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EX-32.2 - EXHIBIT 32.2 - Fuer International Inc.v320997_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - Fuer International Inc.v320997_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Fuer International Inc.v320997_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Fuer International Inc.v320997_ex32-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

£ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended: June 30, 2012

 

Commission File Number: 0-53436

 

Fuer International, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada   84-0290243
(State or Other Jurisdiction of Incorporation or
Organization)
  (I.R.S. Employer Identification No.)

 

Neiwei Road,

Fulaerji District, Qiqihar,

Heiloingjiang, China 161041

(Address of Principal Executive Offices and Zip Code)

 

86-0452-6969150

(Registrant’s Telephone Number, including Area Code)

 

N/A

(Former Name or Former Address, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨.

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨ Accelerated filer                        ¨
Non-accelerated filer     ¨ (do not check if a smaller reporting company) Smaller reporting company     þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ No ¨.

 

As of August 8, 2012, there were 12,598,032 shares of common stock, par value $0.001 per share, outstanding

 

 
 

 

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION:  
     
Item 1. Financial Statements:  
     
  Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 (Audited) 3
     
  Unaudited Statements of Operations and Comprehensive (Loss) Income for the Three Months and Six Months Ended June 30, 2012 and 2011 4
     
  Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 5
     
  Notes to Financial Statements (Unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
     
Item 4. Controls and Procedures 26
     
PART II – OTHER INFORMATION:  
     
Item 1. Legal Proceedings 27
     
Item 1A. Risk Factors 27
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
     
Item 3. Defaults Upon Senior Securities 27
     
Item 4. (Removed and Reserved) 27
     
Item 5. Other Information 27
     
Item 6. Exhibits 27
     
  Signatures 28

 

2
 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FUER INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)   (Audited) 
ASSETS          
Current Assets          
Cash  $13,670,332   $3,848,413 
Trade receivables, net   8,969,365    1,296,296 
Advances to employees   123,549    445,648 
Inventories   2,507,191    8,674,347 
Advances to suppliers and prepaid expenses   897,907    5,527,356 
Current portion of prepaid leases   642,184    660,637 
Total Current Assets   26,810,528    20,452,697 
           
Property, plant and equipment, net   3,284,590    3,392,800 
Intangibles, net   708,258    589,883 
Long term portion of prepaid leases   5,782,369    6,109,134 
Total Assets  $36,585,745   $30,544,514 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Current Liabilities          
Accounts payable and accrued expenses  $1,118,949   $337,782 
Advances from customers   48,776    994,935 
Other payables   85,276    85,480 
Income tax payable   1,636,178    1,154,109 
Total Liabilities   2,889,179    2,572,306 
           
SHAREHOLDERS' EQUITY          
Common stock, $0.001 par value; 20,000,000 shares authorized, 12,958,032 shares issued and outstanding as of June 30, 2012 and December 31, 2011 respectively.   12,958    12,958 
Additional paid in capital   7,046,495    7,046,495 
Statutory reserves   2,522,455    2,275,230 
Retained earnings   21,302,006    15,752,651 
Accumulated other comprehensive income   2,812,652    2,884,874 
Total Shareholders' Equity   33,696,566    27,972,208 
Total Liabilities and Shareholders' Equity  $36,585,745   $30,544,514 

 

The accompanying notes are an integral part of the financial statements

 

3
 

 

 

 

FUER INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

 

   For the Three Months Ended June
30,
   For the Six Months Ended June
30,
 
   2012   2011   2012   2011 
                 
Sales  $3,563,985   $5,855,873   $28,100,266   $28,712,721 
Cost of goods sold   2,175,906    3,705,949    19,505,668    18,132,165 
Gross profit   1,388,079    2,149,924    8,594,598    10,580,556 
                     
Operating and administrative expenses:                    
Sales and marketing   227,125    386,018    993,102    1,391,838 
General and administrative   535,388    479,176    1,175,597    970,844 
Total operating expenses   762,513    865,194    2,168,699    2,362,682 
Income from operations   625,566    1,284,730    6,425,899    8,217,874 
                     
Other income (expenses):                    
Interest income   4,378    11,511    5,286    14,401 
Interest expense   (16)   (58,785)   (94)   (126,597)
Non operating Income (expenses)   (4,481)   358    (4,582)   60,661 
Gain from waived income tax payable   991,321    -    991,321    - 
Other income (expenses), total   991,202    (46,916)   991,931    (51,535)
                     
Income before income tax   1,616,768    1,237,814    7,417,830    8,166,339 
Income tax expenses   161,758    136,787    1,621,250    1,230,145 
Net income  $1,455,010   $1,101,027   $5,796,580   $6,936,194 
                     
Other comprehensive income:                    
Foreign currency translation adjustments   18,961    750,887    (72,222)   620,774 
Comprehensive income  $1,473,971   $1,851,914   $5,724,358   $7,556,968 
                     
Earnings per share                    
Basic  $0.11    0.08   $0.45   $0.54 
Diluted  $0.11    0.08   $0.43   $0.51 
                     
Weighted average number of shares issued and outstanding                    
Basic   12,958,032    12,958,031    12,958,032    12,958,031 
Diluted   13,473,948    13,473,947    13,473,948    13,473,947 

 

The accompanying notes are an integral part of the financial statements

 

4
 

 

 

FUER INTERNATIONAL INC. AND SUBSIDIARIES

CONSLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Six Months Ended June 30, 
   2012   2011 
Cash flow from operating activities:          
Net income  $5,796,580   $6,936,194 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   132,339    123,767 
Amortization of intangible assets and prepaid leases   431,676    355,531 
Gain from waived income tax payable   (991,321)   - 
Changes in current assets and liabilities          
Trade receivables   (7,683,702)   (418,282)
Advances to employees   321,352    (222,565)
Inventories   6,152,578    7,784,182 
Advances to suppliers   4,620,849    1,059,909 
Prepaid leases   -    (241,399)
Biological assets   -    (265,010)
Accounts payable and accrued expenses   782,665    1,291,615 
Advances from customers   (944,722)   - 
Other payables   -    (261,374)
Income tax payables   1,476,611    499,478 
Net cash provided by operating activities   10,094,905    16,642,046 
           
Cash flow from investing activities:          
Purchase of property plant, and equipment   (32,097)   (430,400)
Purchase of intangible assets   (222,127)   (328,857)
Net cash used in investing activities   (254,224)   (759,257)
           
Cash flow from financing activities:          
Repayment of short-term loans   -    (764,783)
Net cash used in financing activities   -    (764,783)
           
Effect of exchange rate on cash   (18,762)   217,797 
Net increase in cash and cash equivalents   9,821,919    15,335,803 
Cash and cash equivalents - beginning of period   3,848,413    2,454,583 
Cash and cash equivalents - ending of period  $13,670,332   $17,790,386 
           
Supplemental disclosure of cash flow information          
Interest paid  $78   $104,476 
Income taxes paid  $9,107   $730,514 

 

The accompanying notes are an integral part of the financial statements

 

5
 

 

 

FUER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATION

 

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”.

 

Fuer International (formerly known as Forex365 Inc.) was incorporated in Nevada on February 8, 1984. 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 Islands 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. Its 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. (“Qiqihar Fuer”) was incorporated in the Heilongjiang Province, in the PRC on March 18, 2003. Qiqihar Fuer is a provider of corn seeds, rice seeds, soybean seeds, humic fertilizer and plant additives that distributes products through its distributors to farmers located primarily in the PRC provinces of Heilongjiang, Jilin, Inner Mongolia and other provinces of PRC. Qiqihar Fuer breeds its proprietary seeds through farmers under contractual agreements. Qiqihar Fuer also distributes 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 Qiqihar Fuer, in addition to being able to appoint Qiqihar Fuer’s senior executives and approve all matters requiring shareholder approval. The structure of the contractual arrangements are such that Qiqihar Fuer is effectively a VIE of Deli. Accordingly, Fuer International, through its wholly-owned subsidiaries, consolidates Qiqihar Fuer’s results of operation, assets and liabilities in its financial statements. Hereafter, Fuer International, China Golden, Deli and Qiqiahr Fuer are collectively referred to as “the Company” unless specific reference is made to an individual entity). Deli and Qiqihar Fuer are both controlled by the same majority shareholders.

 

On June 16, 2010, Fuer International, 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”), and 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 consolidated China Golden and its subsidiaries, including their VIE, as if the Share Exchange had been in effect retroactively for all periods presented.

 

6
 

 

 

 

Name   Domicile and
Date of
Incorporation
  Paid-in Capital   Percentage of Effective
Ownership
  Principal
Activities

Fuer International
Inc. (formerly
known as
“Forex365 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

Deemed as a variable interest entity through contractual agreements with Deli, See description below

  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. As a result, the Company’s subsidiaries, Deli and Qiqihar Fuer, entered into a seriesof exclusive contractual agreements (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 Contractual Agreements, the Company consolidates the VIE, Qiqihar 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 descriptions of the Contractual Agreements entered between Deli and Qiqihar Fuer:

 

  1. Exclusive Business Cooperation Agreement. Pursuant to the exclusive business cooperation agreement between Deli and Qiqihar Fuer, Deli has the exclusive right to provide to Qiqihar Fuer general business operational services, including advice and strategic planning, as well as consulting services related to the technological research and development of the Qiqihar 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. Qiqihar Fuer shall pay consulting service fees in Renminbi (“RMB”) to Deli that is equal to all of Qiqihar Fuer’s profits as defined in the Exclusive Option Agreement. The Agreement is valid for 10 years. Termination or renewal of the agreement is determined by Deli and shall have binding force upon Qiqihar Fuer.

 

  2. Equity Pledge Agreement. Under the equity pledge agreement between Qiqihar Fuer’s shareholders and Deli, Qiqihar Fuer’s Shareholders pledged all of their equity interests in Qiqihar Fuer to Deli to guarantee Qiqihar Fuer’s performance of its obligations under the Exclusive Option Agreement. If Qiqihar Fuer or Qiqihar 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. Qiqihar 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 Qiqihar 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. Qiqihar Fuer’s Shareholders agreed not to dispose of the pledged equity interests or take any actions that would undermine Deli’s interest. 

 

  3. Exclusive Option Agreement.  Under the exclusive option agreement between Qiqihar Fuer’s Shareholders and Deli, Qiqihar 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 Qiqihar Fuer for the cost of the initial contributions to the registered capital of Qiqihar 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.

 

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  4. Loan Agreement. Under the Loan Agreement, the shareholders of Qiqihar Fuer shall borrow RMB 10,000,000 from Deli, only for purpose of increasing the paid-in capital of Qiqihar Fuer. In addition, shareholders of Qiqihar 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, Qiqihar Fuer should not: (1) purchase and dispose of any assets; enter into any material agreements with any third party within its operating activities; (3) declare any dividends to its shareholders.

 

The accounts of Qiqihar Fuer are consolidated in the accompanying consolidated financial statements pursuant to Accounting Standards Codification Topic 810, “Consolidation” As a VIE, Qiqihar 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 Qiqihar 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 consolidated financial statements are prepared in accordance with US 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 US GAAP.  The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant inter-company transactions and balances have been eliminated. The financial statements include all adjustments that, in the opinion of management, are necessary to make the financial statements not misleading.

 

  (b) Unaudited financial statements

 

The accompanying consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 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 disclosures normally included in financial statements prepared in accordance with US GAAP 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 audited consolidated financial statements and notes thereto for the years ended December 31, 2011 and 2010. The results of operations for the three and six months ended June 30, 2012 and 2011 are not necessarily indicative of the operating results to be expected for the full year ended December 31, 2012, or that which was achieved in the year ended December 31, 2011.

 

  (c) Principles of consolidation

 

Pursuant to US GAAP, Qiqihar Fuer is a VIE of Deli 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 Qiqhar 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 Qiqihar Fuer through purchase of their equities at essentially no cost basis. There is no non-controlling interest held by other parties in Qiqihar Fuer, Deli and China Golden.

 

  (d) Business segment

 

The Company operates in one business segment, as a provider and distributor of field seeds and fertilizers herbicides. Our revenue is generated in our distribution to farmers, sales through our Company owned retail establishments and through our branded retail stores. Our revenue is derived exclusively from the sales of field crop seeds, fertilizers and herbicides. All Company’s sales and operations are conducted in the PRC with emphasis in the northeast of China.

 

  (e) Use of estimates

 

The preparation of the consolidated financial statements in conformity with US GAAP 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 financial statements include the allowance for doubtful accounts and the useful lives of property and equipment.

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  (f) 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 the 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 were published by People’s Bank of the People’s Republic of China.

 

    2012   2011
Balance sheet items, except for the registered and paid-up capital and retained earnings as of June 30, 2012 and December 31, 2011   US$1=RMB 6.3089   US$1=RMB 6.2939
         
Amounts included in the statements of operations, and statements of cash flows for the six months ended June 30, 2012 and 2011   US$1=RMB 6.3027   US$1=RMB 6.5378

 

For the three months ended June 30, 2012 and 2011, foreign currency translation adjustments of $18,961 and $750,887, respectively, have been reported as comprehensive income in the consolidated financial statements and for the six months ended June 30, 2012 and 2011, foreign currency translation adjustments of ($72,222) and $620,774, respectively, have been reported as comprehensive income in the consolidated financial statements.

 

  (g) 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 June 30, 2012, 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.

 

  (h) Cash

 

For purposes of the consolidated Statements of Cash Flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company maintains cash with various financial institutions in the PRC and balances are uninsured.

 

  (i) 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 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. No customer accounted for over 10% of our total sales for the three and six months ended June 30, 2012 and 2011.

 

9
 

 

 

 

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.

 

  (j) Trade receivables

 

Trade receivables are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews trade receivables 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 June 30, 2012 and December 31, 2011, the Company had an allowance for doubtful accounts of $232,983 and $233,538, respectively.

 

  (k) Advances to employees

 

Advances to employees are rendered to facilitate the timely implementation of operating activities, such as advertisements, promotions and seed breeding. The amounts advanced under such arrangements totaled $123,549 and $445,648 as of June 30, 2012 and December 31, 2011, respectively.  The Company has not experienced any losses with advances to employees during its operating history, and, accordingly, has made no allowances for advances to employees.

 

  (l) Inventories

 

Inventories, consisting of raw materials and finished goods acquired from third party vendors, are stated at the lower of cost or market, determined on a weighted average basis, or net realizable value. Raw materials are recognized at the purchase price, and consist primarily of seeds, fertilizers, pesticides, and packaging materials. Costs of finished goods are composed of raw materials, direct labor and an attributable portion of manufacturing overhead. Inclusive in manufacturing overhead is amortization expense of intangible assets acquired to secure certain varieties of seeds that are exclusive for the Company’s use and sale. Minimal process is applied to raw material seeds, fertilizers, and pesticides to convert them into finished goods, as raw materials are primarily in a customer usable state. Raw materials are packaged for the specification and needs of the Company’s customers, inclusive of our distributors and branded retail establishments. Inventories are accounted on a weighted average basis during the reporting period. 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 inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required. The Company has not recorded an inventory reserve as of June 30, 2012 and December 31, 2011, respectively.

 

  (m) Advance to suppliers

 

Advances to suppliers represent the cash paid in advance for purchasing of inventory items from suppliers. The advance payments are meant to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $897,907 and $5,527,356 as of June 30, 2012 and December 31, 2011, respectively.

 

  (n) Property, plant and equipment

 

Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.  When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the Statements of Operations in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

 

Buildings 20 years
Operating equipment 5 -10 years
Office equipment 3 years
Vehicles 4 years

 

‘  (o) 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.

 

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The Company records lease payments at cost less accumulated amortization and the amount that is to be amortized within one year is recorded as current portion of prepaid leases. As China’s regulations prohibit companies from acquiring land use rights of farmlands, the Company entered into long term agreements with certain unrelated parties to rent land. The rental payments for the entire contract period are prepaid at the inception of leases. The rental payments are recorded as operating lease expense using the straight line method during the contract period, varying from 5 to 12 years

 

The operating lease expenses for the six months ended June 30, 2012 and 2011 amounted to $329,445 and $299,613, respectively, and for the three months ended June 30, 2012 and 2011 totaled $164,589 and $159,572, respectively.

 

  (p) 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 six months ended June 30, 2012 and 2011.

 

  (q) 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.  Current tax is the expected tax payable on the taxable income for the current year, using tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. 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.

 

  (r) 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 to the distributors and transfer of title. All sales are FOB shipping point.

 

Historically, the Company has not offered sales returns to their customers or distributors subsequent to acceptance of goods by their customers or distributors. Based on previous prior year performance, the Company has not experienced significant dissatisfaction with any of their products. In certain instances, when customers or distributors reported negative results from the usage of the Company’s products, the Company has allowed credits to be issued to these customers or distributors on a limited basis. The Company issuance of credits during the three and six months ended June 30, 2012 and 2011 has been minimal. The Company has not accrued any amount with respect to such potential customer credits as of June 30, 2012 and December 31, 2011 based on the Company’s previous positive experience with products sold.

 

  (s) Cost of goods sold

 

Cost of goods sold primarily consists of direct and indirect manufacturing costs, including production overhead costs.

 

  (t) Shipping expense

 

Shipping costs are classified into selling and marketing expenses. For the six months ended June 30, 2012 and 2011, shipping expense totaled $679,143 and $766,403, respectively. For the three months ended June 30, 2012 and 2011, shipping expense totaled $65,234 and $59,176, respectively.

 

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  (u) 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 June 30, 2012 and 2011, the costs of these payments are charged to general and administrative expenses in the same period as the related salary costs and amounted to $48,382 and $152,271, respectively. For the six months ended June 30, 2012 and 2011, the costs of these payments are charged to general and administrative expenses in the same period as the related salary costs and amounted to $95,999 and $249,743, respectively.

 

  (v) Advertising

 

Advertising is expensed as incurred and is included in selling and marketing expenses on the accompanying consolidated statement of operations. For the six months ended June 30, 2012 and 2011, advertising expense amounted to $100,144 and $378,807, respectively. For the three months ended June 30, 2012 and 2011, advertising expense amounted to $55,972 and $74,958, respectively.

 

  (w) Accumulated other comprehensive income

 

Comprehensive income is comprised of net income and all changes to the Statements of Shareholders’ Equity, except those amounts due to investments by shareholders, changes in paid-in capital and distributions to shareholders. Comprehensive income for the periods ended June 30, 2012 and 2011 include net income and unrealized gains from foreign currency translation adjustments. As of June 30, 2012 and December 31, 2011 accumulated comprehensive income was $2,812,652 and $2,884,874, respectively.

 

  (x) 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.

 

  (y) Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financing statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultant and other third-parties, compensation expenses is determined at the “measurement date”, The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.

 

  (z) Recent adopted accounting pronouncements

 

In September 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles – Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of ASU 2011-08 did not have an impact on our consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The presentation option under current GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted because compliance with amendments is already permitted. We already comply with this presentation.

 

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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, we have not determined whether implementation of such proposed standards would be material to our consolidated financial statements.

 

NOTE 3 – TRADE RECEIVABLES

 

As of June 30, 2012 and December 31, 2011 accounts receivable consisted of the following:

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
Trade receivables  $9,202,348   $1,529,834 
Less: Allowance for doubtful accounts   (232,983)   (233,538)
   $8,969,365   $1,296,296 

 

NOTE 4 – INVENTORIES

 

As of June 30, 2012, and December 31, 2011, inventories consisted of the following:

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
Raw materials  $559,278   $4,307,063 
Finished goods   1,947,913    4,367,284 
   $2,507,191   $8,674,347 

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

As of June 30, 2012 and December 31, 2011, the following are the details of the property and equipment:

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
Property and Plant  $3,636,645   $3,645,312 
Operations Equipment   87,786    82,672 
Office Equipment   806,176    791,097 
Vehicles   166,256    156,834 
    4,696,863    4,675,915 
Accumulated Depreciation   (1,412,273)   (1,283,115)
Total  $3,284,590   $3,392,800 

 

Depreciation expense for the six months ended June 30, 2012 and 2011 were $132,339 and $123,767, respectively. Depreciation expense for the three months ended June 30, 2012 and 2011 were $66,001 and $63,538, respectively.

 

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NOTE 6 – INTANGIBLE ASSETS, NET

 

The Company's intangible assets are purchased intellectual property on seed varieties and have a 10 years useful life. As of June 30, 2012 and December 31, 2011, the balances of net intangible assets were $708,258 and $589,883, respectively. Amortization expense of intangible assets for the six months ended June 30, 2012 and 2011 were $102,231 and $192,861 respectively. Amortization expense of intangible assets for the three months ended June 30, 2012 and 2011 were $59,807 and $179,304 respectively.

 

Expected future amortization for intangible assets is as follows:

 

2012  $137,002 
2013   273,212 
2014   85,382 
2015   56,587 
2016   36,840 
Thereafter   119,235 
   $708,258 

 

NOTE 7 – LONG-TERM PREPAID EXPENSES

 

Long-term prepaid expenses primarily consist of prepaid rental expenses for six parcels of land. The prepaid rental expenses are being amortized using the straight-line method over the lease terms.

 

On March 30, 2010, the Company entered into an agreement with unrelated individuals to lease farm land of totaling 9.33 acres for five years. Subject to the agreement, five years of future rent totaling $38,048 was paid upon the commencement of the lease.

 

On April 2, 2010, the Company entered into an agreement with a certain farm to lease farm land of 100 hectares for 20 years, Subject to the agreement, total rent for the leasing period amounted to $417,235 was fully prepaid on the inception of the lease

 

On December 10, 2010, the Company entered into two agreements with certain farms to lease farm land of totaling 1,000 acres for 12 years. Subject to the agreement, total rent for the leasing period totaling $6,372,326 was paid upon the commencement of the lease.

 

The Company’s prepaid leases are prepayments for leased land. As of June 30, 2012 and December 31, 2011, details about prepaid leases were:

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
Prepaid leases  $7,416,001   $7,433,675 
Amortization of prepaid leases   (991,448)   (663,904)
    6,424,553    6,769,771 
Less: Current portion of prepaid leases   (642,184)   (660,637)
Long term portion of prepaid leases  $5,782,369   $6,109,134 

 

Amortization expense of long-term prepaid expenses for the six months ended June 30, 2012 and 2011 were $329,445 and $299,613 respectively. Amortization expense of long-term prepaid expenses for the three months ended June 30, 2012 and 2011 were $164,589 and $159,572, respectively.

 

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NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expense comprised of accounts payable, salary payables, and welfare payables. At June 30, 2012 and December 31, 2011, accounts payables and accrued expenses were $1,118,949 and $337,782, respectively.

 

NOTE 9 – EARNINGS PER SHARE

 

When calculating diluted earnings per share for common stock equivalents, the Earnings Per Share Topic, ASC 260, requires the Company to include the potential shares that would be outstanding if all outstanding stock options or warrants were exercised. This is offset by shares the Company could repurchase using the proceeds from these hypothetical exercises to calculate common stock equivalents.

 

The following reconciles the components of the EPS computation:

 

   Income   Shares   Per Share 
   (Numerator)   (Denominator)   Amount 
For the six months ended June 30, 2012:               
Net income               
Basic EPS income available to common shareholders  $5,796,580    12,958,032   $0.45 
Effect of dilutive securities:               
Warrants   -    515,916    - 
Diluted EPS income available to common shareholders  $5,796,580    13,473,948   $0.43 
                
For the six months ended June 30, 2011:               
Net income               
Basic EPS income available to common shareholders  $6,936,194    12,958,031   $0.54 
Effect of dilutive securities:               
Warrants   -    515,916    - 
Diluted EPS income available to common shareholders  $6,936,194    13,473,947   $0.51 

 

For the three and six months ended June 30, 2012 and 2011, all options and warrants were included the calculation of diluted earnings.

 

NOTE 10 – SHAREHOLDERS’ EQUITY

 

On June 9, 2010 Fuer International 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 shareholders, and has no effect on shareholders' equity 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.

 

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. The investor issued a written waiver of the registration rights on November 15, 2010. As of June 30, 2012 and December 31, 2011, the warrants did not have intrinsic value.

 

As the parties in the above mentioned transaction were not related, the total amount of the proceeds was deemed to be fair value of the common shares and warrants issued. Common shares issued were valued at total proceeds minus the fair value of the warrants. Management is responsible for determining the fair value of the warrant, as of the grant date. The fair value of the warrants issued is estimated on the date of grant using the Black-Scholes option valuation model to be $849,852. The valuation was based on the assumptions noted in the following table.

 

Expected volatility   112.2%
Expected dividends   0%
Expected term (in years)   3 
Risk-free rate   2.2%

 

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Balances of warrants issued and outstanding as of June 30, 2012 and December 31, 2011 are summarized as follows:

 

   Number of
Warrants
   Weighted
Average
Exercise Price
 
Balance of warrants issued and outstanding at December 31, 2010   -   $- 
Issued   873,315    2.58 
Exercised   -    - 
Forfeited   -    - 
Balance of warrants issued and outstanding at December 31, 2011   873,315    2.58 
Issued   -    - 
Exercised   -    - 
Forfeited   -    - 
Balance of warrants issued and outstanding at June 30, 2012   873,315   $2.58 

 

The following table summarizes the shares of the Company's common stock issuable upon exercise of warrants outstanding at June 30, 2012:

 

Warrants Outstanding   Warrants Exercisable 
Range of
Exercise
Price
   Number
Outstanding at
June 30,
2012
   Weighted
Average
Remaining
Contractual
Life (Years)
   Weighted
Average
Exercise
Price
   Number
Exercisable at
June 30,
2012
   Weighted
Average
Exercise Price
 
$2.58    873,315    0.96   $2.58    873,315   $2.58 

 

In connection with the warrants granted under the Purchase Agreement, the warrants have a price adjustment feature if the Company should issue additional shares of common stock at a lower price than the exercise price in effect when such warrants were granted, at any time prior to the eighteen month anniversary of the Securities Purchase Agreement dated June 15, 2010. If additional shares should be issued at a lower price the Company might have account for these warrants in accordance with the Derivative and Hedging Topic of ASC 815. If the warrants are determined not to have a scope exception under ASC Section 815-10-15, and the warrants are determined to not be indexed to the Company’s common stock, these warrants may be reclassified from equity to a derivative liability for their future fair market value at the time the Company should issue common shares below the original exercise price of 2.58 for such warrants. The valuation of warrants, if they are deemed to be a derivative liability, would be valued at fair market value and adjusted during each reporting period subsequent to reclassification to a derivative liability from that of an equity instrument.

 

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 (“PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with 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. Appropriations are made based on annual net income after the end of each fiscal year of PRC enterprises. 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 six months ended June 30, 2012 and 2011, retained earnings that are restricted for appropriation to statutory reserves were $247,225 and $0, respectively. The table below summarizes the statutory reserves:

 

   For the Six Months Ended 
   June 30, 
   2012   2011 
Registered capital of Chinese operating entity  $6,608,427   $6,608,427 
Maximum reserve rate required   50%   50%
Maximum statutory reserved required by law   3,304,213    3,304,213 
Statutory reserves   (2,522,455)   (1,682,673)
Unfunded statutory reserves  $781,758   $1,621,540 

 

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NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

Substantially all of the Group’s assets and operations are located in the PRC.  The Company is self-insured for all risks and carries no liability or property insurance coverage of any kind. The Company evaluated events occurred until the date the financial statements were issued and did not note any commitments.

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Unaudited Financial Statements and Notes thereto included elsewhere in this report and the Consolidated Financial Statements and Notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2011.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements made in this report about our expectation, beliefs, plans objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and forward-looking statements. 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 products to farmers in northeastern China, which is the most important agriculture region in the country. Through our 1,052 distributors, we distribute our products to farmers located in Heilongjiang, Jilin, and northeastern Inner Mongolia and to the rest of China. Our seed products are bred 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 the China Institute of Agriculture, and have developed a series of products based on the patent that adapt to different environmental and soil conditions in different areas of northeastern China. In 2007, we participated in the China Spark Program, a plan for developing new agricultural techniques and products lead by the Ministry of Science and Technology of PRC, and invented cold proof additives for seeds. The product was launched in 2010.

 

During the past 7 years, we have diligent monitored product quality, successfully elevated our brand reputation and attained a solid customer base. We were granted “the Most Respected Enterprise Award” in 2007 by the China Academy of Humic Acid Industry. In 2008, we were certified under ISO 9001 and 14001.

 

On December 10 2009, the Company was recognized as a “High-tech Enterprise” by the state government, which entitled us to a favorable enterprise income tax treatment for the three years ended in 2011.

 

On December 2, 2010, we were awarded "the Best Enterprise Award" at the Third National Humic Acid Industry Award Assembly for the "Black Gold Cup" Selection in Beijing.

 

On October 25, 2010, we were granted one of the “Top Enterprise of the Seed Industry” awards by the Ministry of Agriculture of the People’s Republic of China, and noted to be one of the 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, the Chinese population is expecting to keep rising until 2033, reaching 1.5 billion people. As a result, China has to lean on extensive use of fertilizer and high yield hybrid grain seeds to maintain sufficient food supply.

 

Great Potential in the Seeds Market

 

Farmers in China use a great portion of seeds from the output of the 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 potential market of $4 billion.

 

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Low Industry Concentration and Abundant Acquisition Opportunities

 

At present, 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 usual level of concentration for industrial markets in developed countries. Historically, the government of China has raised entry barriers for seeds companies by means of certain registered capital threshold, which 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 techniques were adopted in seed production, safety of genetically modified grain is still unproved. It is estimated that the cultivation of genetically modified plants could impact the 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. Although two 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 may still take 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.

 

Seasonality

 

Our business is affected by the seasonal factors. Field crops are planted in early May in Heilongjiang, Jilin and the northeastern part of Inner Mongolia, and are harvested during October. To adapt to the agriculture circle, we sell our seed product from December through April, and most of our fertilizers and herbicides germicides and pesticides from April to June. During the past years, we launched our advertisement and marketing events in the fourth quarters to attract our customers.

 

Our seed breeding plans and fertilizer production plans are made during the second quarter of each year. We incur short term loans as a supplemental source of cash for purchasing raw seeds harvested. We repay the loans during the third quarter of each year when we maintain a larger balance of cash. We believe the cash generated from sales of our product and our short term loans would be sufficient to sustain our business.

 

Results of Operations

 

The following table sets forth certain information regarding our results of operations.

 

   For the three months ended June
30,
   For the six months ended June
30,
 
   2012   2011   2012   2011 
   ($ in thousands)   ($ in thousands) 
Sales  $3,564   $5,856   $28,100   $28,713 
Cost of goods sold   2,176    3,706    19,505    18,132 
Gross profit   1,388    2,150    8,595    10,581 
Operating and administrative expenses:                    
Sales and marketing   227    386    993    1,392 
General and administrative   535    479    1,175    971 
Income from operations   626    1,285    6,426    8,218 
Other income (expenses), total   991    (47)   992    (52)
Income before income tax   1,617    1,238    7,418    8,166 
Income tax expenses   162    137    1,621    1,230 
Net income  $1,455   $1,101   $5,797   $6,936 

 

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For the three months ended June 30, 2012 compared to June 30, 2011

 

Sales

 

Our sales consist primarily of revenues generated from sales of corn seeds, rice seeds, soybean seeds, fertilizers and agricultural chemical products. Sales decreased by approximately $2.29 million, or 39%, from approximately $5.9 million for the three months ended June 30, 2011 to approximately $3.6 million for the same period in 2012. This decrease was primarily caused by the stronger competition at corn, soybean seed products, and fertilizers which led us to alter our marketing strategy focusing on rice seed sales. Our rice seed sales increased dramatically from $7,000 in the second quarter of 2011 to $1.1 million in the comparable quarter of 2012. With the new marketing strategy, we lost some market shares at corn and soybean seed market, but rose up our leading position at rice seeds.

 

The following table sets forth information regarding the sales of our principal products during the three months ended June 30, 2012 and 2011, respectively:

 

   For the 3 months ended
June 30, 2012
   For the 3 months ended
June 30, 2011
 
   Quantity   Amount   %  of   Quantity   Amount    % of 
Product name  (Kg’000)   ($’000)   Sales   (Kg’000)   ($’000)   Sales 
Corn Seeds   730   $1,119    31.2%   1,607   $1,954    33.4%
Soybean Seeds   -    -    -   145    233    4.0%
Rice Seeds   1,127    1,124    31.4%   7    7    0.1%
Vegetable Seeds   -    -    -%   12    613    10.5%
Fertilizers   541    1,331    37.2%   1,304    2,823    48.1%
Plant Regulators   5    9    0.2%   119    226    3.9%
    2,403   $3,584    100.0%   3,194   $5,855    100.0%

 

The fluctuations in average sales price per kilogram of corn seeds, soybean seeds and rice seeds, as reflected in the following table, are primarily driven by increases in the prices of grains and demand for the products. The changes in the average selling prices of fertilizers and plant additives are generally caused by an increase in sales of high margin products. The following table shows sales price per kilogram by product for the three months ended June 30, 2012 and 2011 and the percentage change in the sales price per kilogram.

 

   Average Price   Percentage 
   Per Kilogram   Change 
Product  2012   2011    
Corn Seeds  $1.53   $1.22    25%
Soybean Seeds  $-   $1.61    n/a 
Rice Seeds  $1.00   $1.05    (5)%
Vegetable Seeds  $-   $49.52    n/a 
Fertilizers  $2.46   $2.17    13%
Plant Regulators  $1.97   $1.90    4%

 

Cost of Goods Sold

 

Our costs of goods sold consists primarily of the cost of raw seeds and direct and indirect manufacturing costs, including production overhead costs, shipping and handling costs for the products sold.  Cost of goods sold decreased $1.53 million, or 41.29%, from $3.7 million for the three months ended June 30, 2011 to $2.18 million for the three months ended June 30, 2012. This decrease was primarily attributable to the decrease in sales volume and decreased price in raw materials.

 

Operating and Administrative Expenses

 

Our total operating expenses consist primarily of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $0.10 million, or 11.87%, from $0.87 million for the three months ended June 30, 2011 to $0.76 million for the three months ended June 30, 2012.

 

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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 decreased approximately $0.16 million, or 41.16%, from $0.39 million for the three months ended June 30, 2011 to $0.23 million for the three months ended June 30, 2012. This decrease was primarily attributable to (i) an increase of approximately $0.01 million, or 16.77%, in shipping expense, which is primarily due to higher shipping cost charges; (ii) a decrease of approximately $0.19 million, or 25.33% in advertisement expense as we launched TV advertisement campaigns in 2011 in Heilongjiang and Jilin provinces and increased in spending for advertisement in Jilin Province, to enhance our brand awareness and increase our market share. Sales and marketing expenses are likely to increase as we continue expanding our sales volume throughout China, and launching 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 $0.06 million, or 11.73%, from $0.48 million for the three months ended June 30, 2011 to approximately $0.54 million for the three months ended June 30, 2012. This increase was primarily attributable to an increase in amortization for prepaid leases and payroll expense. General and administrative expenses are likely to increase as we continue to expand our operations in China, hire new employees and appoint directors to improve our corporate governance, and rent more land for raw seed breeding.

 

Income from Operations

 

As a result of the foregoing, our income from operations decreased by $0.66 million, or 51.31%, from approximately $1.28 million for the three months ended June 30, 2011 to approximately $0.63 million for the same period in 2012.

 

Other Income (Expense)

 

Our other income (expense) consists primarily of interest income, interest and finance costs, other income and expense, and a gain from waived income taxes payable. Other income increased approximately by $1.04 million, which is attributable to a gain from the tax authority who waived our 2011 corporate income tax payable which had been accrued by us as of December 31, 2011.

 

Income Tax Expense

 

We are subject to PRC enterprise income taxes. Our income tax expense increased by approximately $0.02 million, or 18.26%, from approximately $0.14 million for the three months ended June 30, 2011 to $0.16 million for the same period of 2012.

 

Cumulative Currency Translation Adjustments

 

Our principal country of operations is the PRC and our functional currency is the Renminbi, and our reporting currency is the U.S. dollar.  All translation adjustments resulting from the translation of our financial statements into U.S. dollars (“USD”) are reported as a cumulative currency translation adjustment. The period-to-period variations in foreign currency translation adjustments were primarily due to changes in exchange rate between the Renminbi and the U.S. dollar.

 

For the six months ended June 30, 2012 compared to June 30, 2011

 

Sales

 

Our sales consist primarily of revenues generated from sales of corn seeds, rice seeds, soybean seeds, fertilizers and agricultural chemical products. Sales decreased by $0.6 million, or 2.13%, from $28.7 million for the six months ended in June 30, 2011 to $28.1 million for the same period of 2012.  This slight decrease was primarily caused by changes at our marketing strategy. To further compete with our seed producers, we focused on sales at rice seed market, instead of corn seeds. The change of marketing strategy limited our sale ability at corn and soybean seeds. The decreased sales at corn and soybean seeds were offset by our improved revenues from rice seeds which contributed over 60% of our half year revenues.

 

The following table sets forth information regarding the sales of our principal products during the six months ended June 30, 2012 and 2011, respectively:

 

   For the 6 months ended
June 30, 2012
   For the 6 months ended
June 30, 2011
 
   Quantity   Amount   % of   Quantity   Amount   % of 
Product name  (Kg’000)   ($’000)   Sales   (Kg’000)   ($’000)   Sales 
Corn Seeds   3,591   $5,671    20.2%   9,127   $11,063    38.5%
Soybean Seeds   3,277    3,366    12.0%   5,350    7,011    24.4%
Rice Seeds   16,357    17,012    60.5%   7,146    6,553    22.8%
Vegetable Seeds   -    -    -   130    1,721    6.0%
Fertilizers   650    1,610    5.7%   1,501    1,867    6.5%
Plant Regulators   231    441    1.6%   300    498    1.7%
    24,106   $28,100    100.0%   23,554   $28,713    100.0%

 

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The fluctuations in average sales price per kilogram of corn seeds, soybean seeds and rice seeds, as reflected in the following table, are primarily driven by increases in the prices of grains and demand for the products. The changes in the average selling prices of fertilizers and plant additives are generally caused by an increase in sales of high margin products. The following table shows sales price per kilogram by product for the six months ended June 30, 2012 and 2011 and the percentage change in the sales price per kilogram.

 

   Average Price   Percentage 
   Per Kilogram   Change 
Product  2012   2011     
Corn Seeds  $1.58   $1.21    31%
Soybean Seeds  $1.03   $1.31    (21)%
Rice Seeds  $1.04   $0.92    13%
Vegetable Seeds  $-   $13.24    n/a 
Fertilizers  $2.48   $1.24    100%
Plant Regulators  $1.91   $1.66    15%

 

Cost of Goods Sold

 

Our costs of goods sold consists primarily of the cost of raw seeds and direct and indirect manufacturing costs, including production overhead costs, shipping and handling costs for the products sold.  Cost of goods sold increased $1.37 million, or 7.57%, from $18.13 million for the six months ended June 30, 2011 to $19.51 million for the six months ended June 30, 2012. This increase was primarily attributable to the increase in sales volume.

 

Operating and Administrative Expenses

 

Our total operating expenses consist primarily of sales and marketing expenses and general and administrative expenses. Our total operating expenses decreased by $0.19 million, or 8.21%, from $2.36 million for the six months ended June 30, 2011 to $2.17 million for the same period of 2012.

 

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 decreased $0.40 million, or 28.65%, from $1.39 million for the six months ended June 30, 2011 to $0.99 million for the six months ended June 30, 2012. This decrease was primarily attributable to (i) a decrease of approximately $0.09 million, or 11.38%, in shipping expense, which is primarily due to less sale volume; (ii) a decrease of approximately $0.28 million, or 73.56% in advertisement expense as we launched TV advertisement campaigns in 2011 in Heilongjiang and Jilin provinces and increased in spending for advertisement in Jilin Province, to enhance our brand awareness and increase our market share. Sales and marketing expenses are likely to increase as we continue expanding our sales volume throughout China, and launching 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 $0.20 million, or 21.09%, from $0.97 million for the six months ended June 30, 2011 to approximately $1.18 million for the six months ended June 30, 2012. This increase was primarily attributable to an increase in amortization for prepaid leasing expense and intangible assets. General and administrative expenses are likely to increase as we continue to expand our operations in China, hire new employees and appoint directors to improve our corporate governance, and rent more land for raw seed breeding.

 

Income from Operations

 

As a result of the foregoing, our income from operations decreased by $1.79 million, or 21.81%, from $8.22 million for the six months ended June 30, 2011 to $6.43 million for the same period in 2012.

 

Other Income (Expense)

 

Our other income (expense) consists primarily of interest income, interest and finance costs, other income and expense, and a gain from waived income taxes payable. Other income increased approximately by $1.04 million, which is attributable to a gain from the tax authority who waived our 2011 corporate income tax payable which had been accrued by us as of December 31, 2011.

 

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Income Tax Expense

 

We are subject to PRC enterprise income taxes. Our income tax expense increased by approximately $0.39 million, or 31.79%, from approximately $1.23 million for the six months ended June 30, 2011 to $1.62 million for the same period of 2012. This increase was caused by expiration of a favorable cooperate income tax rate of 15% in December 31, 2011.

 

Cumulative Currency Translation Adjustments

 

Our principal country of operations is the PRC and our functional currency is the Renminbi, and our reporting currency is the U.S. dollar.  All translation adjustments resulting from the translation of our financial statements into U.S. dollars (“USD”) are reported as a cumulative currency translation adjustment. The period-to-period variations in foreign currency translation adjustments were primarily due to changes in exchange rate between the Renminbi and the U.S. dollar.

 

Liquidity and Capital Resources

 

Our summary cash flow information is as follows:

 

   For the Six Months Ended June 30, 
   2012   2011 
   Unaudited   Unaudited 
   ($ in thousands) 
Net cash provided by operating activities  $10,095   $16,642 
Net cash used in investing activities  $(254)  $(759)
Net cash provided by financing activities  $-   $(765)

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities decreased by approximately $6.55 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, which is due to i) a decrease of approximately $1.14 million in net income attributable to the factors discussed above; ii) a decrease of approximately $7.27 million in changes in trade receivables due to our sales peak during the half of 2012; iii) a decrease of approximately $1.63 million in changes in inventories as we received more delivery of raw seeds since our production capacity and distribution is improved and more storage capacity was allocated for the raw seeds; and iv) a decrease of approximately $0.94 million in changes in advances from customers.

 

We had retained earnings of $21.30 million and $15.75 million as of June 30, 2012 and December 31, 2011, respectively. As of June 30, 2012, we had cash of approximately $13.67 million, total current assets of approximately $26.81 million, and a working capital surplus of approximately $23.92 million. We have financed our activities to date principally from cash derived from our operations in the previous year. We maintain a large balance of non-cash current assets because our collection process of trade receivables. We expect to collect most of the trade receivables in the coming quarter, and believe the cash flow provided by operating activities in the same period will be sufficient to sustain our operations.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities decreased approximately $0.51 million, from approximately $0.76 million for the six months ended June 30, 2011 to $0.25 million for the same period of 2012. This decrease was primarily attributable to less investment in plant and equipment. Net cash used in investing activities primarily relates to expenditures associated with our equipment and purchase of a new product patent.

 

Net Cash Used in Financing Activities

 

Net cash provided by financing activities were nil and ($0.76) million for the six months ended June 30, 2012 and 2011. The decrease at our financing cash outflow was because of our repayment of short-term loans.

 

Tax Favor

 

On December 10 2009, the Company was recognized as a “High-tech Enterprise” by the state government, which entitled us to a favorable enterprise income tax treatment for the three years ended in 2011.

 

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.

 

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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.

 

Critical Accounting Policies

 

The consolidated financial statements include the financial statements of us, our subsidiaries and VIE.  All transactions and balances among us and our subsidiaries and VIE 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.

 

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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 three and six months ended June 30, 2012 and 2011.

 

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 three and six months ended June 30, 2012 and 2011.

 

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. Our inventory balances varied greatly from quarter to quarter due to seasonality of our business, since seeds are purchased during November to February and was sold from December to April. Seeds can be kept for more than two years before they expire or become less effective in germination.

 

Revenue recognition – Revenue from the sale of goods is recognized on the transfer of risks and rewards of ownership, which is generally upon shipment. All sales are FOB shipping point. We render neither sales return 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 September 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles – Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of ASU 2011-08 did not have an impact on our consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The presentation option under current GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted because compliance with amendments is already permitted. We already comply with this presentation.

 

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, we have not determined whether implementation of such proposed standards would be material to our consolidated financial statements.

 

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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 June 30, 2012 and December 31, 2011, the Company has $2,522,455 and $2,275,230, respectively, in these non-distributable reserve funds.

 

Off Balance Sheet Arrangements

 

As of June 30, 2012 and December 31, 2011, we have no off balance sheet arrangements.

 

Outstanding Indebtedness

 

As of June 30, 2012 and December 31, 2011, we had no outstanding indebtedness.

 

Contractual Obligations

 

We did not enter into any material contractual obligations during the six months ended June 30, 2012. The Company has no material contractual obligations not fully recorded on our Consolidated Balance Sheets or fully disclosed in the Notes to our Consolidated Financial Statements.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

Item 4.Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

In connection with the preparation of this Report, management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and the identification of certain material weaknesses in internal control over financial reporting, such as a lack of segregation of duties, which we view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2012. We are in the process of evaluating and remedying the material weaknesses identified by our Chief Executive Officer and Chief Financial Officer. Nevertheless, based on a number of factors, including the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the consolidated financial statements in this Report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with US GAAP.

 

Changes in Internal Controls

 

There have been no changes in our internal controls over financial reporting during the six months ended June 30, 2012 that have materially affected or are reasonably likely to materially affect our internal controls. Our Board of directors and management is working on our internal control deficiencies and material weaknesses by recruiting staff and finance department personnel with expertise on accounting and internal controls, and are working on improving our corporate governance.

 

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PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

To the best knowledge of our officers and sole director, the Company is not a party to any legal proceeding or litigation.

 

Item 1A.Risk Factors.

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item. See the “Risk Factors” of the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2012 (“Form 10-K”), which identifies and discloses certain risks and uncertainties including, without limitation, those “Risk Factors” included in Item 501 of the Form 8-K.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3.Defaults Upon Senior Securities.

 

None

 

Item 4.(Removed and Reserved).

 

None

 

Item 5.   Other Information.

 

None

 

Item 6.Exhibits.

 

For a list of exhibits filed with this report, refer to the Index to Exhibits.

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: August 10, 2012

 

FUER INTERNATIONAL, INC.

 

By: /s/ Zhang Li  
Zhang Li  
Chief Executive Officer  
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INDEX TO EXHIBITS

 

EXHIBIT    
NUMBER   DESCRIPTION OF DOCUMENT
3.1   Amended and Restated Certificate of Incorporation*
     
3.2   Seventh Amended and Restated Bylaws *
     
31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

* Filed as an exhibit to the Company’s Registration Statement on Form 10, as filed with the Securities and Exchange Commission on September 22, 2009, and incorporated herein by this reference.

 

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