Liquidity
and Capital Resources
At
December 31, 2006 we had a working capital deficit of $2,098,233. We had only
$2,600 in liquid assets, and only $41,204 in accounts receivable (net of
allowance). At the same time we owed the Agricultural Bank of China $1,358,920
plus $143,059 in accrued interest, and had other past-due obligations that
far
exceeded our ability to pay.
We
remain
in default with respect to our obligations to the Bank. 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.
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.
Application
of Critical Accounting Policies
In
preparing our financial statements we are required to formulate working policies
regarding valuation of our assets and liabilities and to develop estimates
of
those values. In our preparation of the financial statements for 2006, there
were two estimates made which were (a) subject to a high degree of uncertainty
and (b) material to our results. The first was our determination, reflected
in
Note 2 and Note 7 to the Financial Statements, that our long-lived assets
(specifically, our patents) have not been impaired and should continue to be
amortized on the ten year schedule that we initially adopted. This determination
was based on our expectation that our recent losses from operations will end
as
we expand our operations, and that we will realize the full value of our
patents. The second was our determination, reflected in Note 3 to the Financial
Statements, to record a $245,240 allowance for bad debt against our $286,444
in
accounts receivable. The determination was based on our assessment that we
are
unlikely to collect the accounts beyond the net amount recorded on our balance
sheet.
We
made
no material changes to our critical accounting policies in connection with
the
preparation of financial statements for 2006.
Impact
of Accounting Pronouncements
There
were no recent accounting pronouncements that have had a material effect on
the
Company’s financial position or results of operations. There was one recent
accounting pronouncement that may have a material effect on the Company’s
financial position or results of operations.
In
December 2004, the FASB issued SFAS No. 123R “Share-Based Payment.” This
Standard addresses the accounting for transactions in which a company receives
employee services in exchange for (a) equity instruments of the company or
(b)
liabilities that are based on the fair value of the company’s equity instruments
or that may be settled by the issuance of such equity instruments. This Standard
eliminates the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
to Employees,” and requires that such transactions be accounted for using a
fair-value-based method. The Standard is effective for periods beginning after
June 15, 2005. The Standard may adversely affect the Company’s results of
operations if the Company issues a material amount of capital stock for
services.
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.
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. 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
$1.3
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.
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