in Nevada, entered
into a Share Exchange Agreement (the “Exchange Agreement”) with China Golden.
Pursuant to the terms of the Exchange Agreement, the shareholders of China
Golden transferred to the Forex365 all of the China Golden Shares in exchange
for the issuance of 11,550,392 shares (the “Shares”) of Forex365 common stock
(the “Share Exchange”). As a result of the Share Exchange, China Golden became a
wholly-owned subsidiary of Forex365 and the shareholders of China Golden
acquired approximately 96.47% of our issued and outstanding stock of
Forex365.
The
effect of the Share Exchange is such that effectively a reorganization of the
entities has occurred for accounting purposes and is deemed to be a reverse
acquisition. Subsequent to the Share Exchange the financial statements presented
are those of a combined China Golden and its subsidiaries, including their VIE,
as if the Share Exchange had been in effect retroactively for all periods
presented. As previously noted the “Company” for financial statement purposes
was the consolidation of China Golden, Deli and Fuer. Subsequent to the Share
Exchange the “Company” is referred to as the consolidation of China Golden,
Deli, Fuer and Forex365, with Forex365 as the legal acquirer in Share Exchange,
and subsequent to the Share Exchange the parent company of the consolidated
entity.
F-20
On June
17, 2010, Forex365 Inc. has entered into a securities purchase agreement (the
“Purchase Agreement”) with a certain investor (the “Investor”) for the sale of
an aggregate of 1,018,868 common shares (the “Investor Shares”), and warrants to
purchase 873,315 common shares of the Company, for aggregate proceeds equal to
$2,500,000 (the “Offering”). The Offering was closed on June 17, 2010 (the
“Closing Date”). The warrants are exercisable at $2.58 per share, have a three
year life, and have a cashless exercise feature. In connection with the
Offering, the Company also entered into a registration rights agreement (the
“Registration Rights Agreement”) with the Investor, in which the Company
agreed to file a registration statement (the “Registration Statement”) with the
Securities and Exchange Commission (the “SEC”) to register for resale the
Investor Shares and the shares underlying the warrants, within 60 calendar days
of the Closing Date of the Offering and to have the Registration Statement
become effective within 150 days of the Closing Date of the
Offering.
On June
9, 2010 Forex365, Inc.
approved a 1 for 64 reverse stock split prior to the Share Exchange. The reverse
split does not result in any modification of the rights of stockholders, and
have no effect on the stockholders' equity in the Corporation except for a
transfer from stated capital to additional paid-in capital. The Company effected
the amendments in connection with the consummation of the transactions
contemplated by that certain Share Exchange Agreement pursuant to which the
Registrant acquired all of the issued and outstanding shares of stock of China
Golden Holdings, Ltd.
F-21
FOREX365,
INC. AND CHINA GOLDEN HOLDINGS, LTD.
PRO FORMA
CONSOLIDATED FINANCIAL STATEMNTS
CONTENTS
|
Pro
Forma Consolidated Financial Statements:
|
||
|
Pro
Forma Consolidated Balance Sheet
|
||
|
As
of March 31, 2010 (unaudited)
|
F-2
|
|
|
Pro
Forma Consolidated Statements of
Operations
for the Three Months Ended
March 31, 2010
|
F-3
|
|
|
Pro
Forma Consolidated Statements of
Operations
for the Year Ended December
31, 2009
|
F-4
|
|
|
Notes
to Pro Forma Consolidated Financial Statements
|
F-5
|
F-1
|
FOREX365
INC.
|
||||||||||||||||
|
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEET
|
||||||||||||||||
|
AS
OF MARCH 31, 2010
|
|
|
China
Golden
Holdings Ltd.
|
Forex365
Inc.
|
Pro
Forma
Adjustments
|
Pro
Forma
Combined
Total
|
||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current
Assets
|
||||||||||||||||
|
Cash
and Cash Equivalents
|
$ | 9,768,705 | $ | 2,505 | $ | 2,500,000 | (b) | $ | 9,771,210 | |||||||
|
Restricted
cash
|
219,813 | - | - | 219,813 | ||||||||||||
|
Trade
receivables, net
|
6,367,834 | - | - | 6,367,834 | ||||||||||||
|
Other
receivables, net
|
145,439 | - | - | 145,439 | ||||||||||||
|
Inventories
|
2,101,724 | - | - | 2,101,724 | ||||||||||||
|
Advances
to suppliers
|
460,150 | - | - | 460,150 | ||||||||||||
|
Current
Portion of Prepaid Leases
|
7,337 |
|
|
7,337 | ||||||||||||
|
Total
Current Assets
|
19,071,002 | 2,505 | 2,500,000 | 19,073,507 | ||||||||||||
|
|
|
|
|
|
||||||||||||
|
Property,
plant and equipment, net
|
2,729,463 | - | - | 2,729,463 | ||||||||||||
|
Intangibles,
net
|
176,014 | - | - | 176,014 | ||||||||||||
|
Prepaid
leases
|
29,347 | - | - | 29,347 | ||||||||||||
|
Total
Assets
|
$ | 22,005,826 | 2,505 | 2,500,000 | 22,008,331 | |||||||||||
|
|
|
|
- |
|
||||||||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
||||||||||||
|
Liabilities
|
|
|
|
|
||||||||||||
|
Short
term loans
|
$ | 2,194,234 | - | - | 2,194,234 | |||||||||||
|
Accounts
payable and accrued expenses
|
718,032 | 66,374 | - | 784,406 | ||||||||||||
|
Advances
from customers
|
36,608 | - | - | 36,608 | ||||||||||||
|
Income
tax payable
|
1,483,071 | - | - | 1,483,071 | ||||||||||||
|
Total
Liabilities
|
4,431,945 | 66,374 |
|
4,498,319 | ||||||||||||
|
|
|
|
|
|
||||||||||||
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
||||||||||||
|
Preferred
stock of Forex365 Inc.; $0.001 par value,
10,000,000
authorized and -0- issued and outstanding
|
- | - | - | - | ||||||||||||
|
Common stock
of Forex365 Inc. $0.001 par value,
200,000,000
authorized, 388,740 issued and outstanding
|
- | 389 | 12,569 | (a,b,c) | 12,958 | |||||||||||
|
Common
stock of China Golden Holdings, Ltd.; $1 par value,
50,000
authorized, 30,000 issued and outstanding
|
50,000 | - | (50,000 | )(c) | - | |||||||||||
|
Additional
paid in capital
|
4,509,453 | 1,915,784 | 557,389 | (a,b,c) | 6,982,626 | |||||||||||
|
Statutory
reserves
|
1,112,119 |
|
|
1,112,119 | ||||||||||||
|
Retained
earnings
|
10,829,817 | (1,980,042 | ) | 1,980,042 | (c) | 10,829,817 | ||||||||||
|
Accumulated
other comprehensive
|
1,072,492 | - | - | 1,072,492 | ||||||||||||
|
Total
Stockholders' Equity
|
17,573,881 | (63,869 | ) | 2,500,000 | 20,010,012 | |||||||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 22,005,826 | 2,505 | 2,500,000 | 24,508,331 | |||||||||||
The
accompanying notes are integral parts of the pro forma consolidated financial
statements.
F-2
FOREX365
INC.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010
|
China
Golden Holdings Ltd.
|
Forex365
Inc.
|
Pro
Forma Adjustments
|
Pro
Forma Combined Total
|
|||||||||||||
|
Sales
|
$ | 15,307,410 | - | - | $ | 15,307,410 | ||||||||||
|
Cost
of goods sold
|
8,990,729 | - | - | 8,990,729 | ||||||||||||
|
Gross
profit
|
6,316,681 | - | - | 6,316,681 | ||||||||||||
|
Operating
and administrative expenses:
|
||||||||||||||||
|
Sales
and marketing
|
$ | (123,054 | ) | - | - | (123,054 | ) | |||||||||
|
General
and administrative
|
(285,041 | ) | (7,931 | ) | - | (292,972 | ) | |||||||||
|
Total
operating expenses
|
(408,096 | ) | (7,931 | ) | - | (416,027 | ) | |||||||||
|
Income
from operations
|
5,908,585 | (7,931 | ) | - | 5,900,654 | |||||||||||
|
Other
income (expenses):
|
||||||||||||||||
|
Interest
income
|
1,766 | - | - | 1,766 | ||||||||||||
|
Interest
expense
|
(27,973 | ) | (227 | ) | - | (28,200 | ) | |||||||||
|
Other
income, net
|
- | - | - | |||||||||||||
|
Non
operating Income (expenses)
|
36,571 | - | - | 36,571 | ||||||||||||
|
Other
income (expenses), total
|
10,364 | (8,158 | ) | - | 10,137 | |||||||||||
|
Income
before income tax
|
5,918,949 | - | - | 5,910,791 | ||||||||||||
|
Income
tax expenses
|
886,959 | - | - | 886,959 | ||||||||||||
|
Net
income
|
$ | 5,031,990 | (8,158 | ) | - | $ | 5,023,832 | |||||||||
|
Other
comprehensive income:
|
||||||||||||||||
|
Foreign
currency translation adjustments
|
1,958 | - | - | 1,958 | ||||||||||||
|
Comprehensive
income
|
$ | 5,033,948 | (8,158 | ) | - | $ | 5,025,790 | |||||||||
|
Net
income per common share:
|
||||||||||||||||
|
Basic
|
$ | (0.02 | ) | $ | 0.39 | |||||||||||
|
Diluted
|
$ | (0.02 | ) | $ | 0.39 | |||||||||||
|
Weighted
average number of shares outstanding
|
||||||||||||||||
|
Basic
|
388,740 | * | 12,569,260 | (d) | 12,958,000 | |||||||||||
|
Diluted
|
388,740 | * | 12,569,260 | (d) | 12,958,000 | |||||||||||
* - Effective for 1 for 64 reverse stock split effective as of June
9, 2010.
F-3
FOREX365
INC.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE YEAR ENDED MARCH 31, 2010
|
China
Golden Holdings Ltd.
|
Forex365
Inc.
|
Pro
Forma Adjustments
|
Pro
Forma Combined Total
|
|||||||||||||
|
Sales
|
$ | 16,168,421 | $ | - | $ | - | $ | 16,168,421 | ||||||||
|
Cost
of goods sold
|
9,469,206 | - | - | 9,469,206 | ||||||||||||
|
Gross
profit
|
6,699,215 | - | - | 6,699,215 | ||||||||||||
|
Operating
and administrative expenses:
|
||||||||||||||||
|
Sales
and marketing
|
1,345,927 | - | - | 1,345,927 | ||||||||||||
|
General
and administrative
|
1,342,509 | 33,563 | - | 1,376,072 | ||||||||||||
|
Total
operating expenses
|
2,688,436 | 33,563 | - | 2,721,999 | ||||||||||||
|
Income
from operations
|
4,010,779 | (33,563 | ) | - | 3,977,216 | |||||||||||
|
Other
income (expenses):
|
||||||||||||||||
|
Interest
income
|
20,713 | - | - | 20,713 | ||||||||||||
|
Interest
expense
|
(76,623 | ) | (393 | ) | - | (77,016 | ) | |||||||||
|
Other
income, net
|
(14,810 | ) | - | (14,810 | ) | |||||||||||
|
Non
operating Income (expenses)
|
(7,009 | ) | - | - | (7,009 | ) | ||||||||||
|
Other
income (expenses), total
|
(77,729 | ) | (393 | ) | - | (78,122 | ) | |||||||||
|
Income
before income tax
|
3,933,050 | (33,956 | ) | - | 3,899,094 | |||||||||||
|
Income
tax expenses
|
(994,852 | ) | - | - | (994,852 | ) | ||||||||||
|
Net
income
|
$ | 2,938,198 | $ | (33,956 | ) | $ | - | $ | 2,904,242 | |||||||
|
Other
comprehensive income:
|
||||||||||||||||
|
Foreign
currency translation adjustments
|
25,268 | - | - | 25,268 | ||||||||||||
|
Comprehensive
income
|
$ | 2,963,466 | $ | (33,956 | ) | $ | - | $ | 2,929,510 | |||||||
|
Net
income per common share:
|
||||||||||||||||
|
Basic
|
$ | (0.09 | ) | 0.23 | ||||||||||||
|
Diluted
|
$ | (0.09 | ) | 0.23 | ||||||||||||
|
Weighted
average number of shares outstanding
|
||||||||||||||||
|
Basic
|
388,740 | * | 12,569,260 | (d) | 12,958,000 | |||||||||||
|
Diluted
|
388,740 | * | 12,569,260 | (d) | 12,958,000 | |||||||||||
* - Effective for 1 for 64 reverse stock split effective as of June
9, 2010.
F-4
FOOTNOTES
TO PRO FORMA FINANCIAL STATEMENTS
|
|
|
|||||||
|
Description
of Pro Forma Adjustments
|
Dr
|
Cr
|
||||||
|
|
|
|
||||||
|
a
- Stock Issuance in reverse merger
|
|
|||||||
|
Additional
paid in capital
|
$ | 11,550 |
|
|||||
|
Common
shares
|
|
$ | 11,550 | |||||
|
|
|
|
||||||
|
b
-Stock issued in purchase agreement
|
|
|
||||||
|
Cash
|
$ | 2,500,000 | ||||||
|
Common
shares
|
$ | 1,019 | ||||||
|
Additional
paid in capital
|
|
$ | 2,498,981 | |||||
|
|
|
|
||||||
|
c
- To eliminate retained deficit of Forex365, Inc. and Common
stock
of
China Golden Holdings, Ltd
|
|
|
||||||
|
Additional
paid in capital
|
$ | 1,930,042 |
|
|||||
|
Retained
Deficit
|
|
$ | 1,980,042 | |||||
|
Common
shares - China Golden
|
$ | 50,000 | ||||||
|
d -
To give effect to 11,550,392 common shares issued with Exchange Agreement
and
1,018,868 common shares sold with Purchase Agreement
|
||||||||
The
unaudited pro forma consolidated financial information for the three months
ended March 31, 2010 and for the year ended December 31, 2009 has been derived
from China Golden’s unaudited financial statements as of and for the three month
ended March 31, 2010. This unaudited pro forma combined financial information
should be read in conjunction with China Golden’s unaudited and audited
financial statements and notes related to those consolidated financial
statements included elsewhere in this Form 8-K.
The pro
forma adjustments are based on the best information available and assumptions
that management believes are reasonable given the information available;
however, such adjustments are subject to change based upon the costs incurred in
connections with the Share Exchange Agreement and related transactions and
any other material information. The unaudited pro forma financial information is
for illustrative and informational purposes only and is not intended to
represent or be indicative of what the Company’s financial position would have
been had the transactions contemplated by the Share Exchange Agreement and
related transactions occurred on March 31, 2010.
On June
16, 2010, Forex365, Inc., (“Forex365”) a company incorporated in Nevada, entered
into a Share Exchange Agreement (the “Exchange Agreement”) with China Golden
Holding, Ltd., (“China Golden”) a British Virgin Island company. Pursuant to the
terms of the Exchange Agreement, the shareholders of China Golden transferred to
the Forex365 all of the China Golden Shares in exchange for the issuance of
11,550,392 shares (the “Shares”) of Forex365 common stock (the “Share
Exchange”). As a result of the Share Exchange, China Golden became a
wholly-owned subsidiary of Forex365 and the shareholders of China Golden
acquired approximately 96.47% of our issued and outstanding stock of
Forex365.
The
effect of the Share Exchange is such that effectively a reorganization of the
entities has occurred for accounting purposes and is deemed to be a reverse
acquisition. Subsequent to the Share Exchange the financial statements presented
are those of a combined China Golden and its subsidiaries, as if the Share
Exchange had been in effect retroactively for all periods presented. China
Golden operates through their wholly owned subsidiary, Qiqihar Deli Enterprise
Management Consultancy Co., Ltd. (“Deli”) a company incorporated in
Heilongjiang, People’s Republic of China (“PRC”) on February 10, 2010 as a
limited liability company. Other than the equity interest in Deli, China Golden
does not own any assets or conduct any operations.
Qiqihar
Fuer Agronomy Inc. (“Fuer”) was incorporated in the Heilongjiang Province, in
the PRC on March 18, 2003. Fuer is a provider of corn seeds, rice seeds, soybean
seeds, humic fertilizer and plant additives that distribute products through
1094 distributors to farmers located primarily in the PRC provinces of
Heilongjiang, Jilin, Inner Mongolia and other provinces of PRC. Fuer breeds its
proprietary seeds through farmers under contractual agreements. Fuer also sells
to their customers of humic fertilizer, plant additives as well as pesticides,
germicides and herbicides. Deli through a series of contractual arrangements has
the ability to substantially influence the daily operations and financial
affairs of Fuer, in addition to being able to appoint Fuer’s senior executives
and approve all matters requiring stockholder approval. The structure of the
contractual arrangements are such that Fuer is effectively a variable interest
entities (“VIE’s”) of Deli. Accordingly, China Golden through its wholly-owned
subsidiary Deli consolidates Fuer’s results of operation, assets and liabilities
in their financial statements.. Hereafter, China Golden, Deli and Fuer are
collectively referred to as the “Company” unless specific reference is made to
an individual entity)
On June
17, 2010, Forex365 Inc. entered into a securities purchase agreement (the
“Purchase Agreement”) with a certain investor (the “Investor”) for the sale of
an aggregate of 1,018,868 common shares (the “Investor Shares”), and warrants to
purchase 873,315 common shares of the Company, for aggregate proceeds equal to
$2,500,000 (the “Offering”). The Offering was closed on June 17, 2010 (the
“Closing Date”). The warrants are exercisable at $2.58 per share, have a three
year life, and have a cashless exercise feature. In connection with the
Offering, the Company also entered into a registration rights agreement (the
“Registration Rights Agreement”) with the Investor, in which The Company agreed
to file a registration statement (the “Registration Statement”) with the
Securities and Exchange Commission (the “SEC”) to register for resale the
Investor Shares and the shares underlying the warrants, within 60 calendar days
of the Closing Date of the Offering and to have the Registration Statement
become effective within 150 days of the Closing Date of the
Offering.
On June
9, 2010 Forex365, Inc. approved a 1 for 64 reverse stock split prior to the
Share Exchange. The reverse split does not result in any modification of the
rights of stockholders, and have no effect on the stockholders' equity in the
Corporation except for a transfer from stated capital to additional paid in
capital. The Company effected the amendments in connection with the consummation
of the transactions contemplated by that certain Share Exchange Agreement
pursuant to which the Registrant acquired all of the issued and outstanding
shares of stock of China Golden Holdings, Ltd.
F-5