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EX-23.1 - Fuer International Inc. | v206977_ex23-1.htm |
As
Filed with the Securities and Exchange Commission on January 14,
2011
Registration
No. _____
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
FUER
INTERNATIONAL, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
|
700
|
84-0290243
|
(State
or other jurisdiction of incorporation
or
organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(IRS
Employer
Identification
No.)
|
North
Neiwei Road,
Fulaerji
District, Qiqihar,
Heilongjiang,
China 161041
86-452-6919150
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
CSC
Services of Nevada, Inc.
2215-B
Renaissance Drive
Las
Vegas, NV 89119
(866)
729-3398
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
William
N. Haddad, Esq.
Yvan-Claude
Pierre, Esq.
DLA Piper
LLP (US)
1251
Avenue of the Americas
New York,
NY 10020
Telephone:
(212) 335-4500
Fax:
(212) 335-4501
Approximate date of commencement of
proposed sale to the public: As soon as practicable after the effective
date of this registration statement].
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box. ¨
If this
Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
|
(Do
not check if a smaller reporting company)
|
CALCULATION
OF REGISTRATION FEE
Title
of Each Class
of Securities
to be Registered
|
Amount
to
be
Registered
|
Proposed
Maximum
Aggregate
Offering
Price
(1)
|
Amount of
Registration
Fee
|
|||||||||
Common stock, par
value $0.001 per share
|
2,155,134 | $ | 10,775,670 | $ | 1,252 | |||||||
TOTAL
|
$ | 10,775,670 | $ | 1,252 |
(1)
Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as
amended.
The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the registration statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and is not an offer to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS
|
SUBJECT
TO COMPLETION, DATED _________,
2011
|
PROSPECTUS
2,155,134
Shares
Fuer
International Inc
This
prospectus relates solely to the resale of up to an aggregate of 2,155,134
shares of common stock of Fuer International Inc by the selling stockholders
identified in the section entitled “Selling Stockholders” on page 61 of
this prospectus.
The
selling stockholders may offer and sell any of the shares of common stock from
time to time at fixed prices, at market prices or at negotiated prices, and may
engage a broker, dealer or underwriter to sell the shares. For additional
information on the possible methods of sale that may be used by the selling
stockholders, you should refer to the section entitled “Plan of Distribution” on
page 68 of this prospectus. We will not receive any proceeds from the sale
of the shares of common stock by the selling stockholders. We are contractually
obligated to pay all expenses of registration incurred in connection with this
offering, except any underwriting discounts and commissions and expenses
incurred by the selling stockholders for brokerage, accounting, tax or legal
services or any other expenses incurred by the selling stockholders in disposing
of the shares.
Our
common stock is currently quoted on the Over-the-Counter Bulletin Board under
the symbol “FRXT”. On January 11, 2011, the last reported sale price
of our shares was $5.00 per share. You should rely only on the information
contained in this prospectus. We have not authorized any other person to provide
you with different information.
You
should consider carefully the risks that we have described in “Risk Factors”
beginning on page 11 before deciding whether to invest in our common
stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful and complete. Any representation to the contrary is a criminal
offense.
You
should rely only on the information contained in this prospectus or contained in
any free writing prospectus filed with the Securities and Exchange Commission,
or SEC. We have not authorized anyone to provide you with information different
from that contained in this prospectus. The selling stockholders are offering to
sell, and seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The information in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of our common
stock.
The date
of this prospectus is ______________, 2011
1
TABLE
OF CONTENTS
Page
|
|
Prospectus
Summary
|
3
|
Risk
Factors
|
11
|
Use
of Proceeds
|
26
|
Market
Price of and Dividends on Common Equity and Related Stockholder
Matters
|
27 |
Dividends
and Dividend Policy
|
28
|
Management’s
Discussion and Analysis Of Financial Condition and Results of
Operations
|
29
|
Business
|
40
|
Description
of Properties
|
54
|
Director
and Executive Officers
|
55
|
Executive
Compensation
|
59
|
Selling
Shareholders
|
61
|
Security
Ownership of Certain Beneficial Owners and Management
|
62
|
Certain
Relationships and Related Transactions
|
65
|
Description
of Securities
|
66
|
Shares
Eligible for Future Sale
|
67
|
Plan
of distribution
|
68
|
Disclosure
of Commission Position on Indemnification For Securities Act
Liability
|
70
|
Legal
Matters
|
71
|
Experts
|
71
|
Where
You Can Find More Information
|
71
|
Index
to Financial Statements
|
F-1
|
You
should rely only on the information contained or incorporated by reference to
this prospectus in deciding whether to purchase our common stock. We have not
authorized anyone to provide you with information different from that contained
or incorporated by reference to this prospectus. Under no circumstances should
the delivery to you of this prospectus or any sale made pursuant to this
prospectus create any implication that the information contained in this
prospectus is correct as of any time after the date of this prospectus. To the
extent that any facts or events arising after the date of this prospectus,
individually or in the aggregate, represent a fundamental change in the
information presented in this prospectus, this prospectus will be updated to the
extent required by law.
We
obtained statistical data, market data and other industry data and forecasts
used throughout this prospectus from market research, publicly available
information and industry publications. Industry publications generally state
that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy and completeness of the
information. Nevertheless, we are responsible for the accuracy and completeness
of the historical information presented in this prospectus, as of the date of
the prospectus.
2
PROSPECTUS
SUMMARY
This
summary highlights the information contained elsewhere in this prospectus and
does not contain all of the information you should consider in making your
investment decision. You should read this summary together with the more
detailed information, including our consolidated financial statements and the
related notes, elsewhere in this prospectus. You should carefully consider,
among other things, the matters discussed in “Risk Factors” beginning on page
11.. In addition, some of the statements made in this prospectus discuss future
events and developments, including our future strategy and our ability to
generate revenue, income and cash flow. These forward-looking statements involve
risks and uncertainties which could cause actual results to differ materially
from those contemplated in these forward-looking statements. See “Cautionary
Note Regarding Forward-Looking Statements.”
The
terms "we", "us", "our", mean Fuer International Inc. and its consolidated
subsidiaries.
Our
Business
Fuer
international (formerly Forex365 Inc,) was 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. On July 9, 2010, the Board of Directors of Forex365, Inc.
approved to change the name of the Company to Fuer International
Inc
China
Golden, incorporated in British Virgin Island on November 30, 2009, conduct its
business through its wholly owned subsidiary Qiqihar Deli 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.
Fuer,
established in 2003, is a leading manufacturer and supplier of seeds and
fertilizer products 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 humic fertilizers and plant regulator
products.
Fuer is a
leading regional provider of field seeds and fertilizers in Northeastern China.
The Company 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. As of September 30, Fuer has 214 employees and 64
temporary workers, among which 27 are research and technical staffs and 75 are
with the sales team. The Company produces seeds under contracts with local
farmers or state owned farm. We have two fertilizer production lines, with an
annual production capacity of 50,000 tons in total. 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
35.18% increase in revenue for the 9 months ended September 30, 2010, as
compared to the same period 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 9 months ended
September 30,
|
For the years ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Audited)
|
|||||||||||||||
($ in thousands)
|
($ in thousands)
|
|||||||||||||||
Summary
of Historical Income
|
||||||||||||||||
Sales
|
$ | 19,683 | $ | 14,560 | $ | 16,168 | $ | 11,626 | ||||||||
Gross
profit
|
$ | 8,175 | $ | 6,007 | $ | 6,699 | $ | 4,761 | ||||||||
Net
income
|
$ | 5,985 | $ | 3,843 | $ | 2,938 | $ | 2,053 |
3
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 qualified seeds and fertilizers to the local
farmers, and has great brand awareness 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
products which can adapt to all different major weather conditions in the
region, and therefore has strong resistance to changes in climate. 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. Furthermore, our fertilizer products enhance our
profitability after the selling season of seed products which effectively
reduces the concentration risk within our product portfolio.
Diversified sales channels -
The Company was the first seed provider to launch its branded stores in
northeastern China. As of December 31, 2010 we have opened 5 direct owned sales
stores and over 43 branded 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 the 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 qualified 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 fertilizers, 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 control 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 lines by means of acquiring
quality companies in target regions.
Product
Portfolio
Annual
scale of 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
the northeastern China. Field seed products contributed to over 79.74% of our
total revenue in 2009 and 82.67% for the 9 month ended September 30,
2010..
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 the
northeast China.
4
The
weather in the 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 product 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 chemical products around
China. Qingdao Fuer was owned by Mr. Zhang Li, our chairman of the board of
directors..
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 the entrance barrier to the seed
industry by raising registered capital of existing companies and new companies
to $73,000. We expect the required registered capital of seed providers will be
further raised 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 techniques. 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 agricultural institutions
and academies, such as Heilongjiang Academy of Agriculture Science and Heihe
Institution of Agriculture. We will subsidize the research programs if
feasibility is established, in exchange for preemption and bargained price of
the patent or long term exclusive franchise rights over the new seed
variety.
5
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 province, 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 to 3 represents south part of the
province, and are fit for corn and rice. Zone 4, represents the north part of
the province, and is fit for growth of soybean and certain corn varieties. Zone
5 and 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”). 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 that the government will
open a window for GM crops when a reliable inspective and administrative system
is established. .
The Humic Fertilizer
Industry
Producers
of compound fertilizers including plant nutrition regulators are mainly
traditional fertilizer producers. China’s fertilizer industry is very
fragmented. In 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 quality of their products. Some of them have
not obtained 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
Strategy
Enhancing Cooperative
Research and
Development and
Purchase of Seed Variety Rights:
We are
planning to intensify our communication and cooperation with our existing
agriculture research institute partners and similar institutes in other
provinces. We intend to enhance our participation 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
future, we intend to focus our sales channel on our new direct-owned stores and
enroll more branded stores in our market, so as to enhance our profitability and
customer loyalty. We will establish customer membership and database to trace
the habits of customers to improve accuracy in marketing efforts and customer
service. We believe this business will take our existing advantages in product
quality and leading brands reputation, and create advantages in integrated and
controlling sales network.
Participating in Research of
GM Crops and Building 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 China, we will seek opportunities to develop GM seeds for
northeastern China through cooperation with universities and
institutes.
6
Acquiring Quality Seed and
Fertilizer Enterprises
We
believe seed patent and brand awareness are the one of the most 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.
Risks
and Challenges
An
investment in our securities involves a high degree of risk that includes risks
related to our business, the industries in which we operate, the PRC, the
ownership of our common stock and this Offering, including without limitation,
the following risks:
We are
subject to a number of additional risks which you should be aware of before you
buy our common stock. The risks are discussed more fully in the
section entitled “Risk Factors” following this prospectus summary.
Recent
Developments
On June
16, 2010, we entered into a Share Exchange Agreement (the “Exchange Agreement”)
with China Golden Holdings, Ltd., (“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”) no later than December 15, 2010 to register for resale
the Investor Shares and the shares underlying the warrants, and to have the
Registration Statement become effective within 90 calendar days after December
15, 2010.
On June
9, 2010, our 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.
7
Corporate
Structure
The
following diagram illustrates our corporate structure as of the date of this
prospectus:
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.
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.
8
Corporate
Information
Our
principal executive office is located at North Neiwei Road, Fulaerji District,
Qiqihar, Heiloingjiang, China 161041. Our telephone number
at that address is 86-452-6919150. Our website address is www.fuer.com.cn. The
information on our website is not a part of this prospectus. Our
agent for service of process in the United States is CSC Services of Nevada,
Inc., 2215-B Renaissance Drive, Las Vegas, NV 89119.
OFFERING
SUMMARY
Common
stock offered by the selling stockholders
|
Up
to 2,155,134 shares
|
|
Use
of Proceeds
|
Proceeds
from the sale of common stock covered by this prospectus will be received
by the selling stockholders. We will not receive any proceeds from the
sale of the shares of common stock covered by this
prospectus.
|
|
OTC
Bulletin Board symbol for our Common Stock
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“FRXT”
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As of
December 31, 2010, we had 12,958,032 shares of common stock outstanding, 873,315
shares of common stock issuable upon the exercise of warrants outstanding and no
shares of common stock available for future issuance under our Stock Option
Plan.
We are
contractually obligated to pay all expenses of registration incurred in
connection with this offering, except any underwriting discounts and commissions
and expenses incurred by the selling stockholders for brokerage, accounting, tax
or legal services or any other expenses incurred by the selling stockholders in
disposing of the shares.
9
SUMMARY
FINANCIAL INFORMATION
The table
below presents our historical selected consolidated financial data for the
nine-month periods ended September 30, 2010 and 2009, derived from our unaudited
consolidated financial statements included elsewhere in this prospectus, and for
the two years ended December 31, 2009 and 2008, derived from our audited
consolidated financial statements included elsewhere in this prospectus.
Historical results are not necessarily indicative of the results that may be
expected for any future period. When you read this historical selected financial
data, it is important that you read along with it the appropriate historical
consolidated financial statements and related notes and “Management's Discussion
and Analysis of Financial Condition and Results of Operations” included
elsewhere in this prospectus.
For the 9 months ended September
30,
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For the years ended December 31,
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|||||||||||||||
2010
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2009
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2009
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2009
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|||||||||||||
(Unaudited)
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(Unaudited)
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(Audited)
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(Audited)
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|||||||||||||
($ in thousands)
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($ in thousands)
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|||||||||||||||
Statements
of Operations Data
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||||||||||||||||
Sales
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$ | 19,682 | $ | 14,560 | $ | 16,168 | $ | 11,626 | ||||||||
Cost
of goods sold
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11,507 | 8,553 | 9,469 | 6,865 | ||||||||||||
Gross
profit
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8,175 | 6,007 | 6,699 | 4,761 | ||||||||||||
Operating
and administrative expenses:
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||||||||||||||||
Sales
and marketing
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482 | 196 | 1,346 | 1,119 | ||||||||||||
General
and administrative
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1,086 | 615 | 1,342 | 833 | ||||||||||||
Income
from operations
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6,607 | 5,196 | 4,011 | 2,809 | ||||||||||||
Other
expenses, net
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27 | 72 | 78 | 63 | ||||||||||||
Income
before income tax
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6,580 | 5,123 | 3,933 | 2,746 | ||||||||||||
Income
tax expenses
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595 | 1,281 | 995 | 693 | ||||||||||||
Net
income
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5,985 | 3,842 | 2,938 | 2,053 | ||||||||||||
Foreign
currency translation adjustments
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393 | 26 | 25 | 500 | ||||||||||||
Comprehensive
income
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$ | 6,378 | $ | 3,868 | $ | 2,963 | $ | 2,553 | ||||||||
Earnings
per share data
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||||||||||||||||
Basic
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$ | 0.50 | $ | 0.32 | $ | 0.25 | $ | 0.21 | ||||||||
Diluted
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$ | 0.48 | $ | 0.32 | $ | 0.25 | $ | 0.21 |
September 30, 2010
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||||||||
Actual
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As Adjusted (1)
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|||||||
($ in
thousands)
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($ in thousands)
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|||||||
Balance
Sheet Data:
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||||||||
Cash
and Restricted Cash
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$ | 17,459 | $ | |||||
Working
Capital
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$ | 18,030 | $ | |||||
Total
Assets
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$ | 23,188 | $ | |||||
Total
Liabilities
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$ | 1,770 | $ |
10
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision with regard to our securities. The statements contained in or
incorporated into this offering that are not historic facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by
forward-looking statements. If any of the following risks actually occurs, our
business, financial condition or results of operations could be harmed. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.
Risks relating to our
business
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 industrial factors such as
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 the third and fourth quarter of
our fiscal year, 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 fertilizers and plant regulators.
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 factors 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.
11
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 in accordance with production plans that estimates
customer demand that are 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.
We
substantially depend on a few key personnel who, if not retained, could cause
declines in productivity and operational results and loss of our strategic
guidance, all of which would diminish our business prospects and value to
investors.
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.
Efforts
to protect our intellectual property rights and to defend against claims against
us can increase our costs and will not always succeed. Any failures could
adversely affect our sales and results of operations or restrict our ability to
conduct our business.
12
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.
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.
13
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.
We
may be exposed to product quality claims, which may cause us to incur
substantial legal expenses and, if determined adversely against us, may cause us
to pay significant damage awards.
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.
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.
14
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.
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.
15
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.
16
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. .
17
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.
Risks
relating to doing business in China
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:
|
|
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
|
|
|
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.
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.
18
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
China’s New Enterprise Income Tax Law, we may be classified as a “resident
enterprise” of China. Such classification could result in unfavorable tax
consequences to us and our non-PRC shareholders.
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.
19
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.
A
return to profit repatriation controls may limit our ability to pay dividends
and expand our business, and may reduce the attractiveness of investing in PRC
business opportunities.
The 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.
20
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.
21
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.
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.
22
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.
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.
23
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.
Our
executive officers, directors and principal shareholders and their affiliates
beneficially 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.
24
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. Such forward-looking statements
include statements regarding, among other things, our projected sales and
profitability, our growth strategies, anticipated trends in our industry, our
future financing plans, and our anticipated needs for working capital.
Forward-looking statements, which involve assumptions and describe our
future plans, strategies and expectations, are generally identifiable by use of
the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend,” or “project” or the negative of these words or other
variations on these words or comparable terminology. This information may
involve known and unknown risks, uncertainties, and other factors that may cause
our actual results, performance or achievements to be materially different from
the future results, performance or achievements expressed or implied by any
forward-looking statements. These statements may be found under “Prospectus
Summary”, “Management's Discussion and Analysis of Financial Condition and
Results of Operations” and “Business,” as well as in this prospectus generally.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under “Risk Factors” and matters described in
this prospectus generally. This prospectus may contain market data related to
our business, which may have been included in articles published by independent
industry sources. We are responsible for the accuracy and completeness of the
historical information contained in this market data as of the date of this
prospectus. However, this market data also includes projections that are based
on a number of assumptions. If any one or more of these assumptions turns out to
be incorrect, actual results may differ materially from the projections based on
these assumptions. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this prospectus will
in fact occur. In addition to the information expressly required to be included
in this filing, we will provide such further material information, if any, as
may be necessary to make the required statements, in light of the circumstances
under which they are made, not misleading.
Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this prospectus as well as other pubic reports which
may be filed with the Securities and Exchange Commission. You should not place
undue reliance on any forward-looking statement as a prediction of actual
results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances, unless and to the extent required by applicable law. Neither the
Private Securities Litigation Reform Act of 1995 nor Section 27A of the
Securities Act of 1933, as amended, provides any protection for statements made
in this prospectus.
MARKET
AND INDUSTRY DATA
This
prospectus includes market and industry data and forecasts that we have
developed from independent consultant reports, publicly available information,
various industry publications, other published industry sources and our internal
data and estimates. Independent consultant reports, industry publications and
other published industry sources generally indicate that the information
contained therein was obtained from sources believed to be
reliable.
Our
internal data and estimates are based upon information obtained from our
investors, trade and business organizations and other contacts in the markets in
which we operate and our management’s understanding of industry conditions.
Although we believe that such information is reliable, we have not had this
information verified by any independent sources.
25
USE
OF PROCEEDS
The
selling stockholders will receive all of the net proceeds from the sale of the
shares of common stock offered by this prospectus. We will not receive any
proceeds from an offering contemplated by this prospectus.
26
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY
AND
RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is listed on the OTC Bulletin Board under the symbol “FRXT”. The
following table sets forth, for the periods indicated, the range of quarterly
high and low sales prices for our common stock. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, involving
our common stock during each calendar quarter, and may not represent actual
transactions.
Our
common stock is quoted on the OTC Bulletin Board, under the symbol
“FRXT.” At December 31, 2010 there were 12,958,032 shares of common
stock issued and outstanding that were held by approximately 539 stockholders of
record. The table below lists the high and low closing prices per
share of our common stock for each quarterly period during the past two fiscal
years as quoted on the OTC Bulletin Board. The following prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
High
|
Low
|
|||||||
Year
Ended December 31, 2008:
|
||||||||
3rd
Quarter
|
$ | 12.80 | $ | 12.80 | ||||
4th
Quarter
|
$ | 17.99 | $ | 16.79 | ||||
Year
Decenber 31, 2009:
|
||||||||
1st
Quarter
|
$ | 6.40 | $ | 6.40 | ||||
2nd
Quarter
|
$ | 3.20 | $ | 3.20 | ||||
3rd
Quarter
|
$ | 3.90 | $ | 3.90 | ||||
4th
Quarter
|
$ | 3.90 | $ | 3.90 | ||||
Year
Ended December 31, 2010:
|
||||||||
1st
Quarter
|
$ | 6.32 | $ | 6.32 | ||||
2nd
Quarter
|
$ | 13.92 | $ | 13.92 | ||||
3rd
Quarter
|
$ | 5.50 | $ | 5.00 |
On
December 30, 2010, the closing sale price of our shares of common stock was
$5.00 per share and there were 12,958,032 shares of our common stock
outstanding. On that date, our shares of common stock were held by
approximately 539 shareholders of record. The number of record
holders was determined from the records of our transfer agent and does not
include beneficial owners of our common stock whose shares are held in the names
of various security brokers, dealers, and registered clearing
agencies.
27
DIVIDENDS
AND DIVIDEND POLICY
We have not declared or paid any
dividends on our common stock and presently do not expect to declare or pay any
such dividends in the foreseeable future. Payment of dividends to our
shareholders would require payment of dividends by our PRC subsidiaries to
us. This, in turn, would require a conversion of Renminbi into US
dollars and repatriation of funds to the US. Under current PRC law,
the conversion of Renminbi into foreign currency generally requires government
consent. Further, government authorities may impose restrictions that could
have a negative impact in the future on the conversion process or on our cash
needs, which, in turn, affects our ability to pay cash dividends to our
shareholders. Although our subsidiary’s classification is WFOE under
PRC law permits them to declare dividends and repatriate their funds to us
in the United States, any change in this status or the regulations permitting
such repatriation could prevent them from doing so. Any inability to
repatriate funds to us would in turn prevent payments of dividends to our
shareholders.
28
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 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
January 2010, the Company was recognized as a “High-tech Enterprise” by the
state government, which entitled us to favor upon enterprise income
tax.
In
December 2010, Fuer was granted Top 50 Enterprise of the Seed Industry by the
Ministry of Agriculture of the People’s Republic of China, and Top 5 humic
fertilizer providers by the China Humic Acid Industry Association.
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.
29
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 9,000 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.
30
Results
of Operations
The
following table sets forth certain information regarding our results of
operations.
For the nine months ended
September 30,
|
For the Years Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||||||||
($ in thousands)
|
($ in thousands)
|
|||||||||||||||
Statements
of Operations Data
|
||||||||||||||||
Sales
|
$ | 19,683 | $ | 14,560 | $ | 16,168 | $ | 11,626 | ||||||||
Cost
of goods sold
|
11,507 | 8,553 | 9,469 | 6,865 | ||||||||||||
Gross
profit
|
8,175 | 6,007 | 6,699 | 4,761 | ||||||||||||
Operating
and administrative expenses:
|
||||||||||||||||
Sales
and marketing
|
482 | 196 | 1,346 | 1,119 | ||||||||||||
General
and administrative
|
1,086 | 615 | 1,343 | 833 | ||||||||||||
Income
from operations
|
6,607 | 5,196 | 4,011 | 2,809 | ||||||||||||
Other
income (expenses), net
|
27 | 72 | 78 | 63 | ||||||||||||
Income
before income tax
|
6,580 | 5,123 | 3,933 | 2,746 | ||||||||||||
Income
tax expenses
|
595 | 1,281 | 995 | 693 | ||||||||||||
Net
income
|
$ | 5,985 | $ | 3,843 | $ | 2,938 | $ | 2,053 |
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 $7.72 million as of December
31, 2009. This increase was primarily attributable to increased production in
accordance with the seed breeding plan made in the second quarter of 2009 and
production plan of fertilizer and germicides, pesticides, and herbicides to meet
the growing demand for our products.
The
following table sets forth information regarding the sales of our principal
products during the fiscal years ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||||||||||||||||||
Quantity
|
Amount
|
% of
|
Quantity
|
Amount
|
% of
|
|||||||||||||||||||
Product name
|
(Kg’000)
|
($’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 | % |
31
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 | % |
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.
32
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 $0.01 million.
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.
Comparison
of the Nine Months ended September 30, 2010 and 2009
Sales
Sales
increased by approximately $5.12 million, or 35.18%, from approximately $14.56
million for the nine months ended September 30, 2009 to approximately $19.68
million for the nine months ended September 30, 2009. This increase was
primarily attributable to increase in demand of our soybean seeds, rice seeds,
and fertilizer product.
The
following table sets forth information regarding the sales of our principal
products during the three month ended September 30, 2010 and 2009
For the nine months ended
|
For the nine months ended
|
|||||||||||||||||||||||
September 30 2010
|
September 30 2009
|
|||||||||||||||||||||||
Quantity
|
Amount
|
% of
|
Quantity
|
Amount
|
% of
|
|||||||||||||||||||
Product name
|
(Kg’000)
|
($’000 )
|
Sales
|
(Kg’000)
|
($’000 )
|
Sales
|
||||||||||||||||||
Corn
Seeds
|
7,319 | $ | 8,920 | 46 | % | 9,877 | $ | 9,654 | 46 | % | ||||||||||||||
Soybean
Seeds
|
3,941 | $ | 3,739 | 19 | % | 1,353 | $ | 1,236 | 19 | % | ||||||||||||||
Rice
Seeds
|
4,772 | $ | 3,614 | 18 | % | 1,211 | $ | 919 | 18 | % | ||||||||||||||
Vegetable
Seeds
|
- | $ | - | - | % | 293 | $ | 419 | - | % | ||||||||||||||
Fertilizers
|
3,769 | $ | 2,658 | 14 | % | 3,631 | $ | 1,884 | 14 | % | ||||||||||||||
Plant
Regulators
|
549 | $ | 286 | 1 | % | 443 | $ | 233 | 1 | % | ||||||||||||||
Germicides,
Pesticides and Germicides
|
126 | $ | 466 | 2 | % | 347 | $ | 215 | 2 | % |
33
Price of
corn seeds for the nine months as of September 30, 2010 have increased by 24% as
compared with the same period in 2009. The increase was mainly due to rise in
the market prices of corn seed due to a lack of supply, which is due to the fact
that corn production was hampered by the heavy rainfall and flood in the summer
of 2009.
Price of
fertilizer for the nine months as of September 30, 2010 has increased by 36% as
compared with the same period in 2009, which is resulted from increase in sales
of our premier humic fertilizer.
We rely
on our production of germicides, pesticides and herbicides products on our
Original Equipment Manufacturer (“OEM”), Qingdao Fuer Agronomy Pesticides Ltd.
(“Qingdao Fuer”). During the second quarter of 2010, Qingdao Fuer completed its
facility reformation and began producing only an updated premium herbicide
product. The new premium herbicide was more efficient and less toxic compared
with traditional herbicides, and could be widely applied to cultivation of field
crops. The Company distributed only the new herbicide in the three months ended
September 30, 2010, which led to the increase in the average selling price of
such product category.
|
Average Price Per Kilogram for the nine months endedSeptember 30,
|
Percentage Change |
||||||||||
Product
|
2010
|
2009
|
||||||||||
Corn
Seeds
|
$ | 1.22 | $ | 0.98 | 25.00 | % | ||||||
Soybean
Seeds
|
$ | 0.95 | $ | 0.91 | 4.00 | % | ||||||
Rice
Seeds
|
$ | 0.76 | $ | 0.76 | - | % | ||||||
Vegetable
Seeds
|
$ | - | $ | 1.43 | - | % | ||||||
Fertilizers
|
$ | 0.71 | $ | 0.52 | 36 | % | ||||||
Plant
Regulators
|
$ | 0.52 | $ | 0.53 | (1 | )% | ||||||
Germicides,
Pesticides and Germicides
|
$ | 3.71 | $ | 0.62 | 498 | % |
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 $2.95 million,
or 34.54%, from approximately $8.55 million for the nine months ended September
30, 2009 to approximately $11.51 million for the nine months ended September 30,
2010. This increase was primarily attributable to the increase in sales
volume resulting from our marketing efforts, expanded distribution network and
prolonged credit period.
Operating and Administrative
Expenses
Our total
operating and administrative expenses consist primarily of sales and marketing
expenses and general and administrative expenses. Our total operating
expenses increased by approximately $0.76 million, or 93.19%, from approximately
$0.81 million for the nine months ended September 30, 2009 to approximately
$1.57 million for the nine months ended September 30, 2010.
Sales and Marketing.
Our sales and marketing expenses consist primarily of transportation expenses,
advertising expenses, year-end bonuses for the sales team, and other overhead
expenses incurred by the Company’s sales and marketing personnel. Sales and
marketing expenses increased approximately $0.28 million, or 145.51%, from
approximately $0.20 million for the nine months ended September 30, 2009 to
approximately $0.48 million for the nine months ended September 30, 2010.
This increase was primarily attributable to (i) an increase of approximately
$0.18 million in advertisement expenses to promote our brand awareness, (ii) an
increase of approximately $0.03 million in transportation expenses as our sales
volume inflates, and (iii) approximately $0.03 million spent for our direct
stores.
34
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 $0.47 million, or 76.49%, from
approximately $0.62 million for the nine months ended September 30, 2009 to
approximately $1.10 million for the nine months ended September 30, 2010.
This increase was primarily attributable to: i) approximately $0.25 million for
auditing and legal services, ii) approximately $0.07 million for trial
cultivation of corns for the target of enhancing our seed quality, and iii)
increase of approximately $0.04 million for increased travelling expenses and
participation in industry wide conferences and academic conferences to indentify
research and cooperation opportunities. General and administrative expenses are
likely to increase as we continue to expand our production, sourcing capacity,
and distribution capacity throughout northeastern China.
Income from Continuing
Operations
As a
result of the foregoing, our income from operations increased by approximately
$1.46 million, or 28.43%, from approximately $5.20 million for the nine months
ended September 30, 2009 to approximately $6.60 million for the nine months
ended September 30, 2010.
Other Income
(Expenses)
Our other
income (expenses) consists primarily of interest income, interest and finance
costs, other income and expense accounts. Other expense decreased
approximately by $0.05 million, from other expense of approximately $0.07
million for the nine months ended September 30, 2009 to expense of approximately
$0.03 million for the nine months ended September 30, 2010.
Income Tax
Expenses
We are
subject to PRC enterprise income taxes. Our income tax expenses
decreased by approximately $0.69 million, or 53.51%, from approximately $1.28
million for the nine months ended September 30, 2009 to approximately $0.69
million for the nine months ended September 30, 2010. The increase was
primarily attributable to favorable income tax rate obtained in
2010.
Liquidity
and Capital Resources
Our
summary cash flow information is as follows:
For the nine months
ended March 31,
|
For the years
ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Unaudited
|
Unaudited
|
Audited
|
Audited
|
|||||||||||||
Net cash provided by (used in):
|
($ in thousands)
|
($ in thousands)
|
||||||||||||||
Operating
activities
|
$ | 17,353 | $ | 8,864 | $ | (2,655 | ) | $ | (332 | ) | ||||||
Investing
activities
|
$ | (619 | ) | $ | (90 | ) | $ | (163 | ) | $ | (110 | ) | ||||
Financing
activities
|
$ | 299 | $ | (2,046 | ) | $ | 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 $13.22 million, and a working capital surplus of
a/pproximately $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.
35
We had
retained earnings of approximately $11.78 million and $5.80 million as of
September 30, 2010 and December 31, 2009, respectively. As of September
30, 2010, we had cash and cash equivalents of approximately $17.46 million,
total current assets of approximately $19.80 million, and a working capital
surplus of approximately $18.03 million. We have financed our activities to date
principally from the collection of our trade receivables. We believe the
receivables and advances to customers as of September 30, 2010 will be mostly
received in the first half of 2011, which will be sufficient to sustain our
operations.
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 nine month ended September 30, 2009, net cash used in
investing activities increased approximately $0.50 million in the same period of
2010, which was primarily attributable to the prepaid lease of 0.44 million for
land that are used as seed breeding base.
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
during the nine month ended September 30, 2009, offset against proceeds from the
sales of our common stock, while no share offering and bank loans was made for
the three month period ended March 31, 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.
36
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.
In August
2008, we were accused of 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.
37
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.
Recently
Adopted Accounting Pronouncement
In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures: Improving Disclosures about Fair Value Measurements. ASU 2010-06
amends ASC 820 to require a number of additional disclosures regarding
(1) the different classes of assets and liabilities measured at fair value,
(2) the valuation techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers between
Levels 1, 2, and 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years.
The Company does not expect that the adoption of ASU 2010-06 will have a
material impact on its consolidated financial statements.
On March
5, 2010, the FASB issued authoritative guidance to clarify the type of embedded
credit derivative that is exempt from embedded derivative bifurcation
requirements. Specifically, only one form of embedded credit derivative
qualifies for the exemption – one that is related only to the subordination of
one financial instrument to another. As a result, entities that have contracts
containing an embedded credit derivative feature in a form other than such
subordination may need to separately account for the embedded credit derivative
feature. This guidance also has transition provisions, which permit entities to
make a special one-time election to apply the fair value option to any
investment in a beneficial interest in securitized financial assets, regardless
of whether such investments contain embedded derivative features. This guidance
is effective on the first day of the first fiscal quarter beginning after June
15, 2010. Early adoption is permitted at the beginning of any fiscal quarter
beginning after March 5, 2010. This amendment is not expected to have a material
impact on the Company’s financial statements
In March
2010, FASB issued an authoritative pronouncement regarding the effect of
denominating the exercise price of a share-based payment awards in the currency
of the market in which the underlying equity securities trades and that currency
is different from (1) entity’s functional currency, (2) functional currency of
the foreign operation for which the employee provides services, and (3) payroll
currency of the employee. The guidance clarifies that an employee share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades should be
considered an equity award assuming all other criteria for equity classification
are met. The pronouncement will be effective for interim and annual periods
beginning on or after December 15, 2010, and will be applied prospectively.
Affected entities will be required to record a cumulative catch-up adjustment
for all awards outstanding as of the beginning of the annual period in which the
guidance is adopted. This amendment is not expected to have a material impact on
the Company’s financial statements.
In April
2010, the FASB issued Update No. 2010-17, or ASU 2010-17, Revenue
Recognition—Milestone Method, which updates the guidance currently included
under topic 605, Revenue Recognition. ASU 2010-17 provides guidance on defining
the milestone and determining when the use of the milestone method of revenue
recognition for research or development transactions is appropriate. It provides
criteria for evaluating if the milestone is substantive and clarifies that a
vendor can recognize consideration that is contingent upon achievement of a
milestone as revenue in the period in which the milestone is achieved, if the
milestone meets all the criteria to be considered substantive. ASU 2010-17 is
effective for milestones achieved in fiscal years, and interim periods within
those years, beginning after June 15, 2010 and should be applied
prospectively. Early adoption is permitted. The Company is currently evaluating
the potential impact, if any, of the new accounting guidance on its consolidated
financial statements.
38
In July
2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosure about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This ASU will significantly expand existing disclosures about the credit quality
of financing receivables and their allowance for credit losses. The ASU affects
all entities with financing receivables, excluding short-term trade accounts
receivable or receivables measured at fair value or lower of cost or fair value.
The extent of the effect depends on the relative significance of financing
receivables to an entity’s operations and financial position. For public
companies, the disclosures as of the end of a reporting period (such as
accounting policies for each portfolio segment, ending balances of allowance for
credit losses and credit-quality indicators) are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period (such as modifications and
roll forward of allowance for credit losses) are effective for interim and
annual reporting periods beginning on or after December 15, 2010. The Company is
currently evaluating the potential impact, if any, of the new accounting
guidance on its consolidated financial statements, however the amendment is not
expected to have any impact on the Company’s financial statements.
Statutory
Reserves
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.
39
BUSINESS
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 Qiqihar Deli 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.
Fuer,
established in 2003, is a leading manufacturer and supplier of seeds and
fertilizer product in the 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.
40
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.
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 the 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 employees and 64 temporary workers,
among which 27 are research and technical staff and 75 are with the sales team.
The Company procure raw seeds from local breeders under exclusive contract,
which is valid for 1 year. 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
35.18% increase in revenue for the nine month ended September of 2010, as
compared to the same period 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 9 months ended
September 30,
|
For the years ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Unaudited
|
Unaudited
|
Audited
|
Audited
|
|||||||||||||
($ in thousands)
|
($ in thousands)
|
|||||||||||||||
Summary
of Historical Income
|
||||||||||||||||
Sales
|
$
|
19,682
|
$
|
14,560
|
$
|
16,168
|
$
|
11,626
|
||||||||
Gross
profit
|
$
|
8,175
|
$
|
6,007
|
$
|
6,699
|
$
|
4,761
|
||||||||
Net
income
|
$
|
5,985
|
$
|
3,843
|
$
|
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.
41
Diversified sales channels -
The Company was the first seed provider to launch its brand stores in
northeastern China. In March, 2010 we have opened 5 direct-owned sales stores
and over 43 branded 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 the 2nd in the
world, immediately following the United States. In terms of quantity, seeds
consumption in China ranks the 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 fertilizers, 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 control 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 the
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.
42
For the years 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 | 53.36 | % | ||||||||
Soybean
seeds
|
1,287,337 | 7.96 | % | 1,825,048 | 15.63 | % | ||||||||||
Rice
seeds
|
1,062,094 | 6.57 | % | 1,317,461 | 11.74 | % | ||||||||||
Pesticides
|
247,012 | 1.53 | % | 271,507 | 2.32 | % | ||||||||||
Vegetables
seeds
|
419,325 | 2.59 | % | 100,810 | 0.86 | % | ||||||||||
Fertilizers
|
2,308,656 | 14.28 | % | 1,624,836 | 13.91 | % | ||||||||||
Plant
additives
|
299,715 | 1.85 | % | 254,338 | 2.18 | % | ||||||||||
Total
|
$ | 16,168,421 | 100 | % | $ | 11,626,071 | 100 | % |
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 branded 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 September 30, 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.
43
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.
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 owned stores and 43 branded 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 the Provinces
of 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.
44
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.
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 technical staffs 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.
45
Research and
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 first hand 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.
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. In 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.
46
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.
.
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 acres, 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 acres, 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 side effectr.
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.
Seed market ranked at the
2nd position 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.
47
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.
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 hectares, 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.
48
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
hectares, 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 tons. 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.
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 hectares 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.
49
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.
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.
50
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 from 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 preemption and bargained price of the patent or
long term exclusive franchise rights over the new seed variety.
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 to 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 and 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:
51
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.
52
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.
Participating in Research of
GM Crops and Building 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.
Legal
Proceedings
From time to time, we may be involved
in litigation relating to claims arising out of its operations in the normal
course of business. Any of these claims could subject us to costly litigation
and, while we generally believe that we have adequate insurance to cover many
different types of liabilities, our insurance carriers may deny coverage or our
policy limits may be inadequate to fully satisfy any damage awards or
settlements. If this were to happen, the payment of any such awards could have a
material adverse effect on our results of operations and financial position.
Additionally, any such claims, whether or not successful, could damage our
reputation and business. We are not a party to, or threatened by, any legal
proceedings, the adverse outcome of which, in management’s opinion, individually
or in the aggregate, would have a material adverse effect on our results of
operations or financial position.
Corporate
Information
Our principal executive office is
located at North Neiwei Road, Fulaerji District, Qiqihar, Heiloingjiang, China,
161041. Our telephone number at that address is 86-452-6919150. Our website
address is www.fuer.com.cn. The information on our website is not part of this
prospectus.
53
DESCRIPTION
OF PROPERTIES
We have
offices at all operational locations. The facilities were added to with the
expansion of our facilities.
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
December 31, 2010, the Company owned and operated one office building, and 8
workshops and warehouses.
54
DIRECTORS
AND EXECUTIVE OFFICERS
Directors,
Executive Officers and Significant Employees
The following table sets forth the name
and age of each member of our board of directors and/or executive officers, the
positions and offices held by each of them with us, and the period during which
they has served as one of our directors and/or executive officers.
Directors serve until the election and qualification of their successors.
There was no arrangement or understanding between any executive officer or
director and any other person pursuant to which any person was elected as an
executive officer or director. There are no family relationships between
any of our directors, executive officers, director nominees or significant
employees.
Names of Anticipated Officers and
Directors
|
Age
|
Position
|
||
Zhang
Li
|
46
|
Chairman
of the Board and Chief Executive Officer
|
||
Liu
Yuhua
|
46
|
Director
|
||
Wan
Lipeng
|
35
|
Vice
President of Sales and Marketing
|
||
Li
Baojin
|
60
|
Vice
President of Production
|
||
Li Haitao
|
33
|
Chief Technology Officer
|
||
Yu HaiFei | 41 |
Chief
Financial
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:
Zhang Li has been Chairman of
the Board and CEO since December 2010. Mr. Zhang has been the Chairman of
the Board since December 2010. Mr. Zhang has been the Company’s Chief
Executive Officer since June 2010. 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 the operation of seeds breading
and retailing businesses and was the founder of Qiqihar Fuer Agronomy Inc. Since
2006, Mr. Zhang has served as deputy of the provincial people’s congress of
Heilongjiang. Mr. Zhang completed his MBA degree from Tsinghua University in
2007.
Liu Yuhua has been a Director
since December 2010. Ms. Liu served as Administrative Supervisor of Fuer
Agronomy Inc. from 1995 to 2008. From 1992 to 1995, Ms. Liu served as Financial
Supervisor of Fulaerji Science & Technology Co., Ltd. From 1989 to
1992, Ms. Liu served as the Head of the Human Resources Department of Fulaerji
Science & Technology Research Institute. Ms. Liu has 18 years of experience
in financial management. Ms. Liu received her Associate Degree in Enterprise
Management from Heilongjiang Bayi Agricultural University in 1989.
Wan Lipeng has been our Vice
President of Sales and Marketing since June 2010. 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.
55
Li Baojin has been our Vice
President of Production since June 2010. 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 bachelor degree in business administration
from Northeast Academy of Heavy Mechanics in 1967.
Li Haitao has been our Chief
Technology Officer since June 2010. 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 times of the 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 bachelor degree in seed breeding from
Heilongjiang Academy of Agriculture in 1999.
Yu Haifei has been
our Chief Financial Officer since June 2010. Mr. Yu has served as the
Chief Financial Officer of Qiqihar Fuer Agronomy Inc. since its establishment in
2003. From September 1991 to March 2003 he served as manager of the accounting
department of Fulaerji Institution of Agriculture Research. Mr. Yu has 19 years
of experience in accounting and budgeting.
To our
knowledge, during the last five years, none of our directors and executive
officers (including those of our subsidiaries) has:
|
¨
|
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.
|
|
¨
|
Been
convicted in a criminal proceeding or been subject to a pending criminal
proceeding, excluding traffic violations and other minor
offenses.
|
|
¨
|
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.
|
|
¨
|
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.
56
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.
57
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.
58
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 and 2010 in all capacities. No
executive officers received compensation of $100,000 or more in 2009 or
2010.
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity
Incentive Plan
Compensation
Earnings ($)
|
Non-
qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||
Zhang
Li, Chairman of the Board and Chief Executive Officer(2)
|
2009
|
2,361
|
43,854
|
—
|
—
|
—
|
—
|
—
|
46,485
|
||||||||||||||
2010
|
2,655 | 44,256 | — | — | — | — | — | 46,911 | |||||||||||||||
Wan
Lipeng, Vice-president of sales (3)
|
2009
|
2,361
|
21,927
|
—
|
—
|
—
|
—
|
—
|
24,558
|
||||||||||||||
2010
|
2,655 | 22,128 | — | — | — | — | — | 24,783 | |||||||||||||||
Li
Baojin, Vice President of Production (4)
|
2009
|
2,361
|
14,618
|
—
|
—
|
—
|
—
|
—
|
17,249
|
||||||||||||||
2010
|
2,655 | 17,702 | — | — | — | — | — | 20,357 | |||||||||||||||
Li
Haitao, Chief Technology Officer (5)
|
2009
|
2,361
|
14,618
|
—
|
—
|
—
|
—
|
—
|
17,249
|
||||||||||||||
2010
|
2,124 | 17,702 | — | — | — | — | — | 19,826 | |||||||||||||||
Yu
Haifei,
Chief
Financial Officer
|
2009
|
2,631 | 14,618 |
—
|
—
|
—
|
—
|
—
|
17,249 | ||||||||||||||
2010
|
2,124 | 17,702 | — | — | — | — | — | 19,826 |
(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.
|
59
(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.
|
(5)
|
Mr
Yu Haifei served Qiqihar Fuer as Accounting Chief, and was appointed as
our Chief Financial Officer subsequent to the Share
Exchange.
|
Employment
Agreements
Currently, we do not have an employment
agreement with any of our executive offices.
Benefit
Plans
We do not have any profit sharing plan
or similar plans for the benefit of our officers, directors or employees.
However, we may establish such plans in the future.
Board
Compensation
Currently, our directors do not receive
any compensation for serving as directors for Fuer International.
Severance
and Change of Control Agreement
As of December 31, 2010, we had no
agreements or arrangements providing for payments to a named executive officer
in connection with any termination.
Outstanding
Equity Awards at Fiscal Year End
As of December 31, 2010, none of our
named executive officers held any stock options.
60
SELLING
STOCKHOLDERS
The
following table sets forth information with respect to the selling stockholders
and the respective common stock beneficially owned by each selling stockholder
that may be offered under this prospectus. When we refer to the “selling
stockholders” in this prospectus, we mean those persons listed in the table
below, as well as the permitted pledgees, donees, assignees, transferees,
successors and others who later hold any of the selling stockholders’ interests.
The information is based on information that has been provided to us by or on
behalf of the selling stockholders. Because the selling stockholders may from
time to time use this prospectus to offer all or some portion of the common
stock offered hereby, we cannot provide an estimate as to the amount or
percentage of any such type of security that will be held by any selling
stockholders upon termination of any particular offering or sale under this
prospectus. We also cannot advise you as to whether the selling stockholders
will in fact sell any or all of the shares of common stock listed next to their
names below. In addition, the selling stockholders may have sold, transferred or
otherwise disposed of, or may sell, transfer or otherwise dispose of, at any
time and from time to time, the shares of common stock in transactions exempt
from the registration requirements of the Securities Act, after the date on
which they provided the information set forth on the table below. Information
concerning the selling stockholders may change from time to time, and any
changed information will be set forth if and when required in prospectus
supplements or other appropriate forms permitted to be used by the
SEC.
For the
purposes of the following table, the number of shares of our common stock
beneficially owned has been determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, and such information is not necessarily
indicative of beneficial ownership for any other purpose. Under Rule 13d-3,
beneficial ownership includes any shares as to which a selling stockholder has
sole or shared voting power or investment power and also any shares which that
selling stockholder has the right to acquire within 60 days of the date of this
prospectus through the exercise of any stock option, restricted stock unit,
warrant or other rights.
Name of Selling Stockholder
|
Number of
Shares
Beneficially
Owned
Prior to
Offering
|
Number of
Shares
Offered
|
Number of
Shares
Beneficially
Owned
After
Offering
|
% of
Common
Stock
Beneficially
Owned
After the
Offering
|
|||||||
Allied
Merit International Investment Inc.
|
1,018,868
|
1,018,868
|
0
|
7.86
|
%
|
||||||
Capital Soldier Limited | 372,344 | 372,344 | 0 | 2.87 | % | ||||||
Virtue World Limited | 763,922 | 763,922 | 0 | 5.90 | % | ||||||
TOTAL
|
2,155,134
|
2,155,134
|
0
|
16.63
|
%
|
61
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of December 31, 2010, information concerning the
beneficial ownership of shares of our common stock held by our directors, our
named executive officers, our directors and executive officers as a group, and
each person known by us to be a beneficial owner of 5% or more of our
outstanding common stock.
Beneficial ownership is determined
according to the rules of the SEC. Beneficial ownership means that a
person has or shares voting or investment power of a security and includes any
securities that person has the right to acquire within 60 days after the
measurement date, such as pursuant to options, warrants or convertible
notes. Except as otherwise indicated, we believe that each of the
beneficial owners of our common stock listed below, based on information each of
them has given to us, has sole investment and voting power with respect to such
beneficial owner’s shares, except where community property or similar laws may
apply. For purposes of the column for shares underlying convertible
securities, in accordance with rules of the SEC, shares of our common stock
underlying securities that a person has the right to acquire within 60 days of
September 30, 2010 are deemed to be beneficially owned by such person for the
purpose of computing the percentage ownership of that person, but we do not
treat them as outstanding for the purpose of computing the ownership percentage
of any other person.
62
Common
Stock Beneficially Owned
|
||||||||||||||||
Name
and Address of Beneficial
Owner
|
Total
Outstanding
|
Shares
Underlying
|
Total
|
Percent
(2)
|
||||||||||||
Convertible
Securities
(1)
|
||||||||||||||||
Directors
and Named Executive Officers
|
|
|
|
|||||||||||||
Zhang
Li
|
7,327,749 | 0 | 7,327,749 | 56.55 | % | |||||||||||
Liu
Yuhua
|
0 | 0 | 0 | 0 | % | |||||||||||
Wan
Lipeng
|
0 | 0 | 0 | 0 | % | |||||||||||
Li
Baojin
|
0 | 0 | 0 | 0 | % | |||||||||||
Li
Haitao
|
0 | 0 | 0 | 0 | % | |||||||||||
Yu Haifei | 0 | 0 | 0 | 0 | % | |||||||||||
Directors
and executive officers as a group (6
persons)
|
7,700,093 | 0 | 7,700,093 | 59.42 | % | |||||||||||
5%
Beneficial Owners
|
||||||||||||||||
Oriental
Agriculture
P.O.
Box 957, Offshore Incorporations Center, Road Town, Tortola, British
Virgin Islands
|
7,327,749 | 0 | 7,327,749 | 56.55 | % | |||||||||||
Faith
Origin
Limited
Quastisky Building,P.O. Box,4389, Road Town, Tortola, British Virgin
Islands
|
1,243,968 | 0 | 1,243,698 | 9.60 | % | |||||||||||
Trade
Ever Holdings
P.O.
Box 957, Offshore Incorporations Center, Road Town, Tortola, British
Virgin Islands
|
1,269,884 | 0 | 1,269,884 | 9.8 | % | |||||||||||
Virtue
World
Quastisky
Building,P.O. Box 4389, Road Town, Tortola, British Virgin
Islands
|
763,922 | 0 | 763,922 | 5.9 | % | |||||||||||
Allied
Merit International Investment Inc.
802,
8/F Eton Tower Hysan Ave Causeway Bay, Hong Kong
|
1,018,868 | 0 | 1,018,868 | 7.86 | % |
63
Change
in Control
The
Company is not aware of any arrangements including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the registrant.
64
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions
with Related Persons
We do not have any trasactions with any
related persons.
Review,
Approval or Ratification of Transactions with Related Persons
Although we have not adopted formal
procedures for the review, approval or ratification of transactions with related
persons, we adhere to a general policy that such transactions should only be
entered into if they are on terms that, on the whole, are no more favorable, or
no less favorable, than those available from unaffiliated third parties and
their approval is in accordance with applicable law. Such transactions
require the approval of our board of directors. The above related
party transactions were approved by our board of directors.
65
DESCRIPTION
OF SECURITIES
The
following description is based on relevant portions of the
Nevada General Corporation Law and on our charter and bylaws. This
summary is not necessarily complete, and we refer you to the Nevada General
Corporation Law and our charter and bylaws for a more detailed description of
the provisions
summarized
below.
The
Company is authorized by its articles of incorporation, as amended and restated,
to issue an aggregate of 210,000,000 shares of capital stock, of which
200,000,000 are shares of common stock, par value $0.001 per share (the "Common
Stock") and 10,000,000 are shares of preferred stock, par value $0.001 per
share (the "Preferred Stock").
As
of December 31, 2010 there are 12,958,032 shares of common stock outstanding.
There are no outstanding shares of preferred stock, and there are no outstanding
options or warrants to purchase our stock. No stock has been authorized for
issuance under any equity compensation plans.
Common Stock
All
shares of our common stock have equal rights as to earnings, assets, dividends
and voting privileges and, when they are issued, will be duly authorized,
validly issued, fully paid and nonassessable. Distributions may be paid to the
holders of our common stock if, as and when authorized by our Board of Directors
and declared by us out of assets legally available therefor. Shares of our
common stock have no preemptive, conversion or redemption rights and are freely
transferable, except where their transfer is restricted by federal and state
securities laws or by contract. In the event of a liquidation, dissolution or
winding up of us, each share of our common stock would be entitled to share
ratably in all of our assets that are legally available for distribution after
we pay all debts and other liabilities and subject to any preferential rights of
holders of our preferred stock, if any preferred stock is outstanding at such
time.
Each share of our common stock is entitled to one vote on all matters submitted
to a vote of stockholders, including the election of directors. Except as
provided with respect to any other class or series of stock, the holders of our
common stock will possess exclusive voting power. There is no cumulative voting
in the election of directors, which means that holders of a majority of the
outstanding shares of common stock will be able to elect all of our directors,
and holders of less than a majority of such shares will be unable to elect any
director.
Preferred Stock
Our
articles of incorporation authorize the issuance of up to 10,000,000 shares of
Preferred Stock with designations, rights and preferences determined from time
to time by our Board of Directors. Accordingly, our Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting, or other rights which could adversely affect
the voting power or other rights of the holders of the Common Stock. In the
event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although we have no present intention to issue any
shares of our authorized Preferred Stock, there can be no assurance that the
Company will not do so in the future.
66
SHARES
ELIGIBLE FOR FUTURE SALE
The sale
of a substantial amount of our common stock in the public market after this
offering could adversely affect the prevailing market price of our common stock.
As of December 31, 2010, we had 12,958,032 shares of common stock outstanding,
assuming no exercise of outstanding options or warrants. 15,126 of these shares
of common stock are freely tradable, subject to Rule 144 limitations applicable
to affiliates and the lock-up agreements described in this document. In
addition, the 2,155,134 shares of common stock registered pursuant to this
Registration Statement will be freely tradable once this Registration Statement
is declared effective by the Securities and Exchange Commission without
restriction or further registration under the Securities Act, unless the shares
are purchased by “affiliates” as that term is defined in Rule 144 under the
Securities Act. Any shares purchased by an affiliate may not be resold except
pursuant to an effective registration statement or an applicable exemption from
registration, including an exemption under Rule 144 of the Securities Act. These
restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act. These rules are summarized
below.
Rule
144
In
general, under Rule 144 as currently in effect, a person who has beneficially
owned shares of our common stock for at least six months from the later of the
date those shares of common stock were acquired from us or from an affiliate of
ours would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of:
|
·
|
one
percent of the number of shares of common stock then outstanding;
or
|
|
·
|
the
average weekly trading volume of the common stock on Nasdaq during the
four calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale of any shares of common
stock.
|
Sales of
shares of common stock under Rule 144 may also be subject to manner of sale
provisions and notice requirements and will be subject to the availability of
current public information about us.
Under
Rule 701 of the Securities Act, each of our employees, consultants or advisors
who purchased shares from us in connection with a compensatory stock plan or
other written agreement is eligible to resell those shares in reliance on Rule
144, but without compliance with some of the restrictions, including the holding
period, contained in Rule 144.
No
precise prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
our common stock prevailing from time to time. We are unable to estimate the
number of our shares that may be sold in the public market pursuant to Rule 144
or Rule 701 because this will depend on the market price of our common stock,
the personal circumstances of the sellers and other factors. Nevertheless, sales
of significant amounts of our common stock in the public market could adversely
affect the market price of our common stock.
67
PLAN
OF DISTRIBUTION
The
shares covered by this prospectus may be offered and sold from time to time by
the selling stockholders. The term “selling stockholder” includes pledgees,
donees, transferees or other successors in interest selling shares received
after the date of this prospectus from each selling stockholder as a pledge,
gift, partnership distribution or other non-sale related transfer. The number of
shares beneficially owned by a selling stockholder will decrease as and when it
effects any such transfers. The plan of distribution for the selling
stockholders’ shares sold hereunder will otherwise remain unchanged, except that
the transferees, pledgees, donees or other successors will be selling
stockholders hereunder. To the extent required, we may amend and supplement this
prospectus from time to time to describe a specific plan of
distribution.
The
selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling stockholders
may make these sales at prices and under terms then prevailing or at prices
related to the then current market price. The selling stockholders may also make
sales in negotiated transactions. The selling stockholders may offer their
shares from time to time pursuant to one or more of the following
methods:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
one
or more block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the
transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
public
or privately negotiated
transactions;
|
The
selling stockholders may enter into derivative transactions with third parties,
or sell securities not covered by this prospectus to third parties in privately
negotiated transactions. If the applicable prospectus supplement indicates, in
connection with those derivatives, the third parties may sell securities covered
by this prospectus and the applicable prospectus supplement, including in short
sale transactions. If so, the third party may use securities pledged by the
selling stockholders or borrowed from the selling stockholders or others to
settle those sales or to close out any related open borrowings of stock, and may
use securities received from the selling stockholders in settlement of those
derivatives to close out any related open borrowings of stock.
|
·
|
on
the Over-the-Counter Bulletin Board (or through the facilities of any
national securities exchange or U.S. inter-dealer quotation system of a
registered national securities association, on which the shares are then
listed, admitted to unlisted trading privileges or included for
quotation);
|
|
·
|
through
underwriters, brokers or dealers (who may act as agents or principals) or
directly to one or more purchasers;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
In
connection with distributions of the shares or otherwise, the selling
stockholders may:
|
·
|
enter into
hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the shares in the course of
hedging the positions they assume;
|
|
·
|
sell
the shares short and redeliver the shares to close out such short
positions;
|
68
|
·
|
enter
into option or other transactions with broker-dealers or other financial
institutions which require the delivery to them of shares offered by this
prospectus, which they may in turn resell;
and
|
|
·
|
pledge
shares to a broker-dealer or other financial institution, which, upon a
default, they may in turn resell.
|
In
addition to the foregoing methods, the selling stockholders may offer their
shares from time to time in transactions involving principals or brokers not
otherwise contemplated above, in a combination of such methods or described
above or any other lawful methods. The selling stockholders may also transfer,
donate or assign their shares to lenders, family members and others and each of
such persons will be deemed to be a selling stockholder for purposes of this
prospectus. The selling stockholders or their successors in interest may from
time to time pledge or grant a security interest in some or all of the shares of
common stock, and if the selling stockholders default in the performance of
their secured obligations, the pledgees or secured parties may offer and sell
the shares of common stock from time to time under this prospectus; provided
however in the event of a pledge or then default on a secured obligation by the
selling stockholder, in order for the shares to be sold under this registration
statement, unless permitted by law, we must distribute a prospectus supplement
and/or amendment to this registration statement amending the list of selling
stockholders to include the pledge, secured party or other successors in
interest of the selling stockholder under this prospectus.
The
selling stockholders may also sell their shares pursuant to Rule 144 under the
Securities Act, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, the availability of certain current public information concerning
the issuer, the resale occurring following the required holding period under
Rule 144 and the number of shares being sold during any three-month period not
exceeding certain limitations.
Sales
through brokers may be made by any method of trading authorized by any stock
exchange or market on which the shares may be listed or quoted, including block
trading in negotiated transactions. Without limiting the foregoing, such brokers
may act as dealers by purchasing any or all of the shares covered by this
prospectus, either as agents for others or as principals for their own accounts,
and reselling such shares pursuant to this prospectus. The selling stockholders
may effect such transactions directly, or indirectly through underwriters,
broker-dealers or agents acting on their behalf. In effecting sales,
broker-dealers or agents engaged by the selling stockholders may arrange for
other broker-dealers to participate. Broker-dealers or agents may receive
commissions, discounts or concessions from the selling stockholders, in amounts
to be negotiated immediately prior to the sale (which compensation as to a
particular broker-dealer might be in excess of customary commissions for routine
market transactions).
In
offering the shares covered by this prospectus, the selling stockholders, and
any broker-dealers and any other participating broker-dealers who execute sales
for the selling stockholders, may be deemed to be “underwriters” within the
meaning of the Securities Act in connection with these sales. Any profits
realized by the selling stockholders and the compensation of such broker-dealers
may be deemed to be underwriting discounts and commissions.
We are
required to pay all fees and expenses incident to the registration of the
shares.
We have
agreed to indemnify the selling stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities
Act.
69
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Pursuant
to Article 7 of our Articles of Incorporation and Nevada’s Revised Business
Statutes, we adopted Bylaws with the following indemnification provisions for
our directors and officers:
“Section
8.1. Indemnification. No officer or director shall be personally liable for any
obligations arising out of any acts or conduct of said officer or director
performed for or on behalf of the Corporation. The Corporation shall and does
hereby indemnify and hold harmless each person and his heirs and administrators
who shall serve at any time hereafter as a director or officer of the
Corporation from and against any and all claims, judgments and liabilities to
which such persons shall become subject by reason of any action alleged to have
been heretofore or hereafter taken or omitted to have been taken by him as such
director or officer, and shall reimburse each such person for all legal and
other expenses reasonably incurred by him in connection with any such claim of
liability; including power to defend such person from all suits as provided
for under the provisions of the Nevada Corporation Laws; provided, however that
no such person shall be indemnified against, or be reimbursed for, any expense
incurred in connection with any claim or liability arising out of his own
gross negligence or willful misconduct. The rights accruing to any person under
the foregoing provisions of this section shall not exclude any other right to
which he may lawfully be entitled, nor shall anything herein contained restrict
the right of the Corporation to indemnify or reimburse such person in any proper
case, even though not specifically herein provided for. The Corporation, its
directors, officers, employees and agents shall be fully protected in taking any
action or making any payment or in refusing so to do in reliance upon the advice
of counsel.
Section
8.2. Other Indemnification. The indemnification herein provided shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer or employee and shall inure
to the benefit of the heirs, executors and administrators of such a
person.
Section
8.3. Insurance. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer or employee of the Corporation, or
is or was serving at the request of the Corporation in such capacity for another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any capacity, or arising
out of his status as such, whether or not the Corporation would have the power
to indemnify him against liability under the provisions of this Article VIII or
the laws of the State of Nevada.
Section
8.4. Settlement by Corporation. The right of any person to be indemnified shall
be subject always to the right of the Corporation by its Board of Directors, in
lieu of such indemnity, to settle any such claim, action, suit or proceeding at
the expense of the Corporation by the payment of the amount of such settlement
and the costs and expenses incurred in connection therewith.”
These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant's executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities
Act.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. No pending material litigation
or proceeding involving our directors, executive officers, employees or other
agents as to which indemnification is being sought exists, and we are not aware
of any pending or threatened material litigation that may result in claims for
indemnification by any of our directors or executive officers.
70
LEGAL
MATTERS
The
validity of the shares sold by us under this prospectus will be passed upon for
us by DLA Piper LLP (US), New York.
EXPERTS
The
consolidated financial statements as of December 31, 2009 and 2008, included
herein, have been audited by Sherb & Co. LLP, an independent registered
public accounting firm, as stated in their report dated June 21,, 2010, which is
included herein, and such consolidated financial statements have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
with respect to the common stock being offered pursuant to this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules filed as part of the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, we refer you to the copy of the contract
or document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. You may obtain copies of this information by mail from the Public
Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C.
20549, at prescribed rates. You may obtain information on the operation of the
public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet website that contains reports, proxy statements and other
information about issuers, like us, that file electronically with the SEC. The
address of that website is www.sec.gov .
71
CHINA
GOLDEN HOLDINGS, LTD. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
As
of December 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Operation and Comprehensive (Loss) Income
For
the Years Ended December 31, 2009 and 2008
|
F-4
|
Consolidated
Statements of Changes in Shareholder’s Equity
For
the Years Ended December 31, 2009 and 2008
|
F-5
|
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2009 and 2008
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7 to F-18
|
FUER
INTERNATIONAL INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Consolidated
Balance Sheets
As
of September 30, 2010 and December 31, 2009
|
F-19
|
Consolidated
Statements of Operation and Comprehensive (Loss) Income
For
the Three and Nine Months Ended September 30, 2010 and
2009
|
F-20
|
Consolidated
Statements of Cash Flows
For
the Three and Nine Months Ended September 30, 2010 and
2009
|
F-21
|
Notes
to Consolidated Financial Statements
|
F-22 to F-34
|
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 operations and comprehensive (loss) 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 HOLDINGS, LTD.
CONSOLIDATED
BALANCE SHEETS
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(Audited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and Cash Equivalents
|
$ | 155,425 | $ | 2,772,020 | ||||
Restricted
cash
|
219,580 | 434,140 | ||||||
Trade
receivables, net
|
2,066,430 | 413,626 | ||||||
Other
receivables, net
|
383,817 | 35,380 | ||||||
Inventories
|
7,721,554 | 6,460,321 | ||||||
Advances
to suppliers
|
2,670,374 | - | ||||||
Current
Portion of prepaid leases
|
||||||||
Total
Current Assets
|
13,217,180 | 10,115,487 | ||||||
- | ||||||||
Property,
plant and equipment, net
|
2,739,385 | 2,921,828 | ||||||
Intangibles,
net
|
181,909 | 61,337 | ||||||
Prepaid
leases
|
- | - | ||||||
Total
Assets
|
$ | 16,138,474 | $ | 13,098,652 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Liabilities
|
||||||||
Short
term loans
|
$ | 2,193,881 | $ | 2,042,543 | ||||
Accounts
payable and accrued expenses
|
504,965 | 881,146 | ||||||
Advances
from customers
|
303,669 | 316,933 | ||||||
Income
tax payable
|
596,026 | 331,563 | ||||||
Total
Liabilities
|
3,598,541 | 3,572,185 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Common
stock; $1 par value; 50,000 authorized, 50,000 issued and
outstanding
|
50,000 | - | ||||||
Additional
paid in capital
|
4,509,453 | 4,509,453 | ||||||
Statutory
reserves
|
1,112,119 | 797,844 | ||||||
Retained
earnings
|
5,797,827 | 3,173,904 | ||||||
Accumulated
other comprehensive
|
1,070,534 | 1,045,266 | ||||||
Total
Stockholders' Equity
|
12,539,933 | 9,526,467 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 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 AND COMPREHENSIVE (LOSS) INCOME
For the Years Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
(Audited)
|
(Audited)
|
|||||||
Sales
|
$
|
16,168,421
|
$
|
11,626,071
|
||||
Cost
of goods sold
|
9,469,206
|
6,865,447
|
||||||
Gross
profit
|
6,699,215
|
4,760,624
|
||||||
Operating
and administrative expenses:
|
||||||||
Sales
and marketing
|
1,345,927
|
1,119,204
|
||||||
General
and administrative
|
1,342,509
|
832,641
|
||||||
Total
operating expenses
|
2,688,436
|
1,951,845
|
||||||
Income
from operations
|
4,010,779
|
2,808,779
|
||||||
Other
income (expenses):
|
||||||||
Interest
income
|
20,713
|
16,090
|
||||||
Interest
expense
|
(76,623
|
)
|
(76,133
|
)
|
||||
Other
income, net
|
(14,810
|
)
|
(6,487
|
)
|
||||
Non
operating Income (expenses)
|
(7,009
|
)
|
3,873
|
|||||
Other
income (expenses), total
|
(77,729
|
)
|
(62,658
|
)
|
||||
Income
before income tax
|
3,933,050
|
2,746,121
|
||||||
Income
tax expenses
|
994,852
|
692,744
|
||||||
Net
income
|
2,938,198
|
2,053,378
|
||||||
Other
comprehensive income:
|
||||||||
Foreign
currency translation adjustments
|
25,268
|
500,245
|
||||||
Comprehensive
income
|
$
|
2,963,466
|
$
|
2,553,623
|
The
accompanying notes are an integral part of these statements.
F-4
CHINA
GOLDEN HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF SHARESHOLDERS' EQUITY
Common Stock
|
Accumulated
|
|||||||||||||||||||||||||||
Number
of
Shares
|
Amount
|
Additional
Paid In
Capital
|
Statutory
Reserves
|
Retained
Earnings
|
Other
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 |
The
accompanying notes are an integral part of these statements.
F-5
CHINA
GOLDEN HOLDINGS, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
(Audited)
|
(Audited)
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
income
|
$ | 2,938,198 | $ | 2,053,378 | ||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities
|
||||||||
Depreciation
|
213,260 | 215,956 | ||||||
Amortization
|
14,131 | 10,054 | ||||||
Loss
from disposal of long term assets
|
4,882 | 12,523 | ||||||
Allowances
for trade receivables
|
323,231 | (16,607 | ) | |||||
Changes
in current assets and liabilities
|
||||||||
Restricted
cash
|
215,524 | (290,950 | ) | |||||
Trade
receivables
|
(1,974,117 | ) | 830,333 | |||||
Other
receivables
|
(348,163 | ) | (15,846 | ) | ||||
Inventories
|
(1,244,500 | ) | (1,049,935 | ) | ||||
Prepaid
leases
|
- | - | ||||||
Advances
to suppliers
|
(2,668,938 | ) | 65,356 | |||||
Accounts
payable and accrued expenses
|
(378,168 | ) | (1,288,909 | ) | ||||
Advances
from customers
|
(14,131 | ) | (681,617 | ) | ||||
Income
tax payables
|
263,497 | (175,724 | ) | |||||
Net
cash used in operating activities
|
$ | (2,655,294 | ) | $ | (331,988 | ) | ||
Cash
flow from investing activities:
|
||||||||
Purchase
of property plant and equipment
|
(28,828 | ) | (111,129 | ) | ||||
Proceeds
from disposal of equipment
|
292 | 1,005 | ) | |||||
Purchase
of intangible assets
|
(134,486 | ) | - | |||||
Net
cash used in investing activities
|
(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
|
(2,046,520 | ) | (1,924,651 | ) | ||||
Net
cash provided by financing activities
|
196,180 | 976,689 | ||||||
Currency
translation adjustment
|
5,541 | 148,588 | ||||||
Net
(Decrease) Increase in cash and cash equivalents
|
(2,616,595 | ) | 683,165 | |||||
Cash
and cash equivalents - beginning balance
|
2,772,020 | 2,088,855 | ||||||
Cash
and cash equivalents - ending balance
|
$ | 155,425 | $ | 2,772,020 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Interest
paid
|
$ | 76,596 | $ | 24,853 | ||||
Income
taxes paid
|
994,852 | 692,744 | ||||||
$ | 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
|
F-7
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.
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.
|
F-8
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.
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)
|
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.
(c)
|
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.
(d)
|
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.
F-9
December 31,
|
||||
2009
|
2008
|
|||
(audited)
|
(audited)
|
|||
Exchange
Rate at Period End
|
US$1=RMB6.8282
|
US$1=RMB6.8346
|
||
Average
Exchange rate for the Period
|
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.
(e)
|
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)
|
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.
(g)
|
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.
F-10
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.
(h)
|
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.
|
(i)
|
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.
(j)
|
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.
(k)
|
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 December 31, 2009 and December
31, 2008, respectively.
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.
|
(l)
|
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.
(m)
|
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.
F-11
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
|
(n)
|
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.
(o)
|
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.
(p)
|
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.
(q)
|
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.
F-12
(r)
|
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.
(s)
|
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.
(t)
|
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.
(u)
|
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.
(v)
|
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,
included net income and unrealized gains from foreign currency translation
adjustments.
(w)
|
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.
(x)
|
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 year
ended December 31, 2009, subsequent events were evaluated by the Company as of
the date on which the consolidated financial statements at and for the year
ended December 31, 2009, were available to be released.
F-13
|
(y)
|
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.
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.
F-14
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.
NOTE
3 – TRADE
RECEIVABLES
At
December 31, 2009 and 2008 accounts receivable consisted of the
following:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Audited
|
Audited
|
|||||||
Trade
receivables
|
$ | 2,398,297 | $ | 422,067 | ||||
Less:
Allowance for receivables
|
(331,867 | ) | (8,441 | ) | ||||
$ | 2,066,430 | $ | 413,626 |
NOTE
4 – INVENTORIES
At
December 31, 2009 and 2008, the inventories consisted of the
following:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Audited
|
Audited
|
|||||||
Raw
materials
|
$ | 2,903,920 | $ | 2,068,663 | ||||
Finished
goods
|
4,817,634 | 4,391,658 | ||||||
$ | 7,721,554 | $ | 6,460,321 |
NOTE
5 – PROPERTY, PLANT
AND EQUIPMENT
At
December 31, 2009 and 2008, the following are the details of the property and
equipment:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Audited
|
Audited
|
|||||||
Property
and Plant
|
$ | 2,713,547 | $ | 2,706,817 | ||||
Operation
Equipment
|
605,576 | 598,235 | ||||||
Office
Equipment
|
54,684 | 62,912 | ||||||
Vehicle
|
98,938 | 81,952 | ||||||
3,472,745 | 3,449,916 | |||||||
Accumulated
Depreciation
|
(733,360 | ) | (528,088 | ) | ||||
Total
|
$ | 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-15
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.
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:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Audited
|
Audited
|
|||||||
5.31%
loan payable to Agriculture Development Bank of China for one year term,
maturing on November 5, 2010, collateralized with
buildings.
|
$
|
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
|
||||||
$
|
2,193,881
|
$
|
2,042,543
|
NOTE
8 – ACCOUNTS PAYABLE
AND ACCRUED EXPENSES
Accounts
payable and accrued expense comprised of account payables, salary payables, and
due to related parties. At December 31, 2009 and 2008, details of accounts
payables and accrued expenses were:
December 31,
|
||||||||
2009
|
2008
|
|||||||
(Audited)
|
(Audited)
|
|||||||
Accounts
payable
|
$
|
494,927
|
$
|
880,445
|
||||
Due
to related parties
|
10,038
|
701
|
||||||
$
|
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.
F-16
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 years ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Audited
|
Audited
|
|||||||
China
statutory rates
|
%
|
25
|
%
|
25
|
%
|
|||
Non-deductible
items
|
0.3
|
%
|
0.3
|
%
|
||||
Total
provision for income taxes
|
%
|
25.3
|
%
|
25.3
|
%
|
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.
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.
F-17
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, Fuer International 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.
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 Fuer International 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-18
FUER
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 17,458,847 | $ | 155,425 | ||||
Restricted
cash
|
- | 219,580 | ||||||
Trade
receivables, net
|
1,034,607 | 2,066,430 | ||||||
Other
receivables, net
|
88,785 | 383,817 | ||||||
Inventories
|
774,946 | 7,721,554 | ||||||
Advances
to suppliers and prepaid expenses
|
367,068 | 2,670,374 | ||||||
Biological
assets
|
47,872 | - | ||||||
Current
portion of prepaid leases
|
28,016 | - | ||||||
Total
Current Assets
|
19,800,141 | 13,217,180 | ||||||
- | ||||||||
Property,
plant and equipment, net
|
2,692,032 | 2,739,385 | ||||||
Intangibles,
net
|
290,033 | 181,909 | ||||||
Prepaid
leases
|
405,979 | - | ||||||
Total
Assets
|
$ | 23,188,185 | $ | 16,138,474 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Liabilities
|
||||||||
Short
term debt
|
$ | - | $ | 2,193,881 | ||||
Accounts
payable and accrued expenses
|
795,935 | 504,965 | ||||||
Advances
from customers and other payables
|
83,545 | 303,669 | ||||||
Income
tax payable
|
890,669 | 596,026 | ||||||
Total
Liabilities
|
1,770,149 | 3,598,541 | ||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Common
stock, $0.001 par value; 20,000,000 shares authorized, 12,958,000 shares
issued and outstanding, and 11, 939,132 shares outstanding as of June 30,
2010 and December 31, 2009, respectively.
|
12,958 | 11,550 | ||||||
Additional
paid in capital
|
7,046,494 | 4,547,903 | ||||||
Statutory
reserves
|
1,112,119 | 1,112,119 | ||||||
Retained
earnings
|
11,782,515 | 5,797,827 | ||||||
Accumulated
other comprehensive income
|
1,463,950 | 1,070,534 | ||||||
Total
Shareholders' Equity
|
21,418,036 | 12,539,933 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 23,188,185 | $ | 16,138,474 |
The
accompanying notes are an integral part of the financial
statements
F-19
FUER
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE (LOSS) INCOME
(Unaudited)
For the three months
ended
September 30,
|
For the nine months
ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
|
$ | 739,230 | $ | 560,003 | $ | 19,682,772 | $ | 14,560,417 | ||||||||
Cost
of goods sold
|
433,584 | 344,349 | 11,507,436 | 8,553,018 | ||||||||||||
Gross
profit
|
305,646 | 215,654 | 8,175,336 | 6,007,399 | ||||||||||||
Operating
and administrative expenses:
|
||||||||||||||||
Sales
and marketing
|
215,298 | 104,898 | 481,975 | 196,312 | ||||||||||||
General
and administrative
|
364,354 | 249,595 | 1,085,972 | 615,308 | ||||||||||||
Total
operating and administrative expenses
|
579,652 | 354,493 | 1,567,947 | 811,620 | ||||||||||||
(Loss)
Income from operations
|
(274,006 | ) | (138,839 | ) | 6,607,389 | 5,195,779 | ||||||||||
Other
(expenses) income:
|
||||||||||||||||
Interest
income
|
6,576 | 4,502 | 14,379 | 15,859 | ||||||||||||
Interest
expense
|
(29,947 | ) | (7,832 | ) | (86,392 | ) | (66,902 | ) | ||||||||
Other
income, net
|
92,568 | (1 | ) | 68,658 | (14,806 | ) | ||||||||||
Non
operating Income (expenses)
|
(98,618 | ) | (257 | ) | (23,974 | ) | (6,569 | ) | ||||||||
Other
(expenses) income
|
(29,421 | ) | (3,588 | ) | (27,329 | ) | (72,418 | ) | ||||||||
(Loss)
Income before income tax
|
(303,427 | ) | (142,427 | ) | 6,580,060 | 5,123,361 | ||||||||||
Income
tax (benefit) expenses
|
(31,997 | ) | (37,189 | ) | 595,373 | 1,280,536 | ||||||||||
Net
(Loss) income
|
(335,424 | ) | (179,616 | ) | 5,984,687 | 3,842,825 | ||||||||||
Other
comprehensive (loss) income:
|
||||||||||||||||
Foreign
currency translation adjustments
|
316,448 | 13,713 | 393,416 | 25,887 | ||||||||||||
Comprehensive
(loss) income
|
$ | (18,976 | ) | $ | (165,903 | ) | $ | 6,378,103 | $ | 3,868,712 | ||||||
Earnings
per share
|
||||||||||||||||
Basic
|
$ | (0.03 | ) | $ | (0.02 | ) | $ | 0.50 | $ | 0.32 | ||||||
Diluted
|
$ | (0.03 | ) | $ | (0.02 | ) | $ | 0.48 | $ | 0.32 | ||||||
Weighted
average number of shares issued and outstanding
|
||||||||||||||||
Basic
|
12,095,881 | 11,939,132 | 12,017,939 | 11,939,132 | ||||||||||||
Diluted
|
12,611,797 | 11,939,132 | 12,533,856 | 11,939,132 |
The
accompanying notes are an integral part of the financial
statements
F-20
FUER
INTERNATIONAL INC. AND SUBSIDIARIES
CONSLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months
ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
Income
|
$ | 5,984,687 | $ | 3,842,825 | ||||
Adjustments
to reconcile net income to net cash used in operating
activities
|
||||||||
Depreciation
and Amortization
|
177,249 | 168,896 | ||||||
Loss
from disposal of long term assets
|
- | 4,881 | ||||||
Changes
in current assets and liabilities
|
||||||||
Restricted
cash
|
220,250 | (554 | ) | |||||
Trade
receivables
|
1,015,454 | (1,074,304 | ) | |||||
Other
receivables
|
338,374 | (256,331 | ) | |||||
Inventories
|
6,983,619 | 5,275,324 | ||||||
Advances
to suppliers
|
2,351,244 | (372,716 | ) | |||||
Biological
assets
|
(47,042 | ) | - | |||||
Accounts
payable and accrued expenses
|
275,616 | 376,781 | ||||||
Advances
from customers
|
(304,085 | ) | 203,573 | |||||
Other
payables
|
80,394 | - | ||||||
Income
tax payables
|
277,366 | 695,500 | ||||||
Net
cash provided by operating activities
|
17,353,126 | 8,863,875 | ||||||
Cash
flow from investing activities:
|
||||||||
Purchase
of property plant and equipment
|
(53,875 | ) | (28,822 | ) | ||||
Proceeds
from disposal of property and equipment
|
- | 292 | ||||||
Purchase
of intangible assets
|
(124,699 | ) | (61,381 | ) | ||||
Increase
in prepaid leases
|
(440,228 | ) | - | |||||
Net
cash used in investing activities
|
(618,802 | ) | (89,911 | ) | ||||
Cash
flow from financing activities:
|
||||||||
Proceeds
from issuance of common stock and warrants
|
2,500,000 | - | ||||||
Repayment
of short term loans
|
(2,200,575 | ) | (2,046,033 | ) | ||||
Net
cash provided by (used in) financing activities
|
299,425 | (2,046,033 | ) | |||||
Foreign
currency translation adjustments
|
269,673 | 11,560 | ||||||
Net
increase in cash and cash equivalents
|
17,303,422 | 6,739,491 | ||||||
Cash
and cash equivalents - beginning balance
|
155,425 | 2,772,020 | ||||||
Cash
and cash equivalents - ending balance
|
$ | 17,458,847 | $ | 9,511,511 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Interest
paid
|
$ | 61,894 | $ | 66,878 | ||||
Income
taxes paid
|
$ | 341,930 | $ | 608,868 |
The
accompanying notes are an integral part of the financial
statements
F-21
NOTE
1 – ORGANIZATION
The
consolidated financial statements include the financial statements of Fuer
International Inc. (referred to herein as “Fuer International”), its
subsidiaries, and variable interest entity (“VIE”), where Fuer International is
deemed the primary beneficiary. Fuer International, its consolidated
subsidiaries and VIEs are collectively referred to herein as the “Company”, “we”
and “us”.
On June
16, 2010, Fuer International Inc. (the “Fuer International”), a company
incorporated in Nevada on February 8, 1984, 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.
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.
On July
28, 2010, we completed a name change from “Forex365, Inc,” to “Fuer
International Inc,” under the consent of the holders of approximately 92.58% of
the outstanding shares of Common Stock.
China
Golden was incorporated in the British Virgin Island on November 30, 2009 as a
limited liability company (a BVI company). China Golden 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 the Heilongjiang Province, the People’s Republic of China (the
“PRC”) on February 10, 2010 as a limited liability company that provides
management advisory services. 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 the 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
structures of the contractual arrangements are such that Fuer is effectively a
variable interest entity (“VIE”) 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, Fuer International
China Golden, Deli and Fuer are collectively referred to as the “Company” unless
specific reference is made to an individual entity.
F-22
Name
|
Domicile and
Date of
Incorporation
|
Paid-in Capital
|
Percentage of Effective
Ownership
|
Principal
Activities
|
|||||||
Fuer
International
Inc.
|
February
8, 1984,
Nevada
|
USD
|
12,958 |
56.55% owned
by Oriental Agriculture Inc.,
43.45%
owned by other institutional and individual investors.
|
Investment
Holding
|
||||||
China
Golden
Holdings,
Ltd.
|
November
30,
2009,
British
Virgin
Island
|
USD
|
50,000 |
100%
owned by Fuer International Inc..
|
Investment
Holding
|
||||||
Qiqihar
Deli
Enterprise
Management Consultancy Co., Ltd.
|
February
10,
2010,
PRC
|
USD
|
2,100,000 |
100%
owned by China Golden
|
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
|
Chinese
laws and regulations currently restrict foreign ownership in a seed producing
company. 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 a full guarantee for the performance of such contracts,
agreements or transactions entered into by Fuer. As a result of the Contractual
Agreement, Deli will absorb 100% of the expected losses and gains of Fuer, which
results in Deli being the primary beneficiary of Fuer.
Based on
these exclusive agreements, the Company consolidates the variable interest
entity, 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 Fuer 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, strategic planning,
and 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.
|
F-23
|
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 the 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 the purpose of increasing the registered 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; and (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. There were deduction to
net income in calculating the net income attributable to the
Company.
NOTE
2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a)
Basis of presentation
For the
three and nine month periods ended September 30, 2010 and 2009, the Company
has used the same significant accounting policies and estimates that are
discussed in the SEC Form 8-K filed on July 16, 2010, as filed for Share
Exchange, Included in this filing are financial statements for the year ended
December 31, 2009 for China Golden Holdings, Inc.
(b) Unaudited Financial
Statements
The
accompanying consolidated financial statements as of September 30, 2010 and for
the three and nine months ended September 30, 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 for the years ended December 31,
2009 and 2008 for China Golden Holdings, Inc, as filed in form 8-K on July 16,
2010. The results of operations for the three and nine months ended September
30, 2010 and 2009 are not necessarily indicative of the operating results to be
expected for the full year ended December 31, 2010, or that which was
achieved in the year ended December 31, 2009.
F-24
(c) Principles of
consolidation
Pursuant
to US GAAP, Fuer is a VIE of the Company and the Company is the primary
beneficiary of the VIE. Accordingly, Fuer have been consolidated in the
Company’s financial statements.
Based on
various VIE agreements, the Company is able to excise control over the Fuer; and
has the exclusive right to obtain all of the financial interests of Fuer, such
as obtaining periodic income through Exclusive Business Cooperation Agreements
and obtaining the net assets of Fuer through agreement to purchase of their
equity at essentially a no cost basis. There is no non-controlling interest
held by other parties in Fuer
(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 the reported
interim financial statements include the allowance for doubtful accounts and the
useful life of property and equipment.
(e) Foreign currency
translation
The
Company’ primarily operates in the PRC. The financial position and results of
operations of Fuer and Deli are determined using the local currency (“Renminbi”
or “RMB”) as the functional currency. The financial position of Fuer
International and China Golden are determined using USD 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.
For the periods ended September 30, 2010
|
For the periods ended September 30, 2009
|
|||||||
3 months
|
9 months
|
3 months
|
9 months
|
|||||
Balance
sheet items, except for the registered and paid-up capital and retained
earnings, as of the three and nine months ended September 30, 2010 and
2009
|
US$1=RMB
6.6981
|
US$1=RMB6.6981
|
US$1=RMB
6.8376
|
US$1=RMB
6.8376
|
||||
Amounts
included in the statements of operations, and statements of cash flows for
the three and nine months ended September 30, 2010 and
2009
|
US$1=RMB
6.7803
|
US$1=RMB6.8376
|
US$1=RMB
6.8411 |
US$1=RMB
6.8425
|
F-25
For the
three and nine months ended September 30, 2010, foreign currency translation
adjustments of $316,448 and $393,416, respectively, have been reported as
comprehensive income.
For the
three and nine months ended September 30, 2009, foreign currency translation
adjustments of $13,713 and $25,587, respectively, have been reported as
comprehensive income.
(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.
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.
(g) Cash and cash
equivalents
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.
F-26
(i) Restricted Cash
Restricted
cash are amounts held in a special bank account which are kept as
guarantees for the short term bank loans. As of September 30, 2010 and
December 31, 2009, the balances of restricted cash were $0 and $219,580,
respectively.
(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 September 30, 2010 and December 31, 2009, the Company had allowances for
doubtful accounts of $338,759 and $331,867, respectively.
(k) Other receivable,
net
Other
receivables are travel and business advances to employees. As of September 30,
2010 and December 31, 2009, total advances under such arrangements were $88,785
and $383,817, respectively. The Company has not recorded any allowances for
doubtful accounts of other receivables as of September 30, 2010 and December 31,
2009.
(l) Inventory
Inventory,
consisting of 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. Management also regularly evaluates the
composition of its inventory to identify slow-moving and obsolete inventories to
determine if a valuation allowance is required. The Company has not recorded an
inventory reserve as of September 30, 2010 and December 31,
2009.
(m) Advance to
suppliers
Advances
to suppliers represent 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 $367,068 and
$2,670,374 as of September 30, 2010 and December 31, 2009,
respectively.
(n) Biological assets
Biological
assets are crops planted to provide seeds for the commercial distribution which
will be harvested within one year. The cost of the biological assets includes
cost of input seeds, fertilizers, and other materials, direct overhead and
expensing of prepaid leases of land used. As of September 30, 2010 and December
31, 2009, biological assets are totaled $47,872 and nil,
respectively.
(o) 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:
F-27
Buildings
|
20
years
|
|
Operating
equipment
|
5
-10 years
|
|
Office
equipment
|
3
years
|
|
Vehicles
|
|
4
years
|
(p) Intangible assets
The
Company states intangible assets at cost less accumulated amortization. The
Company’s intangible assets as of September 30, 2010 include 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 of intangible assets for the three months ended September 30, 2010
and 2009 amounted to $9,107 and $3,093, respectively. The amortization
expense of intangible assets for the nine months ended September 30, 2010
and 2009 amounted to $20,942 and $8,208, respectively.
(q) Prepaid Leases
Leases
where substantially all the risks and rewards of ownership of assets remain with
the lessor are accounted for as operating leases. Payments made under operating
leases net of any incentives received from the lessor are charged to the
consolidated statements of operations on a straight-line basis over the terms of
the underlying lease.
The
Company records lease payments at cost less accumulated amortization
and amount that to be amortized within one year. The amount that to be amortized
within one year is recorded as current portion of prepaid leases. As
China’s regulation prohibit companies from acquisition of land use right, the
company entered into long term agreement with certain people to rent land. The
rentals for the whole contract period are prepaid at the inception of leases.
The rentals are recorded as operating lease expenses using the straight line
method during the contract period. Leases that are expensed within 12 months
subsequent to the balance sheet date are recorded as current portion of prepaid
leases.
The
operating lease expenses for the three and nine months ended September 30,
2010 amounted to $6,900 and $13,765, respectively.
(r) 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 three and nine months
ended September 30, 2010 and 2009, respectively.
(s) 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.
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. Effect of applying of this standard is
immaterial on our financial statement.
F-28
(t) 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.
(u) Advances from
customers
Advances
from customers represent prepayments by customers for the Company’s products
during the peak season from November to July. The Company does not require
advances during months other than the peak season. The Company records such
prepayment as advances from customers when the payments are
received.
(v) Shipping expense
Shipping
costs are included in selling and marketing expenses and totaled $9,335 and $109
for the three months ended September 30, 2010 and 2009, respectively. Shipping
cost for the nine months ended September 30, 2010 and 2009 was $44,979 and
$12,387, respectively
(w) 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 three months
ended September 30, 2010 and 2009, the costs of these benefits are charged to
general and administrative expenses and amounted to $57,550 and $47,624,
respectively. The employee benefits for the nine months ended September 30, 2010
and 2009 was $170,334 and $142,502, respectively
(x) Advertising
Advertising
is expensed as incurred and is included in selling and marketing expenses on the
accompanying consolidated statement of operations. For the three months ended
September 30, 2010 and 2009, advertising expense amounted to $144,949 and
$73,070, respectively. For the nine months ended September 30, 2010 and 2009,
advertising expense amounted to $253,641 and $73,856,
respectively.
(y) Accumulated other comprehensive
income
Comprehensive
income is comprised of net income, except those due to investments by
shareholders, changes in paid-in capital and distributions to shareholders. For
the Company, comprehensive income for the three months ended September 30, 2010
and 2009 included net income and unrealized gains from foreign currency
translation adjustments. As of September 30, 2010 and December 31, 2009,
accumulated other comprehensive income amounted to $1,463,950 and $1,070,534,
respectively.
(z) 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.
F-29
(aa) 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 period
ending September 30, 2010, subsequent events were evaluated by the Company as of
the date on which the consolidated financial statements at and for the periods
ended September 30, 2010, were available to be released.
(bb) Recent accounting
pronouncements
In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures: Improving Disclosures about Fair Value Measurements. ASU 2010-06
amends ASC 820 to require a number of additional disclosures regarding
(1) the different classes of assets and liabilities measured at fair value,
(2) the valuation techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers between
Levels 1, 2, and 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years.
The Company does not expect that the adoption of ASU 2010-06 will have a
material impact on its consolidated financial statements.
On March
5, 2010, the FASB issued authoritative guidance to clarify the type of embedded
credit derivative that is exempt from embedded derivative bifurcation
requirements. Specifically, only one form of embedded credit derivative
qualifies for the exemption – one that is related only to the subordination of
one financial instrument to another. As a result, entities that have contracts
containing an embedded credit derivative feature in a form other than such
subordination may need to separately account for the embedded credit derivative
feature. This guidance also has transition provisions, which permit entities to
make a special one-time election to apply the fair value option to any
investment in a beneficial interest in securitized financial assets, regardless
of whether such investments contain embedded derivative features. This guidance
is effective on the first day of the first fiscal quarter beginning after June
15, 2010. Early adoption is permitted at the beginning of any fiscal quarter
beginning after March 5, 2010. This amendment is not expected to have a material
impact on the Company’s financial statements
In March
2010, FASB issued an authoritative pronouncement regarding the effect of
denominating the exercise price of a share-based payment awards in the currency
of the market in which the underlying equity securities trades and that currency
is different from (1) entity’s functional currency, (2) functional currency of
the foreign operation for which the employee provides services, and (3) payroll
currency of the employee. The guidance clarifies that an employee share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades should be
considered an equity award assuming all other criteria for equity classification
are met. The pronouncement will be effective for interim and annual periods
beginning on or after December 15, 2010, and will be applied prospectively.
Affected entities will be required to record a cumulative catch-up adjustment
for all awards outstanding as of the beginning of the annual period in which the
guidance is adopted. This amendment is not expected to have a material impact on
the Company’s financial statements.
In April
2010, the FASB issued Update No. 2010-17, or ASU 2010-17, Revenue
Recognition—Milestone Method, which updates the guidance currently included
under topic 605, Revenue Recognition. ASU 2010-17 provides guidance on defining
the milestone and determining when the use of the milestone method of revenue
recognition for research or development transactions is appropriate. It provides
criteria for evaluating if the milestone is substantive and clarifies that a
vendor can recognize consideration that is contingent upon achievement of a
milestone as revenue in the period in which the milestone is achieved, if the
milestone meets all the criteria to be considered substantive. ASU 2010-17 is
effective for milestones achieved in fiscal years, and interim periods within
those years, beginning after June 15, 2010 and should be applied
prospectively. Early adoption is permitted. The Company is currently evaluating
the potential impact, if any, of the new accounting guidance on its consolidated
financial statements.
F-30
In July
2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosure about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This ASU will significantly expand existing disclosures about the credit quality
of financing receivables and their allowance for credit losses. The ASU affects
all entities with financing receivables, excluding short-term trade accounts
receivable or receivables measured at fair value or lower of cost or fair value.
The extent of the effect depends on the relative significance of financing
receivables to an entity’s operations and financial position. For public
companies, the disclosures as of the end of a reporting period (such as
accounting policies for each portfolio segment, ending balances of allowance for
credit losses and credit-quality indicators) are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period (such as modifications and
rollforward of allowance for credit losses) are effective for interim and annual
reporting periods beginning on or after December 15, 2010. The Company is
currently evaluating the potential impact, if any, of the new accounting
guidance on its consolidated financial statements, however the amendment is not
expected to have any impact on the Company’s financial statements.
A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to the consolidated statements.
NOTE
3 – TRADE RECEIVABLES, NET
At
September 30, 2010 and December 31, 2009 trade receivables consisted of the
following:
|
September 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
Trade
receivables
|
$ | 1,373,366 | $ | 2,398,297 | ||||
Less:
Alloances for receivables
|
(338,759 | ) | (331,867 | ) | ||||
|
$ | 1,034,607 | $ | 2,066,430 |
NOTE
4 – INVENTORY
At
September 30, 2010 and December 31, 2009, inventory consisted of the
following:
|
September 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
Raw
materials
|
$ | 608,516 | $ | 2,903,920 | ||||
Goods
in transit
|
- | 4,817,634 | ||||||
Finished
goods
|
166,430 | - | ||||||
Total
|
$ | 774,946 | $ | 7,721,554 |
NOTE
5 – PROPERTY, PLANT AND EQUIPMENT, NET
At
September 30, 2010 and December 31, 2009, the following are the details of the
property, plant and equipment:
F-31
|
September 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
Property
and Plant
|
$ | 2,769,900 | $ | 2,713,547 | ||||
Operation
Equipment
|
630,597 | 605,576 | ||||||
Office
Equipment
|
68,941 | 54,684 | ||||||
Vehicles
|
130,251 | 98,938 | ||||||
3,599,690 | 3,472,745 | |||||||
Accumulated
Depreciation
|
(907,658 | ) | (733,360 | ) | ||||
Total
|
$ | 2,692,032 | $ | 2,739,385 |
Depreciation
expense for the three months ended September 30, 2010 and 2009 was $53,528 and
$53,332, respectively. Depreciation for the nine months ended September 30, 2010
and 2009 was $156,307 and $160,688, respectively. Loss from disposal of assets
for the nine months ended September 30, 2010 and 2009 was nil and $4,881,
respectively.
NOTE
6 – INTANGIBLE ASSETS, NET
The
Company's intangible assets are purchased intellectual property on seed
varieties. At September 30, 2010 and December 31, 2009, the balances of net
intangible assets were $290,033 and $181,909, respectively. Accumulated
amortization of the intangible assets as of September 30, 2010 and December 31,
2009 was $71,898 and $55,029, respectively. The amortization expense of
intangible assets for the three months ended September 30, 2010 and 2009
amounted to $9,107 and $3,093, respectively. The amortization expense of
intangible assets for the nine months ended September 30, 2010 and 2009
amounted to $20,942 and $8,208, respectively.
Expected
future amortization expenses for future years are as follows:
For
the remainder of fiscal year 2010
|
$ | 9,219 | ||
2011
|
36,876 | |||
2012
|
36,876 | |||
2013
|
36,130 | |||
2014
|
32,957 | |||
Thereafter
|
137,975 | |||
$ | 290,033 |
NOTE
7 – PREPAID LEASES
The
Company’s prepaid leases are prepayments for leased land. As of September 30,
2010, and December 31, 2009, details about prepaid leases was:
|
September
30,
|
December
31,
|
||||||
|
2010
|
2009
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
Prepaid leases
|
$
|
448,004
|
$
|
-
|
||||
Expense
of prepaid leases
|
(14,008
|
)
|
-
|
|||||
433,996
|
-
|
|||||||
Less:
Current portion of prepaid leases
|
28,016
|
-
|
||||||
Net
prepaid leases
|
$
|
405,979
|
$
|
-
|
F-32
NOTE
8 – SHORT-TERM DEBT
Short-term
debt included in the consolidated balance sheets as of September 30, 2010 and
December 31, 2009 was:
|
September
30,
|
December
31,
|
|||
|
2010
|
2009
|
|||
|
(Unaudited)
|
(Audited)
|
|||
5.31%
loan payable to Agriculture Development Bank of China for one year,
matures on November 5, 2010, collateralized with
buildings.
|
$
|
-
|
$2,193,881
|
NOTE
9 – ACCOUNTS PAYABLE AND ACRRUED EXPENSES
Accounts
payable and accrued expenses comprised of account payables, salary payables,
welfare payables and amounts due to related parties. At September 30, 2010 and
December 31, 2009, details of accounts payables and accrued expenses
were:
|
September 30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
Accounts
payable
|
$
|
724,541
|
$
|
494,927
|
||||
Salary
payable
|
13,138
|
-
|
||||||
Welfare
payable
|
58,256
|
-
|
||||||
Due
to related parties
|
-
|
10,038
|
||||||
$
|
795,935
|
$
|
504,965
|
NOTE
10 – RELATED PARTY TRANSACTIONS
As of
September 30, 2010, there was no balance due to related parties. For the three
and nine months ended of September 30, 2010, there were no related party
transactions.
Due to
related parties as of December 31, 2009 consisted of i) $10,038 payable to
Qingdao Fuer Agronomy Inc, a company producing pesticides, germicides, and
herbicides which is controlled by Mr. Zhang Li, CEO of the Company.
NOTE
11 – INCOME TAX PAYABLES
The
Company is governed by the Income Tax Law of the People’s Republic of China.
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 favorable enterprise income tax rate of 15%
for 3 years, start from beginning the fiscal year of 2010.
NOTE
12 – COMMON STOCK AND WARRANTS ISSUANCE
On June
17, 2010, the Company 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”). The warrants are exercisable at $2.58 per common share, have a
three year life time and 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 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, and to have the Registration
Statement become effective within 150 days of the Closing Date of the Offering.
Both parties have informally agreed to amend their registration
rights.
F-33
NOTE
13 – STATUTORY RESERVES
The
Company is required to make appropriations to reserve funds by the ended of each
calendar year, 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 a welfare fund. Statutory
reserves were $1,112,119 as of September 30, 2010 and December 31, 2009, and no
appropriation to the statutory reserves was made during the nine months ended
for September 30, 2010.
NOTE
14 – COMMITMENTS AND CONTINGENCIES
The
Company has launched the Company’s Chain Store program in March, 2010, including
conversion of distributors into branded store operators, and establishment
of the Company’s own stores. As of September, 30, 2010, the Company has
established 5 wholly owned stores, and 43 branded stores.
The
Company entered into five lease agreements in March, 2010 for establishment of
its wholly owned stores, including four agreements for one year and an
agreement for two years. Rentals were prepaid at commencement of the leasing
period. The Company has paid refundable security deposits of $439 for two
stores. No such deposits were required under the other three lease agreements.
Rental expenses for the three and nine months periods ended September 30, 2010
were $4,255 and $12,765, respectively.
On March
30, 2010, the Company entered into an agreement to lease farm land of 23.06
acres from local farmers for five years starting from March 30, 2010.
Subject to the agreement, five years of future rent totaling $34,856 was
required upon the commencement of the lease, which was paid as of March 31, 2010
and is accounted for as prepaid lease. In April 2010, the Company rented
farmland of 247.11 acre for 20 years. $448,004 was prepaid at inception of
the leasing periods. The prepayments are recorded in prepaid expenses and
amortized during the leasing period using the straight line method of
amortization. Expected amortization of prepaid leases is as follows as of
September 30, 2010:
Year
|
Prepaid Rental
|
Prepaid Leases
|
||||||
2010
|
$
|
17,020
|
$
|
$21,013
|
||||
2011
|
4,479
|
28,016
|
||||||
2012
|
-
|
28,016
|
||||||
2013
|
-
|
28,016
|
||||||
2014
|
-
|
28,016
|
||||||
Thereafter
|
-
|
314,927
|
||||||
21,499
|
$ |
448,004
|
||||||
Less -
Rental and lease expensed during the nine months ended September 30,
2010
|
12,795
|
14,009
|
||||||
Less -
Current portion prepaid rental and prepaid leases
|
8,704
|
433,995
|
||||||
Long-term
portion of prepaid rental and prepaid leases
|
-
|
28,016
|
||||||
$
|
8,704
|
$
|
405,979
|
F-34
Shares
of Common Stock
FUER
INTERNATIONAL INC
PROSPECTUS
|
Until
________________, 2011, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers’ obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
following table sets forth the estimated expenses to be incurred in connection
with the issuance and distribution of the securities being
registered.
Registration
Fee
|
$ | 1,252 | ||
Legal
Fees and Expenses
|
$ | 125,000 | ||
Accounting
Fees and Expenses
|
$ | 50,000 | ||
Miscellaneous
|
$ | 13,748 | ||
Total
|
$ | 165,000 |
Item
14.
Indemnification of Directors
and Officers.
Pursuant to Article 7 of our Articles of Incorporation and Nevada’s Revised
Business Statutes, the Company adopted Bylaws with the following indemnification
provisions for our directors and officers:
“Section 8.1. Indemnification. No officer or director shall be personally liable
for any obligations arising out of any acts or conduct of said officer or
director performed for or on behalf of the Corporation. The Corporation shall
and does hereby indemnify and hold harmless each person and his heirs and
administrators who shall serve at any time hereafter as a director or officer of
the Corporation from and against any and all claims, judgments and liabilities
to which such persons shall become subject by reason of any action alleged to
have been heretofore or hereafter taken or omitted to have been taken by him as
such director or officer, and shall reimburse each such person for all legal and
other expenses reasonably incurred by him in connection with any such claim of
liability; including power to defend such person from all suits as provided for
under the provisions of the Nevada Corporation Laws; provided, however that no
such person shall be indemnified against, or be reimbursed for, any expense
incurred in connection with any claim or liability arising out of his own gross
negligence or willful misconduct. The rights accruing to any person under the
foregoing provisions of this section shall not exclude any other right to which
he may lawfully be entitled, nor shall anything herein contained restrict the
right of the Corporation to indemnify or reimburse such person in any proper
case, even though not specifically herein provided for. The Corporation, its
directors, officers, employees and agents shall be fully protected in taking any
action or making any payment or in refusing so to do in reliance upon the advice
of counsel.
Section 8.2. Other Indemnification. The indemnification herein provided shall
not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer or
employee and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 8.3. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation in such
capacity for another corporation, partnership, joint venture, trust or
other enterprise, against any liability asserted against him and incurred by him
in any capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against liability under the
provisions of this Article VIII or the laws of the State of Nevada.
Section 8.4. Settlement by Corporation. The right of any person to be
indemnified shall be subject always to the right of the Corporation by its Board
of Directors, in lieu of such indemnity, to settle any such claim, action, suit
or proceeding at the expense of the Corporation by the payment of the amount of
such settlement and the costs and expenses incurred in connection
therewith.”
II-1
These indemnification provisions may be sufficiently broad to permit
indemnification of the registrant's executive officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act of 1933, as amended (the “Securities Act”).
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. No pending
material litigation or proceeding involving our directors, executive officers,
employees or other agents as to which indemnification is being sought exists,
and we are not aware of any pending or threatened material litigation that may
result in claims for indemnification by any of our directors or executive
officers.
Item
15. Recent Sales of Unregistered Securities
On June 16, 2010, we 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, and to have the Registration Statement become effective within 150
days of the Closing Date of the Offering. 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”).
Item 16.
Exhibits and Financial
Statement Schedules
(a)
Exhibits.
The
exhibits filed with this registration statement or incorporated herein by
reference are set forth on the Exhibit Index set forth elsewhere
herein.
(b)
Financial Statement Schedules.
Schedules
filed with this registration statement are set forth on the Index to Financial
Statements set forth elsewhere herein.
Item 17.
Undertakings
(a) The
undersigned registrant hereby undertakes to:
II-2
(1) File,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
i.
Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the “Securities Act”);
ii.
Reflect in the prospectus any facts or events which, individually or in the
aggregate, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Securities and Commission (the “Commission”) pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement.
iii.
Include any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, each such post-effective
amendment as a new registration statement relating to the securities offered,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering.
(3) File
a post-effective amendment to remove from registration by means of a
post-effective amendment any of the securities that remain unsold at the end of
the offering.
(4) For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
II-3
i. Any
preliminary prospectus or prospectus of the undersigned small business issuer
relating to the offering required to be filed pursuant to Rule 424;
ii. Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned small business issuer or used or referred to by the undersigned
small business issuer;
iii. The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned small business issuer or its
securities provided by or on behalf of the undersigned small business issuer;
and
iv. Any
other communication that is an offer in the offering made by the undersigned
small business issuer to the purchaser.
(b)
Provide to the underwriters at the closing specified in the underwriting
agreements, certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each
purchaser.
II-4
(c)
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(d)
(1) For
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
small business issuer under Rule 424(b)(1), or (4), or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those
securities.
II-5
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on January 14, 2011.
FUER
INTERNATIONAL INC
|
||
By:
|
/s/
Zhang Li
|
|
Zhang
Li
|
||
Chief
Executive Officer
|
POWER
OF ATTORNEY
Each
person whose signature appears below hereby constitutes and appoints, jointly
and severally, Zhang Li and Yu Haifei, and each of them, as his or her
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments, including post-effective amendments,
to this registration statement, and any and all registration statements related
to the offering covered by this registration statement and filed under the
Securities Act of 1933, as amended, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by his or her attorney to any and all amendments to said registration
statement.
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed by the
following persons in the capacities and on the date indicated.
Name
|
Title
|
Date
|
||
/s/ Zhang Li
|
Chief
Executive Officer
|
January
14, 2011
|
||
Zhang
Li
|
(Principal
Executive Officer)
|
|||
/s/ Yu Haifei
|
Chief
Financial Officer
|
January
14, 2011
|
||
Yu
Haifei
|
(Principal
Accounting Officer)
|
|||
/s/ Liu Yuhua
|
Director
|
January
14, 2011
|
||
Liu
Yuhua
|
||||
II-6
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
2.1*****
|
Share
Exchange Agreement between the Fuer International Inc, China Golden
Holdings Ltd and the shareholders of China Golden Holdings
Ltd.
|
|
2.2*****
|
Securities
Purchase Agreement between Fuer International 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 Fuer International Inc and Allied Merit International
Investment, Inc.
|
|
5.1+
|
Opinion of DLA Piper LLP (US) | |
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
II-7
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 Fuer International Inc and Allied Merit
International Investment, Inc.
|
|
23.1 | Consent of Sherb & Co., LLP, |
* 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
*****
Filed as an exhibit to the Company’s Form 8-K, as filed with the Securities and
Exchange Commission on June 22, 2010.
+ To be filed by amendment.
II-8