Fuer International Inc. (OTC BB:FRXT)

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At least one VIE exists in the corporate structure

Company Description

Fuer International Inc. is a leading Chinese agricultural material company providing qualified hybrid corn seeds, soybean seeds, rice seeds and fertilizer products to farmers in Northeastern China, which is the most important agricultural region in the country. Through its 1,094 distributors and 3,430 outlets, the Company distributes its products to farmers located in Heilongjiang, Jilin, Northeast Inner Mongolia and the rest of China. Fuer International procures raw seeds through exclusive contracts with farmers in Heilongjiang, Jilin, and Northeast Inner Mongolia. It controls exclusive rights or patents to provide 10 varieties of corn seeds, 19 of soybean seeds and 14 of rice seed that adapt to different temperature zones and soil conditions in the region. China Golden has signed contracts with breeding bases of 16,474 acres, with an annual production capacity of 20 million kilograms and two fertilizer production lines with an annual production capacity of 50,000 tons. Fuer International has one pending patent on fertilizer, rights to four seed varieties and over 40 registered trademarks.

Factors Affecting our Results of Operations

Our results of operations are primarily affected by the following factors:

Pressures on China’s food supply. China’s food supply is impacted by decreased amounts of arable land in China as a result of urbanization, desertification, soil pollution, and other factors. China’s population is expected to keep rising, reaching approximately 1.5 billion people by 2033. With urban residents in China consuming more meat products than rural residents per capita, increased urbanization has driven meat production and, accordingly, feedstock such as corn. We expect these factors to drive the use of fertilizer and high-yield hybrid grain seeds in order to maintain China’s food supply.

Acceptance of genetically modified seeds. Although genetic modification techniques have been used in seed production for several years, some believe genetically modified plants may impact gene stability of surrounding natural plants and the health of creatures that eat them. Currently, both the EU and the United States have not approved genetically modified crops for humans consumption. Although two varieties of genetically modified corn seed have received limited approvals from PRC government authorities, commercial sales are not permitted. Even if such sales are permitted, it may take several years for genetically modified grain to be accepted by customers. For instance, many farmers in China use seeds from the output of their previous year rather than acquire modern seeds.

Chain store program distribution network. We have launched a chain store program in order to control our distribution channel and enhance brand awareness. As of December 31, 2010 we had over 43 branded retail stores, but as of March 31, 2011 we expanded to over 234 branded retail stores. We believe branded stores enable us to provide better sales services and launch more accurate marketing campaigns. We expect these efforts to result in increased expenses associated with expansion, particularly sales and marketing expenses necessary to build market share and awareness of our high quality products.

Ability to generate high-quality seeds. We believe that our success depends on our ability to develop state of the art seeds that produce high yields of quality crops. For example, during 2010 and the first month of 2011, our new corn varieties, Fudan Nos. V, VI, and VII, were approved and registered in Heilongjiang and Inner Mongolia. In field tests, our new corn varieties had higher yields than comparable products, which we believe presents an attractive value proposition for farmers. We also believe that producing such seeds requires investment in research and development. For example, in March 2010 we entered into two five-year agreements to lease 9.33 acres of farm land, where we have established a research field for hybrid field crops, vegetables and fruits. In addition, in April 2010 we entered into agreements to lease 100 hectares of farm land for 20 years, and in December 2010 we entered into two agreements to lease 1,000 hectares of farm land for 12 years. We plan to use this farm land to increase our cultivation experience with high-end seeds developed by advanced research approaches, such as genetic modification and the molecular marker aided selection method.

Seasonality. Our business is affected by seasonal factors. Field crops are planted in early May in Heilongjiang, Jilin and the northeastern part of Inner Mongolia, and are harvested during October. Our sales cycles tend to correlate to the agriculture cycle, as we tend to sell more seed products from December to April, and more fertilizers, herbicides, germicides and pesticides from April to June. In recent years, we significantly increased seasonal advertisement and marketing events in the fourth quarters to attract customers. In addition, we plan our seed breeding and fertilizer production during the second quarter, which requires capital expenditures that may drive short-term borrowing activities in order to acquire raw seeds.

Acquisition costs. We believe that the significant fragmentation in China among seed companies and providers of fertilizers, pesticides, germicides and herbicides creates opportunities for us to expand our sales and product lines by acquiring quality companies in target regions. Our acquisition plans would result in corresponding increases in expenses in order to attract and retain qualified talent, implement strategic advertising campaigns, and finance our expansion.

Last updated April 9, 2011