UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT
OF 1934 for the quarterly period ended June 30,
2008
|
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
|
for the transition period
from
____________ to
________________
|
Commission
File No. 333-52472
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
(Name
of
Small Business Issuer in its Charter)
Delaware
|
|
58-2258912
|
(State
or Other Jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer I.D. No.)
|
238
Jianxindong Street, Laizhou, Shandong Province, People’s Republic of
China
(Address
of Principal Executive Offices)
Issuer's
Telephone Number: 86 0535-2212279
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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
x
No
¨
Indicate
by check mark whether the registrant is a large accelerate filer, an accelerate
filer, a non-accelerated filer, or a smaller reporting company. See the
definition 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
|
¨
|
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
Number
of
shares of common stock outstanding as of August 11, 2008:
70,001,200
FORWARD-LOOKING
STATEMENTS
In
addition to historical information, this Annual Report contains forward-looking
statements, which are generally identifiable by use of the words “believes,”
“expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or
similar expressions. These forward-looking statements represent Management’s
belief as to the future of Shandong Zhouyuan Seed and Nursery Co. Ltd. Whether
those beliefs become reality will depend on many factors that are not under
Management’s control. Many risks and uncertainties exist that could cause actual
results to differ materially from those reflected in these forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Risk Factors That May
Affect Future Results.” Readers are cautioned not to place undue reliance on
these forward-looking statements. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking
statements.
PART
1—FINANCIAL INFORMATION
Item
1. Financial Statements
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
CONSOLIDATED
BALANCE SHEETS
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
186,876
|
|
$
|
11,345
|
|
Accounts
receivable, net (Note 5)
|
|
|
27,926
|
|
|
18,380
|
|
Inventory
(Note 6)
|
|
|
162,509
|
|
|
183,600
|
|
Other
receivable
|
|
|
16,061
|
|
|
17,144
|
|
Contract
security deposit (Note 15)
|
|
|
136,907
|
|
|
-
|
|
Advance
to suppliers
|
|
|
32,524
|
|
|
113,063
|
|
Total
Current Assets
|
|
|
562,803
|
|
|
343,532
|
|
|
|
|
|
|
|
|
|
Property,
Plant, and Equipment, net (Note 7)
|
|
|
1,886,667
|
|
|
1,827,528
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
Land
use right, net (Note 8)
|
|
|
475,526
|
|
|
452,067
|
|
Acquired
plant variety protections, net (Note 9)
|
|
|
504,803
|
|
|
545,417
|
|
Receivable
from sale of land use right
|
|
|
347,477
|
|
|
326,465
|
|
Total
Other Assets
|
|
|
1,327,806
|
|
|
1,323,949
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
3,777,276
|
|
$
|
3,495,009
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Bank
loans (Note 11)
|
|
$
|
1,248,581
|
|
$
|
1,449,255
|
|
Short-term
loans
|
|
|
81,853
|
|
|
37,238
|
|
Accounts
payable and accrued expenses
|
|
|
339,539
|
|
|
522,151
|
|
Pension
and employee benefit payable
|
|
|
277,498
|
|
|
252,137
|
|
Taxes
payable
|
|
|
132,775
|
|
|
124,748
|
|
Interest
payable
|
|
|
353,147
|
|
|
315,579
|
|
Deferred
revenue
|
|
|
63,560
|
|
|
49,729
|
|
Court
adjustment payable (Note 14)
|
|
|
216,279
|
|
|
208,217
|
|
Due
to employees
|
|
|
36,384
|
|
|
34,526
|
|
Customer
security deposit
|
|
|
93,660
|
|
|
89,591
|
|
Total
Current Liabilities
|
|
|
2,843,276
|
|
|
3,083,171
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
461,909
|
|
|
248,020
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 5,000,000 shares authorized; none issued
and
outstanding as of June 30, 2008 and December 31, 2007
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.001 par value, 150,000,000 shares authorized; 70,001,635
shares
issued and outstanding as of June 30, 2008 and December 31,
2007
|
|
|
70,002
|
|
|
70,002
|
|
Additional
paid-in capital
|
|
|
3,144,237
|
|
|
3,144,237
|
|
Accumulated
deficiency
|
|
|
(2,593,449
|
)
|
|
(2,636,401
|
)
|
Deferred
compensation
|
|
|
(268,333
|
)
|
|
(497,000
|
)
|
Accumulated
other comprehensive income
|
|
|
119,634
|
|
|
82,980
|
|
Stockholders’
Equity
|
|
|
472,091
|
|
|
163,818
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
3,777,276
|
|
$
|
3,495,009
|
|
See
Notes to Consolidated Financial Statements
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(LOSS)
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of seeds
|
|
$
|
541,636
|
|
$
|
270,413
|
|
$
|
809,691
|
|
$
|
459,349
|
|
Total
revenue
|
|
|
541,636
|
|
|
270,413
|
|
|
809,691
|
|
|
459,349
|
|
Cost
of good sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of seeds sold
|
|
|
357,982
|
|
|
197,250
|
|
|
552,199
|
|
|
355,192
|
|
Amortization
of plant variety protections
|
|
|
37,206
|
|
|
33,836
|
|
|
73,570
|
|
|
67,314
|
|
Total
cost of sales
|
|
|
395,188
|
|
|
231,086
|
|
|
625,769
|
|
|
422,506
|
|
Gross
Profit
|
|
|
146,448
|
|
|
39,327
|
|
|
183,922
|
|
|
36,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Governmental
subsidy for one plant variety protection
|
|
|
-
|
|
|
-
|
|
|
552,092
|
|
|
-
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
4,431
|
|
|
5,101
|
|
|
14,701
|
|
|
12,208
|
|
Payroll
|
|
|
12,119
|
|
|
32,439
|
|
|
31,559
|
|
|
41,338
|
|
Pension
and employee benefit
|
|
|
8,198
|
|
|
8,266
|
|
|
16,406
|
|
|
16,272
|
|
Depreciation
expenses
|
|
|
29,155
|
|
|
26,249
|
|
|
57,581
|
|
|
51,392
|
|
Amortization
of land use rights
|
|
|
2,770
|
|
|
2,519
|
|
|
5,478
|
|
|
5,012
|
|
Office
expenses
|
|
|
26,880
|
|
|
2,273
|
|
|
37,809
|
|
|
9,923
|
|
Consultant
fees
|
|
|
114,334
|
|
|
114,333
|
|
|
228,667
|
|
|
114,333
|
|
Travel
and entertainment
|
|
|
9,989
|
|
|
5,805
|
|
|
18,751
|
|
|
13,594
|
|
Judgement
expense
|
|
|
-
|
|
|
201,500
|
|
|
-
|
|
|
201,500
|
|
Other
general and administrative
|
|
|
1,587
|
|
|
77
|
|
|
19,582
|
|
|
28,672
|
|
Total
Operating Expenses
|
|
|
209,463
|
|
|
398,562
|
|
|
430,534
|
|
|
494,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Operation
|
|
|
(63,015
|
)
|
|
(359,235
|
)
|
|
305,480
|
|
|
(457,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,064
|
|
|
3,073
|
|
|
9,070
|
|
|
12,111
|
|
Interest
expenses
|
|
|
(43,219
|
)
|
|
(46,847
|
)
|
|
(98,885
|
)
|
|
(88,793
|
)
|
Other
income (expenses)
|
|
|
9,284
|
|
|
(4,681
|
)
|
|
5,492
|
|
|
(5,896
|
)
|
Total
other income (expenses)
|
|
|
(29,871
|
)
|
|
(48,455
|
)
|
|
(84,323
|
)
|
|
(82,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before provision for Income Tax
|
|
|
(92,886
|
)
|
|
(407,690
|
)
|
|
221,157
|
|
|
(539,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Minority Interest
|
|
|
(92,886
|
)
|
|
(407,690
|
)
|
|
221,157
|
|
|
(539,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
(7,001
|
)
|
|
39,732
|
|
|
(178,205
|
)
|
|
97,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss)
|
|
|
(99,887
|
)
|
|
(367,958
|
)
|
|
42,952
|
|
|
(442,459
|
)
|
Other
Comprehensive Income (Loss) Effects of Foreign Currency
Conversion
|
|
|
13,925
|
|
|
8,376
|
|
|
36,654
|
|
|
12,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
|
|
$
|
(85,962
|
)
|
$
|
(359,582
|
)
|
$
|
79,606
|
|
$
|
(429,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and fully diluted earnings (loss) per share
|
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
70,001,635
|
|
|
66,999,401
|
|
|
70,001,635
|
|
|
66,999,401
|
|
See
Notes to Consolidated Financial Statements.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
42,952
|
|
$
|
(442,459
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided (used) by
operating activities:
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
178,205
|
|
|
(97,520
|
)
|
Depreciation
|
|
|
57,581
|
|
|
51,392
|
|
Amortization
of land use rights and plant variety protections
|
|
|
79,048
|
|
|
72,326
|
|
Amortization
of costs of common stocks issued for consultant service
|
|
|
228,667
|
|
|
114,333
|
|
Increase
in court judgment payable
|
|
|
8,062
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)/Decrease
in accounts receivable
|
|
|
(8,126
|
)
|
|
191
|
|
(Increase)/Decrease
in inventory
|
|
|
31,974
|
|
|
88,077
|
|
(Increase)/Decrease
in other receivable
|
|
|
2,124
|
|
|
(7,906
|
)
|
(Increase)/Decrease
in advance to suppliers
|
|
|
85,323
|
|
|
(3,791
|
)
|
(Increase)/Decrease
in contract security deposit
|
|
|
(133,019
|
)
|
|
-
|
|
(Increase)/Decrease
in judgment receivable
|
|
|
-
|
|
|
29,486
|
|
Increase/(Decrease)
in accounts payable and accrued expenses
|
|
|
(210,080
|
)
|
|
15,913
|
|
Increase/(Decrease)
in pension and employee benefit payable
|
|
|
8,873
|
|
|
12,333
|
|
Increase/(Decrease)
in taxes payable
|
|
|
(2
|
)
|
|
2,693
|
|
Increase/(Decrease)
in interest payable
|
|
|
16,766
|
|
|
73,680
|
|
Increase/(Decrease)
in interest payable
|
|
|
-
|
|
|
201,500
|
|
Increase/(Decrease)
in deferred revenue
|
|
|
10,328
|
|
|
(18,562
|
)
|
Increase/(Decrease)
in customer security deposit
|
|
|
(1,649
|
)
|
|
472
|
|
Net
cash provided (used) by operating activities
|
|
|
397,026
|
|
|
92,158
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(741
|
)
|
|
(86,089
|
)
|
Net
cash (used) by investing activities
|
|
|
(741
|
)
|
|
(86,089
|
)
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payback
of bank loans
|
|
|
(285,608
|
)
|
|
-
|
|
Short-term
loans
|
|
|
41,019
|
|
|
(28,808
|
)
|
Payback
of loans from employees
|
|
|
(354
|
)
|
|
(1,618
|
)
|
Net
cash provided (used) by financing activities
|
|
|
(244,942
|
)
|
|
(30,426
|
)
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash
|
|
|
151,343
|
|
|
(24,357
|
)
|
Effects
of exchange rates on cash
|
|
|
24,188
|
|
|
35,454
|
|
Cash
at beginning of period
|
|
|
11,345
|
|
|
2,600
|
|
Cash
at end of period
|
|
$
|
186,876
|
|
$
|
13,697
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid (received) during year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
(75,438
|
)
|
$
|
(18,111
|
)
|
Income
taxes
|
|
$
|
-
|
|
$
|
-
|
|
See
Notes to Consolidated Financial Statements.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1—BASIS OF PRESENTATION
The
consolidated financial statements of Shandong Zhouyuan Seed and Nursery Co.,
Ltd. (the "Company"), included herein were prepared, without audit, pursuant
to
rules and regulations of the Securities and Exchange Commission. Because certain
information and notes normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America were condensed or omitted pursuant to such rules and regulations, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the audited financial statements of the Company
as
included in the Company's Form 10-KSB for the year ended December 31,
2007.
Note
2—ORGANIZATION AND OPERATIONS
Shandong
Zhouyuan Seed and Nursery Co., Ltd.. f/k/a Pingchuan Pharmaceuticals, Inc.
(“Pingchuan”) was organized under the laws of the State of North Carolina on
July 20, 1996. The Company currently engages in the business of development,
production and distribution of hybrid crop seeds in the People's Republic of
China ("PRC'), through its whole owned subsidiary, Infolink Pacific Limited
("Infolink").
On
January 30, 2007, Pingchuan issued to Mr. Wang, Zhigang and Ms. You, Li
55,000,000 shares of its capital stock in exchange for all of the capital stock
of Infolink.
Infolink
was incorporated on September 28, 2006 in British Virgin Islands (“BVI”) under
the BVI Business Companies Act, 2004, for the purpose of seeking and
consummating a merger or acquisition with a business entity organized as a
private corporation, partnership, or sole proprietorship as defined by Statement
of Financial Accounting Standards (SFAS) No. 7.
On
October 18, 2006, Mr. Li Han Xun and Ms. You Li (collectively the "Trustees"),
both of whom are citizens of the People's Republic of China ("PRC") and owned
a
60% equity ownership interest in Shandong Zhouyuan Seed and Nursery Co., Ltd.
(
"Zhouyuan" ), executed Trust and Indemnity Agreements with Infolink, pursuant
which the Trustees assigned to Infolink all of the beneficial interest in the
Trustee's equity ownership interest in Zhouyuan. These arrangements have been
undertaken solely to satisfy PRC regulations, which prohibits foreign companies
from owning or operating the business of sale and development of crop seeds
in
PRC.
Through
the agreements described in the preceding paragraph Infolink is deemed a
60%
beneficiary resulting in Zhouyuan being deemed a subsidiary of Infolink under
the requirements of Financial Interpretation 46 (Revised) "Consolidation
of
Variable Interest Entities" issued by the Financial Accounting Standards
Board
("FASB"). The Agreements provided for effective control of Zhouyuan to be
transferred to Infolink at October 18, 2006. Infolink did not have any operating
activity prior to the share exchange with Zhouyuan. The majority
shareholders of Infolink and Zhouyuan were substantially the same. These
transactions have been accounted for on a basis similar to a reorganization
between entities under common control. Accordingly, Infolink's consolidated
financial statements are prepared by including the consolidated financial
statements of Zhouyuan through October 18, 2006, and subsequently Infolink's
consolidated financial statements include the financial statements of
Zhouyuan.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2—ORGANIZATION AND OPERATIONS (continued)
Zhouyuan
was incorporated in Laizhou City, Shandong Province, PRC on October 26, 2001.
Zhouyuan engages in the business of development, production and distribution
of
hybrid crop seeds in PRC.
Under
the
Company Law of PRC, two formerly state owned companies, Laizhou Yongzhou Seed
Ltd and Laizhou Agriculture Science Research and Development Ltd., were reformed
and merged into one company named Laizhou Huiyuan Seed Ltd ("Huiyuan") on
October 26, 2001. On December 24, 2002, Huiyuan changed its name to Shandong
Zhouyuan Seed and Nursery Co., Ltd.
Zhouyuan
owns 80% of Laizhou Tianzhe Seed Research and Development Ltd. ("Tianzhe"),
which was incorporated in Laozhou City, Shandong Province, PRC on October 24,
2004 under the Company Law of PRC. Tianzhe engages in the research and
development of crop seeds.
The
merger of Pingchuan with Infolink results in a capital transaction accounted
for
as a reverse merger. The transaction was treated for accounting purposes as
a
recapitalization of the accounting acquirer (Infolink) and a reorganization
of
the accounting acquiree (Pingchuan). Accordingly, the historical financial
statements presented prior to the merger are the historical financial statements
of Infolink, which includes Infolink's wholly-owned subsidiary,
Zhouyuan.
On
April
2, 2007, the Company changed its name to Shandong Zhouyuan Seed and Nursery
Co.,
Ltd.
Pingchuan,
Infolink, Zhouyuan, and Tianzhe are hereafter referred to as the
Company.
Note
3—GOING CONCERN
As
reflected in the accompanying consolidated financial statements, the Company
has
an accumulated deficit of $2,593,449 and working capital deficit of $2,280,473
at June 30, 2008. Additionally, the Company was in default on bank loans and
interest payments, totaling $1,601,728, as of June 30, 2008. These factors
raise
substantial doubt about its ability to continue as a going concern. In view
of
the matters described above, recoverability of a major portion of the recorded
asset amounts shown in the accompanying consolidated balance sheet is dependent
upon continued operations of the Company, which in turn is dependent upon the
Company's ability to raise additional capital, obtain financing and succeed
in
its future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
3—GOING CONCERN (continued)
Management
has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with
the
ability to continue as a going concern. The Company is actively pursuing
additional funding and a potential merger or acquisition candidate and strategic
partners, which would enhance stockholders' investment. Management believes
that
the above actions will allow the Company to continue operations through the
next
fiscal year.
Note
4—SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). This basis of accounting differs from that used in the statutory
accounts of the Company, which are prepared in accordance with the "Accounting
Principles of China " ("PRC GAAP"). Certain accounting principles, which are
stipulated by US GAAP, are not applicable in the PRC GAAP. The difference
between PRC GAAP accounts of the Company and its US GAAP financial statements
is
immaterial.
The
Company maintains its books and accounting records in PRC currency "Renminbi"
("RMB"), which is determined as the functional currency. Assets and
liabilities of the Company are translated at the prevailing exchange rate at
each year end. Contributed capital accounts are translated using the historical
rate of exchange when capital is injected. Income statement accounts are
translated at the average rate of exchange during the year. Translation
adjustments arising from the use of different exchange rates from period to
period are include in the cumulative translation adjustment account in
shareholders' equity. Gain and losses resulting from foreign currency
transactions are included in operations.
Translation
adjustments resulting from this process are included in accumulated other
comprehensive income (loss) in the consolidated statement of shareholders’
equity and amounted to $119,634 as of June 30, 2008, as compared to $82,980
as
of December 31, 2007. The balance sheet amounts with the exception of equity
at
June 30, 2008 were translated at 6.87 RMB to $1.00 USD as compared to 7.31
RMB
at December 31, 2007. The equity accounts were stated at their historical rate.
The average translation rates applied to income statement accounts for the
six
months ended June 30, 2008 and 2007 were 7.07 RMB and 7.73 RMB,
respectively.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements,
and
the reported amounts of revenue and expenses during the reporting period. Actual
results when ultimately realized could differ from those
estimates.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4—SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash on hand, deposits in banks with maturities of
three months or less, and all highly liquid investments which are unrestricted
as to withdrawal or use, and which have original maturities of three months
or
less.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements' assessment of known
requirements, aging of receivables, payment history, the customer's current
credit worthiness, and the economic environment. Recoveries of balances
previously written off are also reflected in this allowance
Concentrations
of Credit Risk
Financial
instruments that subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents. The Company maintains its cash and
cash
equivalents with high-quality institutions. Deposits held with banks may exceed
the amount of insurance provided on such deposits. Generally these deposits
may
be redeemed upon demand and therefore bear minimal risk.
Fair
Value of Financial Instruments
The
carrying value of financial instruments including cash and cash equivalents,
receivables, accounts payable and accrued expenses, approximates their fair
value due to the relatively short-term nature of these instruments.
Advance
to Suppliers
The
Company purchases seeds from the suppliers throughout the operating cycle.
The
majority of the seeds is purchased from the growers from the end of November
through the following February. Pursuant to some purchase contracts, the Company
may advance certain amount of purchase price to growers.
Inventories
Inventories
are stated at the lower of cost or market value. Actual cost is used to value
raw materials and supplies. Finished goods and work in process are valued at
First-In-First-Out (FIFO) method.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4—SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment
of Long-life Assets
Long-lived
assets and certain identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the
carrying amount of the assets exceeds the fair value of the assets. Assets
to be
disposed of are reported at the lower of the carrying amount or fair value
less
costs to sell.
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost. The cost of repairs and maintenance
is
expensed as incurred; major replacements and improvements are
capitalized.
When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included in
income in the year of disposition.
Depreciation
is calculated on a straight-line basis over the estimated useful life of the
assets. The percentages or depreciable life applied are:
Property
and plant
|
30
years
|
Machines
and equipment
|
7
years
|
Office
equipment
|
5
years
|
Motor
vehicles
|
5
years
|
Land
Use Right
All
land
belongs to the State in PRC. Enterprises and individuals can pay the State
a fee
to obtain a right to use a piece of land for commercial purpose or residential
purpose for a period of 50 years or 70 years, respectively. The right of land
usage can be sold, purchased, and exchange in the market.
The
Company obtained the right to use a piece of land at which its headquarter
building is located for a period of 50 years, from December 30, 1998 to December
30, 2045, and a piece of land at which its packing facilities and warehouse
are
located for a period of 50 years from September 10, 2003 to September 10, 2053.
We amortize the cost of these and usage rights over a period of 50 years, using
straight-line method with no residual value.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4—SIGNIFICANT ACCOUNTING POLICIES (continued)
Acquired
Plant Variety Protections, net
Acquired
intangible assets consist primarily of purchased technology rights and are
stated at cost less accumulated amortization. Amortization is calculated on
a
straight-line basis over the estimated useful lives of these assets of an
average of 10 years and recorded in cost of revenues.
Short-term
Loans
Short-term
loans are temporally loans from third parties to finance the Company’s operation
due to lack of cash resources. These loans are unsecured, non-interest bearing
and have no fixed terms of repayment, therefore, deemed payable on demand.
Cash
flows from these activities are classified as cash flows from financing
activates.
Due
to Employees
Due
to
employees are temporally short-term loans from our employees to finance the
Company’s operation due to lack of cash resources. These loans are unsecured,
non-interest bearing and have no fixed terms of repayment, therefore, deemed
payable on demand. Cash flows from these activities are classified as cash
flows
from financing activates. The total borrowing from employees was $0 and $0
for
the six months ended June 30, 2008 and 2007, respectively.
Revenue
Recognition
The
Company derives its revenue primarily from the sale of various branded
conventional seeds and branded seeds with biotechnology traits. Revenue is
recognized when pervasive evidence of an arrangement exists, products have
been
delivered, the price is fixed or determinable, collectibility is reasonably
assured and the right of return has expired. The estimated amounts of revenues
billed in excess of revenues recognized are recorded as deferred
revenues.
Governmental
subsidy for one plant variety protection
In
February 2008, Zhouyuan received governmental subsidy of $552,092 (RMB
3,950,000) for one of its plant variety protections, named H8723, which is
a
wheat variety and was cultivated by one of Zhouyuan's predecessor, Laizhou
Agriculture Science Research and Development Ltd.
Research
and Development Costs
Research
and development costs relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred. The Research and development cost was immaterial for
the
Company for the six months ended June 30, 2008 and 2007, respectively, and
was
included into general and administration expenses.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4—SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising
Costs
Advertising
costs are expensed as incurred and included as part of selling and marketing
expenses. Advertising expenses were $3,768 and $1,610 for the six months ended
June 30, 2008 and 2007, respectively.
Pension
and Employee Benefits
Full
time
employees of the PRC entities participate in a government mandated
multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees. Chinese labor regulations require
the Company to accrue for these benefits based on certain percentages of the
employees' salaries. The total provisions for such employee benefits were
$16,406 and $16,272 for the six months ended June 30, 2008 and 2007,
respectively.
Statutory
Reserves
Pursuant
to the laws applicable to the PRC, PRC entities are required to make
appropriations to three non-distributable reserve funds, the statutory surplus
reserve, statutory public welfare fund, and discretionary surplus reserve,
based
on after-tax net earnings as determined in accordance with the PRC GAAP.
Appropriation to the statutory surplus reserve should be at least 10% of the
after-tax net earnings until the reserve is equal to 50% of the Company's
registered capital. Appropriation to the statutory public welfare fund is 10%
of
the after-tax net earnings. The statutory public welfare fund is established
for
the purpose of providing employee facilities and other collective benefits
to
the employees and is non-distributable other than in liquidation. No
appropriations to the discretionary surplus reserve are made at the discretion
of the Board of Directors. The statutory surplus reserve fund and statutory
public welfare fund are included into retained earnings in the balance sheet
presented. Since the Company has been accumulating deficiency, no such reserve
funds have been made.
Income
Taxes
The
Company accounts for income taxes in interim periods as required by Accounting
Principles Board Opinion No. 28 "Interim Financial Reporting" and as interpreted
by FASB Interpretation No. 18, "Accounting for Income Taxes in Interim Periods".
The Company has determined an estimated annual effect tax rate. The rate will
be
revised, if necessary, as of the end of each successive interim period during
the Company's fiscal year to its best current estimate.
The
estimated annual effective tax rate is applied to the year-to-date ordinary
income (or loss) at the end of the interim period.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4—SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings
(Loss) Per Share
The
Company reports earnings per share in accordance with the provisions of SFAS
No.
128, “Earnings Per Share.” SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings (loss) per share
is
computed by dividing income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is computed similar to basic earnings per share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. There are no potentially
dilutive securities for the six months ended June 30, 2008 and 2007,
respectively.
Comprehensive
Income
Statement
of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive
Income,” establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated comprehensive income, as presented in the accompanying statement
of
changes in shareholders' equity consists of changes in unrealized gains and
losses on foreign currency translation. This comprehensive income is not
included in the computation of income tax expense or benefit.
Segment
Reporting
SFAS
No.
131 “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments on
a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company currently plans on operating in one principal
business segment. Therefore, segment disclosure is not presented.
Related
Parties
For
the
purposes of these financial statements, parties are considered to be related
to
the Company if the Company has the ability, directly or indirectly, to control
the party or exercise significant influence over the party in making financial
and operating decisions, or vice versa, or where the Company and the party
are
subject to common control or common significant influence. Related parties
may
be individuals or other entities.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4—SIGNIFICANT ACCOUNTING POLICIES (continued)
Reverse
Stock Split
Effective
on January 2, 2007, the Company filed with the Secretary of State of the State
of North Carolina Articles of Amendment to its Articles of Incorporation. The
amendment effected a reverse stock split of the Company's common stock in the
ratio of 1:6. The number of common stocks issued and outstanding immediately
after the reverse stock split was 12,001,635, including an addition of 2,234
shares for rounding up fractional shares. All share and per share information
included in these consolidated financial statements have been adjusted to
reflect this reverse stock split.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations is calculated based upon the functional currency. As a
result, amounts related to assets and liabilities reported on the statement
of
cash flows may not necessarily agree with changes in the corresponding balances
on the balance sheet.
Recent
Accounting Pronouncements
In
June
2008, the Financial Accounting Standards Board (“FASB”) issued FSP No. EITF
03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1
concludes that unvested share-based payment awards that contain rights to
receive non-forfeitable dividends or dividend equivalents are participating
securities, and thus, should be included in the two-class method of computing
earnings per share (“EPS”). FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years.
Early
application of EITF 03-6-1 is prohibited. It also requires that all prior-period
EPS data be adjusted retrospectively. We have not yet determined the effect,
if
any, of the adoption of this statement on our financial condition or results
of
operations.
In
April
2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful
Life
of Intangible Assets (“FSP FAS 142-3”) which amends the factors an entity should
consider in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FAS No. 142, Goodwill and
Other Intangible Assets (“FAS No. 142”). FSP FAS 142-3 applies to intangible
assets that are acquired individually or with a group of assets and intangible
assets acquired in both business combinations and asset acquisitions. It removes
a provision under FAS No. 142, requiring an entity to consider whether a
contractual renewal or extension clause can be accomplished without substantial
cost or material modifications of the existing terms and conditions associated
with the asset. Instead, FSP FAS 142-3 requires that an entity consider its
own
experience in renewing similar arrangements. An entity would consider market
participant assumptions regarding renewal if no such relevant experience exists.
FSP FAS 142-3 is effective for year ends beginning after December 15, 2008
with
early adoption prohibited. We have not yet determined the effect, if any, of
the
adoption of this statement on our financial condition or results of
operations.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4—SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent
Accounting Pronouncements (continued)
In
March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities”. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company is currently evaluating the impact of adopting SFAS 161 on its
consolidated financial statements.
In
December 2007, the FASB issued Statements of Financial Accounting Standards
No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”) and No. 160,
“Noncontrolling Interests in Consolidated Financial Statements - an amendment
to
ARB No. 51” (“SFAS 160”). Both SFAS 141R and SFAS 160 are to be adopted
effective January 1, 2009. SFAS 141R requires the application of several new
or
modified accounting concepts that, due to their complexity, could introduce
a
degree of volatility in periods subsequent to a material business combination.
SFAS 141R requires that all business combinations result in assets and
liabilities acquired being recorded at their fair value, with limited
exceptions. Other areas related to business combinations that will require
changes from current GAAP include: contingent consideration, acquisition costs,
contingencies, restructuring costs, in process research and development and
income taxes, among others. SFAS 160 will primarily impact the presentation
of
minority or noncontrolling interests within the Balance Sheet and Statement
of
Operations as well as the accounting for transactions with noncontrolling
interest holders. The Management does not expect that the adoption of SFAS
No.
141 (revised 2007) and SFAS No. 160 would have a material effect on the
Company’s financial position and results of operations.
Note
5—ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
254,030
|
|
$
|
278,713
|
|
less:
Allowance for bad debt
|
|
|
(226,104
|
)
|
|
(260,333
|
)
|
Accounts
receivable, net
|
|
$
|
27,926
|
|
$
|
18,380
|
|
We
use
indirect method to write off accounts receivable. The bad debt expenses was
$0
and $0 for the six months ended June 30, 2008 and 2007,
respectively.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
6—INVENTORIES
Inventories
consist of following:
Inventories
consist of following:
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
101,795
|
|
$
|
121,923
|
|
Supply
and packing materials
|
|
|
60,714
|
|
|
61,677
|
|
|
|
$
|
162,509
|
|
$
|
183,600
|
|
Note
7—PROPERTY AND EQUIPMENT
The
following is a summary of property, plant and equipment-at cost, less
accumulated depreciation:
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Property
and plant
|
|
$
|
2,074,428
|
|
$
|
1,948,984
|
|
Machines
and equipment
|
|
|
201,583
|
|
|
189,391
|
|
Office
equipment
|
|
|
19,717
|
|
|
17,801
|
|
Motor
vehicles
|
|
|
104,543
|
|
|
98,222
|
|
Total
|
|
|
2,400,271
|
|
|
2,254,398
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(513,604
|
)
|
|
(426,870
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,886,667
|
|
$
|
1,827,528
|
|
Depreciation
expense charged to operations was $57,581 and $51,392 for the six months ended
June 30, 2008 and 2007, respectively.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
8—LAND USE RIGHT
The
following is a summary of land use right, less amortization:
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Land
use right
|
|
$
|
526,068
|
|
$
|
494,255
|
|
less:
Amortization
|
|
|
(50,542
|
)
|
|
(42,188
|
)
|
Accounts
receivable, net
|
|
$
|
475,526
|
|
$
|
452,067
|
|
Amortization
expense charged to operations was $5,478 and $5,012 for the six months ended
June 30, 2008 and 2007, respectively.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
9—ACQUIRED PLANT VARIETY PROTECTIONS
The
following is a summary of acquired seed patents, less amortization:
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Acquired
plant variety protections
|
|
$
|
1,514,407
|
|
$
|
1,422,826
|
|
less:
Amortization
|
|
|
(1,009,604
|
)
|
|
(877,409
|
)
|
Accounts
receivable, net
|
|
|
504,803
|
|
|
545,417
|
|
Amortization
expense charged to operations was $73,570 and $67,314 for the six months ended
June 30, 2008 and 2007, respectively.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
10—COMMON STOCK
On
January 18, 2007, The Company entered into a Share Exchange Agreement with
Mr.
Wang, Zhigang and Ms. You, Li, who are the shareholders of Infolink, pursuant
which the Company will issue to Messrs. Wang and You 55,000,000 (330,000,000
pre-split) shares of its common stock in exchange for all of the capital stock
of Infolink. Since this transaction was treated for accounting purposes as
a
capital transaction and reverse merger, the issuance of 33,000,000 shares of
common has been report in 2006, as if it had happened in the earliest period
presented in these consolidated financial statements.
On
April
5,2007, the Company engaged a consultant for a eighteen-month period ended
October 4, 2008. The terms of the agreement are for the consultant to receive
800,000 shares of common stock valued at $0.28 per share, totaling $224,000,
which will be amortized over the beneficial period. The consultant assists
the
Company in establish two distribution centers in the Center Region,
PRC.
On
April
5,2007, the Company engaged another consultant for a twenty-four-month period
ended April 4, 2009. The terms of the agreement are for the consultant to
receive 1,200,000 shares of common stock valued at $0.28 per share, totaling
$336,000, which will be amortized over the beneficial period. The consultant
assists the Company in website design, building, maintenance, and
hosting.
On
April
5,2007, the Company engaged another consultant for a twenty-four-month period
ended April 4, 2009. The terms of the agreement are for the consultant to
receive 1,000,000 shares of common stock valued at $0.28 per share, totaling
$280,000, which will be amortized over the beneficial period. The consultant
assists the Company in establish two distribution centers in the Southwest
Region, PRC.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
11—BANK LOANS
Bank
loans consist of the following as of June 30, 2008:
|
|
|
Loan
|
|
|
|
Annual
|
|
|
|
|
Financial
Institutions
|
|
Amount
|
|
Duration
|
|
Interest
Rate
|
|
Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Agricultural
Bank
of China
|
|
$
|
596,641
|
|
|
04/21/04—
04/21/05
|
|
|
6.903
|
%
|
|
Headquarter
Building and land usage right
|
|
*
|
Agricultural
Bank
of China
|
|
|
582,089
|
|
|
11/26/04—
11/26/05
|
|
|
7.488
|
%
|
|
Guaranteed
by a real estate development company
|
|
*
|
Agricultural
Bank
of China
|
|
|
69,851
|
|
|
11/26/04—
11/26/05
|
|
|
7.488
|
%
|
|
Guaranteed
by a real estate development company
|
|
|
|
|
$
|
1,248,581
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The
Company defaulted on these bank loans, totally $1,248,581 , as
of June 30,
2008. The Company also defaulted on bank loan interest payments
of
$353,147 as of June 30, 2008.
|
In
2004,
the Company sold the usage right of a piece of land, which the Company used
to
secure its bank loans, to a real estate development company. The real estate
company agreed to guarantee these bank loans.
Interest
expense for these bank loans was $90,067 and $88,793 for the six months ended
March 31, 2008 and 2007, respectively.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
12—RECEIVABLE FROM SALE OF LAND USE RIGHT
In
2004,
the Company sold land use rights to a real estate development company for
$1,228,858. The real estate development company owes the Company $309,025 as
of
December 31, 2004. The parties agreed that the real estate development company
would pay interest annually at 7.488% on $126,817 (RMB 1,000,000) of the
$309,025 and the rest of the balance bears no interest.
The
receivable from sale of land use right consists of the following:
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Balance
bearing interest at 7.488%
|
|
$
|
145,522
|
|
$
|
136,722
|
|
Balance
bearing no interest
|
|
|
201,955
|
|
|
189,743
|
|
|
|
|
347,477
|
|
|
326,465
|
|
Note
13—COMMITMENTS AND CONTINGENCIES
The
Company faces a number of risks and challenges not typically associated with
companies in North America and Western Europe, since its assets exist solely
in
the PRC, and its revenues are derived from its operations therein. The PRC
is a
developing country with an early stage market economic system, overshadowed
by
the state. Its political and economic systems are very different from the more
developed countries and are in a state of change. The PRC also faces many
social, economic and political challenges that may produce major shocks and
instabilities and even crises, in both its domestic arena and in its
relationships with other countries, including the United States. Such shocks,
instabilities and crises may in turn significantly and negatively affect the
Company's performance.
Note
14—LITIGATION
On
August
1, 2006 Greentree Financial Group, Inc. ("Greentree"), a former consultant
to a
subsidiary of the Company, filed a breach of contract complaint in the Superior
Court in Mecklenberg County, North Carolina for non payment of contractual
obligations for 2004 and 2005. The claim is for $49,000 in cash and $40,000
worth of stock as compensatory damages or $80,000 in liquidated damages. The
Company failed to appear to the Court, and the Court rendered a judgment, which
orders the Company to pay the plaintiff a sum of $201,500, with interest thereon
at the rate of 8.000% per annum from the date of Entry of the judgment until
paid; and for the costs of this action, in full, to be taxed by the Clerk.
Subsequently, Greentree filed an involuntary bankruptcy petition in the U.S.
Bankruptcy Court to collect on the default judgment.
On
May
23, 2008, the Company entered into a Settlement Agreement and Release (the
“Settlement Agreement”) with GreenTree. Pursuant to the Settlement Agreement,
Greentree is entitled to receive 4,000,000 shares of the Company’s common stock
from various stockholders of the Company and upon delivery of the common stock
by such stockholders, Greentree agreed to file with the appropriate courts
stipulation of dismissal with prejudice to dismiss the petition to collect
on
the default judgment and to remove the default judgment within five business
days. On August 13, 2008, the Company delivered stock certificates representing
4,000,000 shares of the Company’s common stock to Greentree.
SHANDONG
ZHOUYUAN SEED AND NURSERY CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
15—CONTRACT SECURITY DEPOSIT
On
March
18, 2008, the Company executed an acquisition agreement with Henan Zhongyi
Seed
and Nursery Co., Ltd.("Henan Zhongyi"), pursuant to which the Zhouyuan will
acquire 51% equity ownership interest of Henan Zhongyi. Zhouyuan paid $80,036
(RMB 550,000) to security this contract. Zhouyuan is currently negotiating
with
the majority shareholders of Henan Zhongyi to finlize the acquisition terms.
However, there is no guarantee the parties will be able close the
due.
On
April
11, 2008, the Company executed an acquisition agreement with Sichuan Huaxia
Seed
and Nursery Co., Ltd.("Sichuan Huaxia"), pursuant to which the Zhouyuan will
acquire 51% equity ownership interest of Sichuan Huaxia. Zhouyuan paid $56,871
(RMB 390,800) to security this contract. Zhouyuan is currently negotiating
with
the majority shareholders of Sichuan Huaxia to finalize the acquisition terms.
However, there is no guarantee the parties will be able close the
due.
ITEM
2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Business
Overview
Shandong
Zhouyuan Seed and Nursery Co., Ltd. (“Zhouyuan”) through its consolidated
subsidiary, Shandong Zhouyuan Seed and Nursery Co., Ltd., a company formed
under
the laws of the People’s Republic of China, is engaged in the business of
developing, distributing and selling agricultural seeds in China.
The
Company was originally incorporated in the State of North Carolina on July
20,
1996 under the name “Great Land Development Co.” In 2000 Great Land Development
Co. changed its name to “Xenicent, Inc.” In 2004 Xenicent, Inc. changed its name
to “Pingchuan Pharmaceutical, Inc.” In 2007 Pingchuan changed its name to
“Shandong Zhouyuan Seed and Nursery Company, Ltd.” As Great Land Development Co.
the Company was in the business of real estate consulting and purchasing and
reselling vacant tracts of land, primarily in the North Carolina area. In 2002,
the Company acquired a majority interest in Giantek Technology Corporation
("Giantek"), a Taiwanese corporation that manufactured and distributed Light
Emitting Diode (LED) display systems. In 2003, the Company terminated its
relationship with Giantek and agreed to transfer all of the Company’s interest
in Giantek back to its former controlling shareholders. Thereafter the Company
existed as a “shell company,” but not a “blank check” company, under regulations
promulgated by the SEC and had no business operations and only nominal assets
until 2004 when the Company entered into a plan of exchange with Heilongjiang
Pingchuan Yi Liao Qi Xie You Xian Gong Si, a corporation organized and validly
existing under the laws of the People’s Republic of China. The plan of exchange
was consummated on August 11, 2004 and the Company changed its name to
“Pingchuan Pharmaceutical, Inc.” Pingchuan was engaged in the business of
providing integrated operational management services for a related medical
company, Harbin Pingchuan Yao Ye Gu Fen You Xian Gong Si, a corporation validly
organized and existing under the laws of the People’s Republic of China (“Gu
Fen”). In February 2007, the Company consummated the merger of Infolink Pacific
Limited into a wholly-owned subsidiary of the Company (the “Merger”) and changed
its state of incorporation from North Carolina to Delaware. See “The Merger”
below. In connection with the Merger, the Company changed its name from
“Pingchuan Pharmaceutical, Inc.” to “Shandong Zhouyuan Seed and Nursery Company,
Ltd.” Unless the context otherwise requires, the term “Company” as used herein
collectively refers to Shandong Zhouyuan and its wholly-owned subsidiaries
and
consolidated entities, including Infolink Pacific Limited and Shandong Zhouyuan
Seed and Nursery Co., Ltd., a PRC company.
The
Common Stock of the Company is quoted on the Over-the-Counter Bulletin Board
under the symbol “SZSN.OB.” See, “Part II, Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity
Securities.”
The
Company’s executive offices are located at 238 Jianxindong Street, Laizhou,
Shandong Province, Peoples Republic of China. The Company may be contacted
by
telephone at 011 86 451-8271-3712, and its website is
www.chinaseedcorp.com.
Subsidiaries
and Joint Ventures
The
diagram below illustrates the current corporate structure of the Company and
its
subsidiaries (“we,” “our,” “us,” or the “Company”):
InfoLink
Pacific Limited
Infolink
was incorporated on September 28, 2006 in British Virgin Islands (“BVI”) under
the BVI Business Companies Act, 2004 by Li Han Xun and You Li, for the purpose
of seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as
defined by Statement of Financial Accounting Standards (SFAS) No.
7.
In
October 2006 Li Han Xun and You Li, the record shareholders of the PRC
Subsidiary, entered into Trust and Indemnity Agreements with Infolink pursuant
to which Mr. Li and Ms. You assigned to Infolink all of the benefits of
ownership of 60% of the total equity interests in the PRC Subsidiary. In
addition, Mr. Li and Ms. You agreed to vote on shareholder matters as directed
by Infolink. Finally, the Declaration of Trust signed by Mr. Li and Ms. You
contains their undertaking to assign the shares of the PRC Subsidiary to
Infolink at any time upon Infolink’s request.
Shandong
Zhouyuan Seed and Nursery Co., Ltd.
Shandong
Zhouyuan Seed and Nursery Co., Ltd., a People’s Republic of China company was
organized on October 26, 2001 under the laws of the People’s Republic of China
(the “PRC Subsidiary” or “Zhouyuan”) by Li Han Xun and You Li, who are the
record shareholders of the PRC Subsidiary. The PRC Subsidiary was created from
the merger of two formerly state owned companies, Laizhou Yongzhou Seed Ltd
and
Laizhou Agriculture Science Research and Development Ltd., which were reformed
and merged into one company named Laizhou Huiyuan Seed Ltd. ("Huiyuan") on
October 26, 2001. On December 24, 2002, Huiyuan changed its name to Shandong
Zhouyuan Seed and Nursery Co., Ltd. Since its formation in 2001, the PRC
Subsidiary has worked closely with government agencies, particularly the state
Science and Technology Commission, to develop improved hybrid seed strains.
The
PRC Subsidiary now ranks as one of the top three seed producers in the LaiZhou
District, which is known as the “Seed Valley of China.”
The
Merger
On
January 18, 2007, the Company entered into a Share Exchange Agreement with
Infolink Pacific Limited pursuant to which the Company issued 55,000,000 shares
of its common stock to Li Han Xun and You Li in exchange for all of the issued
and outstanding capital stock of Infolink and Infolink became a wholly-owned
subsidiary of the Company.
Subsequently
the Parent Corporation terminated the pharmaceutical consulting business that
had been carried by its subsidiary, Heilongjiang Pingchuan Yi Liao Qi Xie You
Xian Gong Si. On April 2, 2007, the Parent Corporation changed its name to
“Shandong Zhouyuan Seed and Nursery Co., Ltd.”
The
merger of the Company with Infolink was accounted for as a reverse merger and
the transaction was treated for accounting purposes as a recapitalization of
the
accounting acquirer (Infolink) and a reorganization of the accounting acquiree
(the Company). Accordingly, the historical financial statements presented prior
to the merger are the historical financial statements of Infolink, which
includes the PRC Subsidiary.
In
addition, under U.S. accounting rules, as a result of the obligations of the
parties under the Trust and Indemnity Agreements described above, Infolink
is
deemed to be a 60% beneficiary of the PRC Subsidiary and the financial results
of the PRC Subsidiary may be consolidated with the financial results of the
Company under Financial Interpretation 46 (Revised) "Consolidation of Variable
Interest Entities" issued by the Financial Accounting Standards Board ("FASB").
On
April
2, 2007, the Company changed its name to Shandong Zhouyuan Seed and Nursery
Co.,
Ltd.
Production
Zhouyuan
currently has approval from several provincial governments to market a wide
variety of seeds. Its primary product is corn seed, including both corn intended
for forage and corn with a high starch content for use in industrial food
production. In addition, Zhouyuan currently markets varieties of wheat seeds
and
cabbage seeds.
Among
Zhouyuan’s most popular products are:
|
·
|
Corn
- Huiyaun 20. This summer sowing seed achieved first place among
33
competitors in a productivity test conducted in the Zhong District
and
second place in a competition held in Anhui Province.
|
|
·
|
Corn
- White Prince. This white corn has a high gluten content that gives
it a
particularly attractive taste. Zhouyuan is able to sell these seeds
for
almost four times the market price of standard corn
seeds.
|
|
·
|
Corn
- Select Yeden 5. This corn is valued in difficult climates because
it is
especially resistant to disease and
collapse.
|
|
·
|
Corn
- Spring Queen. In only 65 days (compared to the standard 95 - 115
days)
this seed produces a high yield of corn (approx. 24,000 kg. per acre)
with
a particularly good taste. Because of these benefits, Zhouyuan prices
this
seed at nine times the price of conventional corn
seeds.
|
|
·
|
Wheat
- Zhouyuan 9369. This is a new variety of high quality wheat. It
is rust
resistance, and grows to 75 cm.
|
The
majority of Zhouyuan’s seeds are currently produced by three independent seed
growers and one municipality consisting of seven towns. These four sources
dedicate 1400 to 1750 acres to growing seeds for Zhouyuan. Zhouyuan has long
standing working relationships with all of its seed growers. Zhouyuan provides
its growers with the patented seeds and the growers would produce the volume
of
seeds as required by Zhouyuan. There are no long term contractual relationships
between Zhouyuan and any of its growers. Zhouyuan determines its volume
requirements based on its determination of market demand and contracts the
growers to produce enough seeds to meet the market demand on a seasonal basis.
Zhouyuan then inspects and packages the seed for distribution
wholesale.
Zhouyuan’s
proprietary rights to its seeds are protected by patents, specifically six
patents on its corn hybrids, one on its wheat hybrid and one on its cabbage
hybrid. Zhouyuan also owns seven registered trademarks.
The
Seed Industry
The
People’s Republic of China contains less than 7% of the world’s cultivatable
land, but 22% of the world’s population. For this reason, the government of
China has placed a special focus on developing the advanced agricultural
technology needed to successfully feed its population. The seed industry has
been a prime beneficiary of this focus, receiving grants, tax relief and
technological assistance.
Until
2000 China restricted the market of any individual seed company to the district
in which it was located. The Seed Law of the People’s Republic of China, issued
in 2000, eliminated that restriction. Today, there are approximately 3,700
firms
marketing seeds nationwide in China. However, because the ability to have a
national presence is new, the firms marketing seeds in China tend to be small,
and none has significant market share. The eight largest seed companies are
believed to control only about 25% of the national market.
A
number
of multinational companies have made inroads into the Chinese seed market,
among
them Monsanto, Pioneer and Sygenta. To date, however, their influence has been
limited by the difficulty of marketing to the highly decentralized agricultural
community in China. In addition, the multinationals primarily offer
genetically-engineered seeds, which have not gained widespread acceptance in
China.
Marketing
Farming
in China remains a highly decentralized industry. Marketing to farmers is
conducted at a local level and customer loyalty is built on personal
relationships. For that reason, Zhouyuan has developed a decentralized
distribution network, constituted by county-based sales representatives who
report to independent retail companies located in each of the 19 Provinces
and
Autonomous Regions in which Zhouyuan carries on marketing operations. Zhouyuan’s
internal marketing personnel are responsible for monitoring the performance
of
the regional sales companies and providing any assistance they require.
Government
Regulation
Limitations
on Foreign Ownership in the Seed Industry
Due
to
restriction in the People’s Republic of China on foreign investments in Chinese
businesses in the seed industry, Infolink does not have direct equity ownership
in Zhouyuan. Zhouyuan is owned by two PRC citizens, who hold 60% of the equity
interests in Zhouyuan in trust for the benefit of the Company.
Regulation
of Foreign Currency Exchange
The
principal regulation governing foreign currency exchange in China is the Rules
on Foreign Exchange Control (1996), as amended. Under the Rules, Renminbi is
freely convertible for trade and service-related foreign exchange transactions,
but not for direct investment, loan or investment outside China unless the
prior
approval of the State Administration for Foreign Exchange of the PRC or other
relevant authorities is obtained.
Pursuant
to the Rules on Foreign Exchange Control, foreign investment enterprises in
China may purchase foreign currency without the approval of the State
Administration for Foreign Exchange of the PRC for trade and service-related
foreign exchange transactions by providing commercial documents evidencing
these
transactions. They may also retain foreign exchange (subject to a cap approved
by the State Administration for Foreign Exchange of the PRC) to satisfy foreign
exchange liabilities or to pay dividends. However, the relevant PRC government
authorities may limit or eliminate the ability of foreign investment enterprises
to purchase and retain foreign currencies in the future. In addition, foreign
exchange transactions for direct investment, loan and investment outside China
are still subject to limitations and require approvals from the State
Administration for Foreign Exchange of the PRC.
Regulation
of Dividend Distribution
The
principal regulations governing distribution of dividends of wholly
foreign-owned companies include:
|
·
|
The
Foreign Investment Enterprise Law (1986), as amended;
and
|
|
·
|
Administrative
Rules under the Foreign Investment Enterprise Law
(2001).
|
Under
these regulations, foreign investment enterprises in China may pay dividends
only out of their accumulated profits, if any, determined in accordance with
PRC
accounting standards and regulations. In addition, wholly foreign-owned
enterprises in China are required to set aside at least 10% of their after-tax
profits each year, if any, to fund certain reserve funds, unless such reserve
funds as accumulated have reached 50% of their respective registered capital.
These reserves are not distributable as cash dividends.
Regulation
of Enterprise Income Law
The
Enterprise Income Law (“EIT Law’) was promulgated by the National People’s
Congress on March 16, 2007 to introduce a new uniform taxation regime in the
PRC. Both resident and non-resident enterprises deriving income from the PRC
will be subject to this EIT Law from January 1, 2008. It replaces the previous
two different tax rates applied to foreign-invested enterprises and domestic
enterprises by only one single income tax rate applied for all enterprises
in
the PRC. Under this EIT Law, except for some hi-tech enterprises which are
subject to EIT rates of 15% and other very limited situation that allows EIT
rates at 20%, the general applicable EIT rate in the PRC is 25%. We may not
enjoy tax incentives for our further established companies in the PRC and
therefore our tax advantages over domestic enterprises may be
diminished.
Employees
Zhouyuan
has 68 employees, all of whom are employed on a full-time basis. Its employees
include 1 research scientist, 13 senior agronomists, 27 agronomists and 18
technicians.
Results
of Operations
Three
Months Ended June 30, 2008 Compared To Three Months Ended June 30,
2007
Revenues
.
Revenues for the quarter ended June 30, 2008 were $541,636 compared to $270,413
for the quarter ended June 30, 2007, an increase of $271,223, or 100%. This
increase was due to an increase in sales of our seeds with plant variety
protections which has a higher profit margin.
Cost
of sales
.
Cost of
sales increased by 71% from $231,086 for the three months ended June 30, 2007
to
$395,188 for the three months ended June 30, 2008. The increase in cost of
sales
resulted primarily from the increase in volume of seeds sold.
Operating
Expenses
.
Operating expenses decreased by 47% from $398,562 for the three months ended
June 30, 2007 to $209,463 for the three months ended June 30, 2008. The decrease
in operating expenses was primarily because the Company incurred no judgment
expense for the three months ended June 30, 2008.
Net
Income
.
Net
income increased by 73% from net loss of $367,958 for the three months ended
June 30 to a net loss of $99,887 for the three months ended June 30, 2008,
primarily as a result of a 100% increase in sales as described
above.
Our
business operates entirely in Chinese Renminbi, but we report our results in
our
SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars
results in translation adjustments, which are reported as a middle step between
net income and comprehensive income. The net income or net loss is added to
the
retained earnings on our balance sheet; while the translation adjustment is
added to a line item on our balance sheet labeled “accumulated other
comprehensive income,” since it is more reflective of changes in the relative
values of U.S. and Chinese currencies than of the success of our business.
For
the first three months of 2008 we recorded $13,925 in unrealized gains on
foreign currency translation.
Six
Months Ended June 30, 2008 Compared To Six Months Ended June 30,
2007
Revenues
.
Revenues for the quarter ended June 30, 2008 were $809,691 compared to $459,349
for the quarter ended June 30, 2007, an increase of $350,342, or 76%. This
increase was due to an increase in sales of our seeds with plant variety
protections which has a higher profit margin.
Cost
of sales
.
Cost of
sales increased by 48% from $422,506 for the six months ended June 30, 2007
to
$625,769 for the six months ended June 30, 2008. The increase in cost of sales
resulted primarily from the increase in volume of seeds sold.
Operating
Expenses
.
Operating expenses decreased by 13% from $494,244 for the six months ended
June
30, 2007 to $430,534 for the six months ended June 30, 2008. The decrease in
operating expenses was primarily because the Company incurred no judgment
expense for the six months ended June 30, 2008.
Net
Income
.
Net
income increased by 110% from net loss of $442,459 for the six months ended
June
30, 2007 to net income of $42,952 for the six months ended June 30, 2008,
primarily as a result of a 76% increase in sales as described above and the
government subsidy for one of our plant variety protection in the amount of
$552,092.
Our
business operates entirely in Chinese Renminbi, but we report our results in
our
SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars
results in translation adjustments, which are reported as a middle step between
net income and comprehensive income. The net income or net loss is added to
the
retained earnings on our balance sheet; while the translation adjustment is
added to a line item on our balance sheet labeled “accumulated other
comprehensive income,” since it is more reflective of changes in the relative
values of U.S. and Chinese currencies than of the success of our business.
For
the first six months of 2008 we recorded $36,654 in unrealized gains on foreign
currency translation.
Liquidity
and Capital Resources
As
of
June 30, 2008, total current assets were $562,803, total current liabilities
were $2,843,276 and we had working capital deficit of $2,280,473. Cash at June
30, 2008 was $186,876.
As
of
June 30, 2008, we had only $186,876 in liquid assets, and only $27,926 in
accounts receivable (net of allowance). At the same time we are in default
on
bank loans and interest payments totaling $1,248,581. Negotiations are ongoing
with respect to a restructuring of the debt. At the same time, we cannot sustain
operations for any significant period of time unless we obtain additional
capital. Our efforts to attract capital are hindered, however, by our default
to
the Bank. The survival of our business, therefore, depends on our ability to
develop a comprehensive debt relief and financing package. Unfortunately,
because our operations have produced only a trickle of cash during the past
two
years, we can only achieve financing if we convince the investor that an
investment in our company can be leveraged into a significant increase in
revenues and cash flows.
In
the
event that we are unable to achieve a restructuring of our debt, it is likely
that we will be required to sell our real property. This will have the effect
of
eliminating the revenue stream that we obtain by leasing a portion of the
property, and will necessitate that we ourselves commence payment of lease
fees.
This would cause a further deterioration of our financial
results.
Net
cash
provided by operating activities was $397,026 for the six months ended June
30,
2008 compared to a net loss of $92,158 for the six months ended June 30, 2007.
The increase is primarily related to an increase in sales.
Net
cash
used in investing activities was $741 for the six months ended June 30, 2008
compared to $86,089 for the same period in 2007.
Net
cash
used by financing activities was $244,942 for the six months ended June 30,
2008
compared to $30,426 in net cash used in financing activities for the same period
in 2007. The increase in net cash used is primarily due to payback of bank
loans.
We
believe that our business plan is sound, and that our products are marketable.
With adequate capital, we believe that Zhouyuan can be prosperous and
profitable. We have no assurance, however, that the necessary capital can be
achieved.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition or results of
operations.
ITEM
4T. CONTROLS AND PROCEDURES
As
required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange
Act”), as of the end of the period covered by this Quarterly Report, being June
30, 2008, we have carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer.
Based upon that evaluation, our Chief Executive Officer along with our Chief
Financial Officer concluded that our disclosure controls and procedures are
effective as of the end of the period covered by this Quarterly Report. There
have been no significant changes in our internal controls over financial
reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting.
Disclosure
controls and procedures and other procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under
the
Exchange Act are recorded, processed, summarized and reported, within the time
period specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
our
reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer
as
appropriate, to allow timely decisions regarding required disclosure.
PART
II - OTHER INFORMATION
Item
1
Legal
Proceedings
On
August
1, 2006 Greentree Financial Group, Inc. ("Greentree"), a former consultant
to a
subsidiary of the Company, filed a breach of contract complaint in the Superior
Court in Mecklenberg County, North Carolina for non payment of contractual
obligations for 2004 and 2005. The claim is for $49,000 in cash and $40,000
worth of stock as compensatory damages or $80,000 in liquidated damages. The
Company failed to appear to the Court, and the Court rendered a judgment, which
orders the Company to pay the plaintiff a sum of $201,500, with interest thereon
at the rate of 8.000% per annum from the date of Entry of the judgment until
paid; and for the costs of this action, in full, to be taxed by the Clerk.
Subsequently, Greentree filed an involuntary bankruptcy petition in the U.S.
Bankruptcy Court to collect on the default judgment.
On
May
23, 2008, the Company entered into a Settlement Agreement and Release (the
“Settlement Agreement”) with GreenTree. Pursuant to the Settlement Agreement,
Greentree is entitled to receive 4,000,000 shares of the Company’s common stock
from various stockholders of the Company and upon delivery of the common stock
by such stockholders, Greentree agreed to file with the appropriate courts
stipulation of dismissal with prejudice to dismiss the petition to collect
on
the default judgment and to remove the default judgment within five business
days. On August 13, 2008, the Company delivered stock certificates representing
4,000,000 shares of the Company’s common stock to Greentree.
Item
1A. Risk Factors
Risk
Factors That May Affect Future Results
You
should carefully consider the risks described below before buying our common
stock. If any of the risks described below actually occurs, that event could
cause the trading price of our common stock to decline, and you could lose
all
or part of your investment.
There
is no assurance that we will be able to generate profits from our
business.
To
date
we have been unsuccessful in establishing a sufficient market for our seeds
to
assure us of profitability. In 2006 our sales were 34% lower than in 2005,
and
in neither year were sales at a level that could sustain profits. Although
sales
levels are higher in the current year than in 2007, we are still not near a
revenue level at which we can be profitable. Unless we are able to obtain
sufficient capital investment to permit us to expand operations, it is unlikely
that we will be able to operate at a profitable level. We have no commitment
from any source for financing, and there is no assurance that we will be able
to
obtain the necessary financing. Without financing, it is likely that our
business will fail.
If
we
are unable to settle our bank obligations, we may lose control of our
business.
We
are
currently in default with respect to principal and interest payments due on
$1.53 million in obligations to the Agricultural Bank of China. Our current
financial situation does not permit us to satisfy the debt as written. We have
been in negotiations with the Bank regarding a restructuring of the debt. If
those negotiations do not reach a satisfactory conclusion, we may lose the
realty that we pledged to secure the debt and may face a judgment that could
force us into bankruptcy.
We
will be unable to compete effectively unless we maintain a technological
advantage over our competitors.
The
physics of seed generation has been advancing rapidly in the past forty years.
Innovations in design of seeds and methods of growing seeds are constant. Our
ability to compete effectively in this market will depend on our ability to
stay
in the vanguard of technological change. However, we compete against many larger
enterprises that have considerable resources to apply to research and
development. If we are unable to gain access to the latest discoveries in seeds,
we will not be able to compete effectively, and our business will
fail.
Our
business and growth will suffer if we are unable to hire and retain key
personnel that are in high demand.
Our
future success depends on our ability to attract and retain highly skilled
marketing personnel, chemists, manufacturing technicians and engineers.
Qualified individuals are in high demand in China, and there are insufficient
experienced personnel to fill the demand. Therefore we may not be able to
successfully attract or retain the personnel we need to succeed.
We
may have difficulty establishing adequate management and financial controls
in
China.
The
People’s Republic of China has only recently begun to adopt the management and
financial reporting concepts and practices that investors in the United States
are familiar with. We may have difficulty in hiring and retaining employees
in
China who have the experience necessary to implement the kind of management
and
financial controls that are expected of a United States public company. If
we
cannot establish such controls, we may experience difficulty in collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet U.S.
standards.
We
may be unable to protect our proprietary and technology
rights.
The
Company's success will depend in part on its ability to protect its proprietary
rights and technologies. Zhouyuan relies on a combination of patents, trademark
laws, trade secrets, confidentiality provisions and other contractual provisions
to protect its proprietary rights. However, these measures afford only limited
protection. Zhouyuan’s failure to adequately protect its proprietary rights may
adversely affect our competitive prospects. Despite our efforts to protect
our
proprietary rights, unauthorized parties may attempt to copy aspects of
Zhouyuan’s products or to obtain and use trade secrets or other information that
it regards as proprietary.
Zhouyuan’s
means of protecting its proprietary rights in the People’s Republic of China may
not be adequate. The system of laws and the enforcement of existing laws in
China may not be as certain in implementation and interpretation as in the
United States. The Chinese judiciary is relatively inexperienced in enforcing
corporate and commercial law, leading to a higher than usual degree of
uncertainty as to the outcome of any litigation. The inability to enforce or
obtain a remedy for theft of our proprietary information may have a material
adverse impact on our business operations.
Government
regulation may hinder our ability to function efficiently
.
The
national, provincial and local governments in the People’s Republic of China are
highly bureaucratized. The day-to-day operations of our business require
frequent interaction with representatives of the Chinese government institutions
in order to obtain and maintain the licenses needed to market hybrid seeds
in
China. The effort to obtain the registrations, licenses and permits necessary
to
carry out our business activities can be daunting. Significant delays can result
from the need to obtain governmental approval of our activities. These delays
can have an adverse effect on the profitability of our operations. In addition,
compliance with regulatory requirements applicable to manufacturing operations
and production may increase the cost of our operations, which would adversely
affect our profitability.
We
are subject to the risk of natural disasters
.
Our
revenue stream depends on our ability to deliver seeds at the beginning of
their
growing season. Our supply of seeds and their timely availability can be negated
by drought, flood, storm, blight, or the other woes of farming. Any such event
or a combination thereof could render us unable to meet the demands of our
distribution network. This could have a long-term negative effect on our ability
to grow our business, in addition to the near-term loss of income.
Capital
outflow policies in China may hamper our ability to pay dividends to
shareholders in the United States.
The
People’s Republic of China has adopted currency and capital transfer
regulations. These regulations require that we comply with complex regulations
for the movement of capital. Although Chinese governmental policies were
introduced in 1996 to allow the convertibility of RMB into foreign currency
for
current account items, conversion of RMB into foreign exchange for capital
items, such as foreign direct investment, loans or securities, requires the
approval of the State Administration of Foreign Exchange. We may be unable
to
obtain all of the required conversion approvals for our operations, and Chinese
regulatory authorities may impose greater restrictions on the convertibility
of
the RMB in the future. Because most of our future revenues will be in RMB,
any
inability to obtain the requisite approvals or any future restrictions on
currency exchanges will limit our ability to pay dividends to our
shareholders.
Currency
fluctuations may adversely affect our operating results.
Zhouyuan
generates revenues and incurs expenses and liabilities in Renminbi, the currency
of the People’s Republic of China. However, as a subsidiary of the Parent
Corporation, it will report its financial results in the United States in U.S.
Dollars. As a result, our financial results will be subject to the effects
of
exchange rate fluctuations between these currencies. From time to time, the
government of China may take action to stimulate the Chinese economy that will
have the effect of reducing the value of Renminbi. In addition, international
currency markets may cause significant adjustments to occur in the value of
the
Renminbi. Any such events that result in a devaluation of the Renminbi versus
the U.S. Dollar will have an adverse effect on our reported results. We have
not
entered into agreements or purchased instruments to hedge our exchange rate
risks.
We
have limited business insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products, and do not, to
our
knowledge, offer business liability insurance. As a result, we do not have
any
business liability insurance coverage for our operations. Moreover, while
business disruption insurance is available, we have determined that the risks
of
disruption and cost of the insurance are such that we do not require it at
this
time. Any business disruption, litigation or natural disaster might result
in
substantial costs and diversion of resources.
The
Parent Corporation is not likely to hold annual shareholder meetings in the
next
few years.
Management
does not expect to hold annual meetings of shareholders in the next few years,
due to the expense involved. The current members of the Board of Directors
were
appointed to that position by the previous directors. If other directors are
added to the Board in the future, it is likely that the current directors will
appoint them. As a result, the shareholders of the Parent Corporation will
have
no effective means of exercising control over the operations of the Parent
Corporation or Zhouyuan.
Item
2.
Unregistered
Sale of Equity Securities and Use of Proceeds
None.
Item
3.
Defaults
Upon Senior Securities
None.
Item
4.
Submission
of Matters to a Vote of Security Holders
None.
Item
5.
Other
Information
None.
Item 6.
|
|
Exhibits
|
|
|
|
31.1
|
|
Certifications
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act
of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certifications
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act
of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
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.
|
SHANDONG
ZHOUYUAN SEED AND
NURSERY
CO., LTD.
|
|
|
|
Date:
August 19, 2008
|
By:
|
/s/
Wang Zhigang
|
|
Wang
Zhigang, Chief Executive Officer
|
|
|
|
|
By:
|
/s/
Zhang Chunman
|
|
Zhang
Chunman, Chief Financial Officer
|
Grafico Azioni Shandong Zhouyuan Seed a... (CE) (USOTC:SZSN)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni Shandong Zhouyuan Seed a... (CE) (USOTC:SZSN)
Storico
Da Giu 2023 a Giu 2024