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EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - AgFeed Industries, Inc.v176586_ex32-2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - AgFeed Industries, Inc.v176586_ex32-1.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - AgFeed Industries, Inc.v176586_ex31-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - AgFeed Industries, Inc.v176586_ex31-2.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - AgFeed Industries, Inc.v176586_ex23-1.htm
EX-21.1 - LIST OF SUBSIDIARIES - AgFeed Industries, Inc.v176586_ex21-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  ___________ to _____________

Commission File No. 001-33674

AGFEED INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada 
 
20-2597168
(State or Other Jurisdiction
of Incorporation or Organization)
 
 (I.R.S. Employer Identification No.)

Rm. A1001-1002, Tower 16
Hengmao Int'l Center, 333 S. Guangchang Rd.
Nanchang, Jiangxi Province, China 330003
(Address of Principal Executive Offices, including zip code)

011-86-0791-6669093
(Registrant’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:
Common Stock, $0.001 par value
 
The Nasdaq Stock Market LLC
(Title of each class)
 
(Name of each exchange on which registered)

Securities registered under Section 12(g) of the Exchange Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o     No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o     No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit and post such files).    Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o   

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of  “large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company  o

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

The aggregate market value of the voting stock held by non-affiliates as of June 30, 2009 was approximately $170,424,980.

The number of shares of Common Stock outstanding as of March 3, 2010 was 44,903,263.
Documents Incorporated by Reference: Portions of the registrant’s proxy statement for its 2010 annual meeting of shareholders, which the registrant expects to file with the Securities and Exchange Commission ("SEC") within 120 days after December 31, 2009 are incorporated by reference into Part III of this annual report.
 
 


 
TABLE OF CONTENTS

   
Page
   
PART I
1
     
Item 1.
Business
1
Item 1A.
Risk Factors
20
Item 1B.
Unresolved Staff Comments.
33
Item 2.
Properties
33
Item 3.
Legal Proceedings
33
Item 4.
Submission of Matters to a Vote of Security Holders
33
     
PART II
34
     
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
34
Item 6.
Selected Financial Data
37
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
48
Item 8.
Financial Statements and Supplementary Data
48
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
48
Item 9A.
Controls and Procedures
49
Item 9B.
Other Information
50
     
PART III
51
     
Item 10.
Directors and Executive Officers of the Registrant
51
Item 11.
Executive Compensation
51
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
51
Item 13.
Certain Relationships and Related Transactions
51
Item 14.
Principal Accountant Fees and Services
51
   
 
PART IV
51
     
Item 15.
Exhibits and Financial Statement Schedules
51
     
SIGNATURES
 
     
EXHIBITS
 
 

 
The statements contained in this annual report that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business, which can be identified by the use of forward-looking terminology, such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties.  Management wishes to caution the reader of the forward-looking statements that such statements, which are contained in this annual report, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employee, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors discussed in our other filings with the Securities and Exchange Commission ("SEC"), and that these statements are only estimates or predictions.  No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing us, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
 
These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. Some of these risks are described in “Risk Factors” in Item 1A of this annual report.
 
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward-looking statements made in connection with this annual report that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this document is a statement of our intention as of the date of this document and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
 
PART I
 
In this Annual Report on Form 10-K, we will refer to AgFeed Industries, Inc., a Nevada corporation, as "AgFeed," "our company," "we," "us," and "our."
 
Item 1.  Business.
 
OVERVIEW
 
We are a Nevada corporation engaged in the animal nutrition and commercial hog producing businesses in the People's Republic of China ("China") through our indirect operating subsidiaries. We were incorporated as Wallace Mountain Resources Corp. on March 30, 2005 in Nevada.  Since October 31, 2006, our principal place of business has been based in China.  As a result of a merger into a wholly-owned subsidiary, we changed our name to AgFeed Industries, Inc. on November 17, 2006.  Our principal executive offices are located at Rm. A1001-1002, Tower 16, Hengmao Int'l Center, 333 S. Guangchang Rd., Nanchang, Jiangxi Province, China 330003. Our telephone number is +86-0791-6669093. Our website is http://www.agfeedinc.com.
 
Our animal nutrition business consists of the research and development, manufacture, marketing and sale of additive premix ('premix"), concentrates and complete feed for use in the domestic animal husbandry markets, primarily for hog production in China.  Premix is an animal feed additive that is broadly used in commercial animal production worldwide. The use of premix feed can significantly reduce an animal’s growth cycle, enabling the animal to reach market size sooner. We have been in the premix feed business since 1995 and now operate five premix feed manufacturing facilities located in the cities of Nanchang, Shandong, Shanghai, Nanning, and Hainan.
 
1

 
We entered the hog breeding and production business in November 2007.  In this business, we mainly produce hogs for slaughter and sell breeding stock.  From November 2007 through late 2008 we acquired one breeder farm and 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces.  In November 2009, we opened our first farm based on Western hog production technology in the city of Da Hua, Guangxi Province.  In December 2009 we began stocking a second breeder farm in the city of Gangda, Guangxi Province.  We also completed the construction of a nucleus farm in the city of Wuning, Jiangxi Province in November 2009.  This farm will be developed and operated by Hypor AgFeed Breeding Company Inc., a joint venture with Hypor, B.V., a Hendrix Genetics Company, entered into in December 2009.  We own two breeder farms and 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces.
 
On April 15, 2009 we formed a strategic alliance with Hypor. The alliance has four phases: (1) upgrading the genetic base of our existing herds; (2) creating a sow farrow-to -finish nucleus facility to supply superior breeding stock to be utilized in our production systems and for sale to outside commercial hog farms; (3) establishing high health, top quality genetics to the farms being developed by AgFeed International Protein; and (4) developing gene transfer centers to maximize the use of the top performing boars in China across our production system.  On December 17, 2009, we formed Hypor AgFeed Breeding Company with Hypor to develop, operate and market a genetic nucleus farm in Wuning, China.  Hypor AgFeed Breeding is owned 85% indirectly by us and 15% by Hypor.
 
On July 13, 2009, we formed a joint venture with M2P2 LLC. AgFeed International Protein Technology Corp. focuses on enhancing hog production systems for Chinese and other Pan Asian clients based on modern western standards to increase productivity and ensure the highest bio-security health standards in the Pan Asian hog industry.  The joint venture was formed to take advantage of the commercialization and consolidation of the hog industry being fostered by the Chinese central and local governments.  We are the joint venture's first client.  AgFeed International Protein is owned 80.1% indirectly by us and certain affiliates and 19.9% by M2P2.
 
Core Strategic Concept
 
Our core strategic concept is: AgFeed, Government & Farmer.  These are the three principal market participants that lead and drive our business discussions and which together must find common ground and benefit in order for our business plan to be successful.  Our business plan calls for introducing modern western standards and methods to greatly improve the efficiency and yields in our operations.  In order to successfully implement these methods and apply these standards we require the cooperation of the Government and the Farmers.  We need to continually educate each of these constituencies and demonstrate the benefits of our methods and standards for food safety, yields, returns and employment.
 
Market Dynamics
 
We expect that both of our core businesses, animal nutrition and hog production, will witness significant consolidation going forward due to the convergence of government policies and natural market forces.  Investment opportunities will expand as the mode of operation in both animal husbandry and animal feed production evolve from traditional modes to modern, industrial scale and highly professional enterprises. This will lead to a much smaller number of larger integrated market participants.  Scale will become increasingly important in both the hog and feed businesses.
 
The dual imperatives of government regulation to assure food safety and the security of the food chain together with heightened consumer demand for high quality and reliably safe food will act to drive consolidation and market growth for those producers that are positioned to comply with the evolving regulatory and consumer market.   The growing urbanization of China will further consolidate markets and will require industrial scale market participants in order to efficiently and effectively serve a much more concentrated distribution system of supermarkets.
 
2

 
Falling provincial barriers and value added tax reforms will aid the consolidation within our industry.  Pork remains not only a staple of the Chinese diet but also the primary source of protein.  We have strategically positioned our business units both operationally and financially to take advantage of these market dynamics and to assure the quality and safety of the pork supplied to the Chinese consumer.
 
ANIMAL NUTRITION BUSINESS
 
We manufacture, distribute, market and sell three main product lines - premix, concentrates and complete feeds for use in all stages of a pig’s life. We conduct these operations through our indirect subsidiaries Nanchang Best Animal Husbandry Co., Ltd. (“Nanchang Best”), Shanghai Best Animal Husbandry Co., Ltd. (“Shanghai Best”), Guangxi Huijie Sci. & Tech. Feed Co., Ltd., (“Guangxi Huijie”), Shandong AgFeed Agribusiness Co., Ltd. ("Shandong Feed"), and Hainan HopeJia Feed Co., Ltd. ("HopeJia"). We also provide educational, technical and veterinary support to our customers.
 
Nanchang Best, Shanghai Best, Guangxi Huijie, Shandong Feed and HopeJia are collectively referred to as our "feed operating companies."  They operate manufacturing facilities in Nanchang, Shanghai, Nanning, Shandong, and Hainan provinces, respectively, primarily serving the hog industry.  Each subsidiary independently conducts local marketing and sales efforts.  We share sales referrals and leads among subsidiaries, but our subsidiaries do not compete against each other for new sales.  Nanchang Best and Guangxi Huijie are primarily responsible for our ongoing research and development efforts and share their expertise in this area with all of our manufacturing operations.  There are no formal written agreements relating to these services, as each of these companies are our wholly owned subsidiaries.
 
The Ministry of Agriculture of China has granted Agfeed “Green Certification” status for our premix products under the brand label “BEST.”  This means that these products are safe, environmentally friendly, and can effectively promote the healthy growth of pigs. According to current government regulations, pork cannot be accredited by the government as “green” unless it is produced using government certified green feed. Having our feed certified as green requires us to adhere to strict operational controls and procedures. This green certification laid the foundation for our hog farms to produce hogs that result in high quality “Green” pork products. It is also an incentive for other commercial hog farms to enter into sales contracts with our feed operations.
 
Livestock producers may directly buy animal feed in finished form, referred to as “complete” feed, which contains a concentrate of additive premix and the foundational grains in one complete package, or, they may choose to buy the premix and then combine it with protein, corn, hay, wheat and other elements readily available in the market to make their own complete feed. Premix provides the essential amino acids and binder necessary for proper absorption of protein by pigs. Feeding pigs a balanced diet is an essential part of the pork profit equation and the quality of feed and nutrition has a significant effect on profits.  Management estimates that in 2009 feed costs comprise approximately 75% of AgFeed’s production expenses.
 
Our total combined feed output in 2009 was approximately 117,000 metric tons (75,000 in 2008), consisting of 33,000 metric tons of premix, 23,000 metric tons of concentrates and 61,000 metric tons of complete feed.
 
It is typical for a feed company to pass on ingredient price increases or decreases to the customer that materially influence revenues and cost of goods sold without materially impacting the net gross margin of the business.
 
3

 
Additive Premix
 
According to the different growth stages of a pig, different additives are necessary to accelerate the growth of the animal and provide safe products for consumption. Premix is composed mainly of essential amino acids, vitamins, minerals, antibiotics and growth promoters. We market 30 different brands of premix that are priced from standard to premium to satisfy wide ranging customer demand. Within each brand there are 8 different mixes that correspond to the different stages of a pig’s life cycle: newborn to 15 kg, 15-30 kg, 30-60 kg, market ready, over 60 kg boar, replacement gilt, mating/pregnant and lactating. We provide superior customer service by customizing the premix to the specific needs of each customer. Large scale pig farms are typically the biggest consumers of our premix. Our veterinarians work with these large pig farms to determine the optimal formulation of feed.
 
Premix sales represent approximately 29% of our annual feed revenues, including sales to our hog farms, and carry a gross profit margin of approximately 32%. Our ability to formulate customized premix fodder to meet customer specifications enables us to charge a premium for our products. The average price of our premix is $672/metric ton. We are also able to justify premium pricing due to the strong brand name recognition of our operating companies, hands-on after market support, and superior, more effective products developed as a result of a strong R&D program. Large scale piggeries are willing to pay a premium for more effective products as they are concerned with producing healthy piglets, controlling disease and marketing profitable pork products.
 
Concentrate Feed
 
Concentrates, mainly composed of high protein, vitamin, amino acid, mineral and antibiotics, are designed to supply nutrition necessary for pigs, including piglets weaned to 15 kg and lactating pigs. We produce different brands of concentrates with different formulation catering to different customer needs and climate.
 
Concentrate feeds include premix and the protein for all phases of a pigs life cycle. The farmer adds the carbohydrate (corn) to make a complete ration. This allows the farmer the ability to use his own grown corn or carbohydrate source.
 
Concentrate sales represent approximately 30% of our annual feed revenues, including sales to our hog farms, and carry a gross profit margin of approximately 15%. We have the ability to formulate concentrate feeds to meet various nutrient specifications. The average price of our concentrate is $990/metric ton.
 
Complete Feed
 
Complete feed consists of premix, protein and carbohydrates providing a total feed ration for the animal. Commercial farmers favor the utilization of complete feeds in order to better provide the nutrient needs for the various life cycle of the animal. Complete feeds offer consistent particle size, guarantee proper mixing distribution of ingredients and eliminate the need for commercial farmers to maintain inventory of corn and soybean meal.
 
We produce piglet complete feed designed to both nourish and protect newborns and is composed primarily of proteins, such as fish meal and soybean (30%), and raw material grains, such as corn and chaff (roughly 65%). Local climate and environment also influence the formulation of the piglet blend. We intend to expand our product offerings to meet the growing demand for complete feed for all stages of a pig's life cycle as more and more small farms and mid-size farms are moving to purchase complete feed (ready-made feed with balanced diet) from large animal nutrition companies with stringent quality control on raw materials, cutting-edge feed processing technique, and low cost of raw materials benefiting from scale of economies.
 
4

 
Complete feed sales represent approximately 41% of our annual feed revenues, including sales to our hog farms, and carry a gross profit margin of approximately 12%. We have the ability to formulate complete feeds to meet various nutrient specifications, including piglet feeds. The average price of our complete feed is $519/metric ton.
 
Market Information
 
The feed industry in China, initially developed during the 1980s, was transformed by the issuance of the feed and feed additives regulations in the early 1990s. These regulations emphasized labeling standards for the different grades of product. These standards assisted in regulating the feed industry’s expansion and aimed to eliminate substandard products and fraudulent labeling.
 
A safe, highly efficient feed industry producing high quality animal nutrition products is the foundation for the sustainable and healthy development of the animal breeding industry as well as a fundamental component of providing safe animal feeds which affect the security and health of the people.
 
China’s feed manufacturing industry is second only to the United States in volume. The feed industry grew from 96 million tons in 2004 to 140 million tons in 2009. In the same period the market for the Chinese feed industry has growth from $36 billion to $58 billion.  As incomes rise in China, annual meat consumption is expected to rise from the current 53 kg per person to around 70 kg per person in the coming years. The country's annual pork consumption almost doubled from 20kg per person in 1990 to 40kg per person in 2006.  According to a report by the USDA Foreign Agricultural Services, developing countries average 24 kg per person annually while developed countries average 75 kg per person annually. It is estimated that 4 kg of feed grain are needed to produce 1 kg of pork.
 
The animal feed industry in China is highly fragmented with over 10,000 producers, each with an annual production of less than 10,000 tons.  Consolidation is a central theme in the government’s efforts to restructure the industry and promote industrial modernization in the coming years. Based on management's international experience it is expected that the consolidation of the feed industry will result in there being less than 1,000 larger scale feed enterprises in China by 2015.
 
The Chinese feed industry, after many years of development, has set up a complete feed industrial system integrated with feed processing, additive, raw material, and machinery manufacturing industries as well as feed research, education, standardization and government examination.  Chinese industrial feed production was approximately 137 million tons in 2008, with production by product type as follows:
 
 
·
Additive premix was approximately 5.46 million tons, or 4%
 
·
Concentrate feed was approximately 25.3 million tons, or 18%
 
·
Complete feed was approximately 105 million tons, or 77%
 
Pork feed represented 34% of the total market in 2008.
 
Sales and Marketing
 
Nanchang Best and Shanghai Best have aggressively marketed and promoted the “Best” brand since their inception. Guangxi Huijie markets its products under the “Huijie” brand name. HopeJia’s feed products are marketed under the brand name “HeJie” and Shandong markets its products under the “AgFeed” brand name.  Our feed operating companies send their sales force and technicians to the pig farms to educate their clients on new product developments and improvements to existing products. They also conduct educational seminars in pig farming regions to explain the benefits of a balanced, nutritious diet for pigs in producing a healthy herd and to educate farmers to properly prepare and mix feed components. While these services are not unique among premix manufacturers, we believe our services in this area are superior to our competitors as we have a highly responsive and experienced technical services team while our sales persons, most of whom majored in animal or veterinary science, are equipped with general service capabilities.  As we market and sell directly to pig farmers, we are able to collect and analyze data which assists in the preparation and design of new products. We attend agricultural conventions that take place in the market areas where we conduct business as well as in provinces that we expect to enter. We also place advertisements and promotional pieces in agricultural trade journals.
 
5

 
We sell our products directly to over 781 large commercial hog farms.  On average, each large commercial farm to whom we sell our products, purchases approximately three metric tons of premix, two metric tons of concentrates and one metric ton of complete feed per month.
 
Additionally, we work with independently-owned and operated feed distribution chain stores that exclusively distribute AgFeed brand premix feed products throughout China. This program allows us to cost-effectively sell our products to the individual “mom and pop” farmer that may raise only a few hogs per year for personal consumption or for sale in the marketplace as an additional source of income. These distribution stores generally sell approximately two metric tons of premix, one metric ton of concentrates and one metric ton of complete feed per month.  As of December 31, 2009, feed distribution chain stores in more than 1,302 locations were open and operating using the AgFeed brand name.  The sales data of distributors indicates that smaller farms tend to be more sensitive to price increases than the large-scale piggeries, with large-scale hog farms placing more emphasis on customer service and other ancillary services we provide.
 
These distributors do not pay an initiation fee to become exclusive distributors of our products but do receive marketing and technical training from our staff. Each distributor signs an exclusive agreement with us, agreeing not to sell any other brand of animal feed products and to decorate its store with approved AgFeed marketing materials and signage.  Additionally, these distributors are encouraged to buy animal health care products, such as quality vaccines and veterinary drugs that we sell as agent, benefiting from a diversified product structure.
 
In addition, each distributor must: (i) during a three month probationary period pass a screening process based on performance benchmarks, (ii) abide by our rules and receive ongoing training from our sales and technical staff, (iii) support the sales of new AgFeed products when launched in the distributor’s territory, and (iv) remain within our guidelines for payment of products purchased from us.
 
Distributors receive discounted prices from the regular wholesale listed prices and have payment terms that are typically 15 days from the date of sale. These discounted prices earn the distributors an increased gross profit margin of approximately 5-10%. They build a relationship with the small farmers that in many cases are illiterate and continue to do business as they have always done. As part of the distribution arrangement, they have a specified territory that entitles them to the exclusive right to sell AgFeed products to small farm owners in that territory.
 
As of December 31, 2009, each of the feed operating companies had the following customers for their respective feed products:
 
    
Local
Distributors
   
Large Scale
Pig Farm
   
Distribution
Chain Stores
   
Total
 
Nanchang Best
    152       228       280       660  
Shanghai Best
    148       221       330       699  
Guangxi Huijie
    81       75       139       295  
Shandong Feed
    110       42       183       335  
HopeJia
    120       215       370       705  
 
6

 
Suppliers
 
Normally, purchases of raw materials are made on an “as needed” basis each month. Orders are managed by both our warehouse and purchasing managers together, each of whom is familiar with on-site inventory levels. We sign long-term contracts with leading soybean meal suppliers when our purchasing specialists deem it appropriate.  We have also established long-term relationships with “accredited key suppliers” by setting up five supply bases in China’s largest corn production areas which centralize our purchasing and logistics resources, and reduce and remove agent commissions.
 
We have implemented a "supplier accreditation system."  Regularly, suppliers of raw materials are jointly selected and rated by our purchasing center and technical center according to the quality of their supplies, price and credit record. Generally, all of our purchases are made from qualified suppliers. Raw materials are generally purchased by our purchasing center to take advantage of the economies of scale associated with our size.
 
Research and Development
 
We engage in continuous research and development to maintain a competitive advantage in the marketplace and keep pace with current developments.  We conduct these activities primarily through Nanchang Best and Guangxi Huijie. Their research and development results are shared with each of the feed operating companies. We also sponsor research alliances with Jiangxi Agricultural University, South China Agricultural University, Nanjing Agricultural University and Zhejiang Agricultural University. As a result of our R&D we were among the first in China to test an antibiotics-free production technology and apply a low-protein diet formulation, which may prove to be effective and could reduce the cost of hog production.
 
In addition to sponsoring national and provincial academic research projects at various academic institutions, in November 2004, Nanchang Best launched a fund called Best Fund contributing RMB 98,000 (US$12,250) to sponsor 12 research projects at Jiangxi Agricultural University. Nanchang Best retains proprietary rights to any research findings from these projects.. In 2009, Nanchang Best was designated as the sole research base for post graduates from Jiangxi Agricultural University. The University and Jiangxi Provincial Government plan to invest $100,000 on updating lab equipment and post graduate subject study at AgFeed.
 
Intellectual Property
 
We have registered the "AgFeed," "Best," "Huijie, " "HeJie," "Block," and "Best King" trade names used on our products with the China Trademark Bureau and these names are known in the provinces in which we conduct business.  We do not hold any patents or intend to apply for patents on proprietary technology or formulas relating to our feed products. The formulas for our feed products are considered trade secrets and are protected as such.
 
Government and Environmental Regulation
 
Our feed products and services are subject to substantial regulation by governmental agencies responsible for the agricultural and commerce industries.  We are required to obtain business and company registrations and production licenses under the laws and regulations of China, the provincial governments of Jiangxi, Shanghai, Hainan, Shandong, and Guangxi provinces and the Shanghai City government.  All of our feed products are certified on a regular basis and must be in compliance with the laws and regulations of provincial and other local governments and industry agencies.
 
Prior to engaging in any production or marketing of feed products, all products must receive a earned formal approval production number pursuant to the National Code of Feed and Feed Additives, promulgated by the National State Council of China and qualified products reports from the Technology and Supervision Bureau.  All of our feed products have earned these formal approvals, which are valid for five years from the date of issuance.
 
7

 
There is no material cost in obtaining and maintaining these licenses, but it is illegal to do business without them.  If any production license or product permit were lost, production would need to cease until a new license or permit was obtained, which would likely take a minimum of 30 to 45 days to receive, and the loss of which would result in the possibility of regulatory fines.
 
We are also subject to China’s National Environmental Protection Law as well as a number of other national and local laws and regulations involving pollutant discharge and air, water and noise pollution.
 
The central government, through the Ministry of Agriculture, issues production licenses. The Ministry of Agriculture dispatches officials at the local level to review staff qualifications, production facilities, quality control, and management departments for competency.  These licenses are valid for five years from the date of issuance.
 
Provincial production permits are also required for all entities involved in the manufacture of animal feed and feed components.  Provincial permits are issued for all products manufactured at each facility. Each facility has the necessary permits for all products produced at each of our operating facilities. These permits are valid for five years from the date of issuance.
 
 
There is a broad market for animal feed and a large gap between the overall quality of animal feed enterprises and the growing demand for high quality feed products driven by the industrialization of animal husbandry. Most of our competitors operate on a small scale and are weak scientifically with low technological development capabilities.  Due to the highly fragmented nature of the industry we experience varying degrees and types of competition from region to region. Our local competitors include Da Bei Nong in Jiangxi province, Fuj Minke Biology Company in Fujian province, Zheng Da in various provinces, Xinnong located in the Shanghai area and Provimi in Guangxi.  Larger domestic competitors include Sichuan, New Hope Agribusiness, Tongwei Company Limited, Ning Bo Tech Bank Company Limited and Zhengbang Group. These larger domestic companies are listed on the Shenzhen Stock Exchange.
 
Animal feed can be a low margin business thus competitors depend on scale to generate sufficient returns. There is also a degree of product homogeneity, which leads competitors to concentrate on price and brand competition.
 
 
As of December 31, 2009, our feed operating companies had a total of 527 employees. The breakdown of our employees by location and department is:
 
   
Nanchang
Best
   
Shanghai
Best
   
Guangxi
Huijie
   
Shandong
Feed
   
HopeJia
 
                               
Management
    4       2       4       1       3  
General Administration and Human Resources
    9       11       8       3       9  
Production
    42       23       47       12       45  
Sales
    53       32       34       36       43  
Purchasing
    1       1       3       3       2  
Finance
    8       6       5       4       5  
Technical Services
    7       3       2       2       5  
Quality Control
    3       2       10       5       8  
Research and Development
    4       0       1       0       5  
Customer Service
    4       0       7       0       0  
 
8

 
Facilities
 
Nanchang Best is located in Chang Bei District Industrial Park, in Nanchang, Jiangxi Province.  It owns three buildings consisting of an office building, a factory and a dormitory.  Nanchang Best has been granted the right to use the land in Nanchang by the Municipal Administration of state-owned land through December 2049.  Nanchang Best also leases a feed manufacturing facility at No. 4 Chuangye Street, East New Area, in the city of Taian, Shandong Province.  The facility consists of four buildings, one each for manufacturing, offices, warehouse and dormitory facilities. Nanchang Best has been granted the right to use the land in Shandong by the Shandong Provisional Government through July 2052.
 
Shanghai Best is located in Qingcun Town, Fengxian District, Shanghai.  It has two  workshop buildings and two office buildings in which it conducts all manufacturing and business operations.  The annual rent on the land Shanghai leases is approximately $80,000 and the lease runs through December 2017.
 
Guangxi Huijie is located in Coastal Industrial Park, Liangqin District, Nanning City, Guangxi Province.  Guangxi Huijie owns three buildings, an office building, a production plant and a worker dormitory.  The right to use the land was granted by the Housing Bureau and Land Administrative Bureau of Langqin District, Nanning City through October 2056.
 
Shandong Feed is located at No. 4 Chuangye Street, East New Area, in the city of Taian, Shandong Province.  This facility consists of four buildings, one each for manufacturing, offices, warehouse and dormitory facilities. Shandong Feed has been granted the right to use this land by the Shandong Provisional Government through July 2052.
 
HopeJia is located on South Wuting Road, Laocheng Development Zone, Chengmai County, Hainan Province. HopeJia owns three buildings, an office building, production plant and a worker dormitory. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Hainan Province through January 2056.
 
Commercial Hog Production Business
 
We raise, breed and sell hogs for use in China's pork production and hog breeding markets.  We own two breeder farms and 29 meat hog producing farms located in Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces, which are strategically located in or near the largest pork consumption areas in China.
 
We entered the hog farming business on November 9, 2007 as a result of our acquisition of ninety percent (90%) of the capital stock of Lushan Breeder Pig Farm Co., Ltd. ("Lushan"). Lushan owns and operates a breeder hog farm occupying 258,000 square meters located in the town of Hualin in Xingzi County, Jiangxi Province. Lushan is a mid-scale hog farm engaged in the business of raising, breeding and selling hogs in China for use in the pork production market in China. Lushan operates as a majority-owned subsidiary of Nanchang Best. In 2008, we acquired at least a majority interest in 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces through our indirect subsidiaries - Nanchang Best, Shanghai Best, Guangxi Huijie and Jiangxi Best Swine Development Co. ("Best Swine").
 
In 2009, we initiated a strategic plan to modernize our existing hog production facilities and introduced western hog production technologies and a science based genetic program. Our goal is the development of a platform for the production and sale of approximately 2.5 million hogs into the Chinese market during the three years ending on December 31, 2011. Our plan also calls for investment in reporting and cash management systems and the training of our employees, and the development of enhanced environmental and health safety programs including upgraded bio security measures. These actions are part of our effort to improve on the standards of the new China Food Safety Law that was implemented on June 1, 2009 and to ensure the production of consistently high quality, healthy pork.
 
 
9

 

We took several key steps in connection with the implementation of our strategic plan in 2009.  We restocked Guangxi Guigang Gangda Hog Farm (“Gangda”), a breeder farm in Gangda, China (Guangxi Province) beginning in December 2009.
 
On April 15, 2009 we formed a strategic alliance with Hypor.  The alliance has four phases: (1) upgrading the genetic base of our existing herds; (2) creating a sow farrow-to-finish genetic nucleus facility (Wuning Farms) to supply superior breeding stock to be utilized in our production systems and for sale to outside commercial hog farms; (3) establishing high health, top quality genetics to stock farms being developed by AgFeed International Protein Technology Corp.; and (4) developing gene transfer centers to maximize the use of the top performing boars in China across our production system.  On December 17, 2009, we formed Hypor AgFeed Breeding with Hypor to develop, operate and market Wuning Farms.  AgFeed owns 85% of Hypor AgFeed Breeding and Hypor owns the remaining 15%.  Construction of Wuning Farms has been completed and we have initiated the process of stocking it with superior pure-line animals and genetic material imported from Hypor's purebred facilities in France for cross-breeding purposes. This facility will supply our multiplier breeding farms in Lushan and Gangda with genetically superior hogs that are bred to be productive and efficient, allowing us to maximize our hog production and improve feed conversions at these facilities. Additionally, any excess capacity produced by Wuning Farms will be marketed to other hog farmers, allowing the joint venture to maximize its profit potential.
 
On July 13, 2009, we formed a joint venture with M2P2. AgFeed International Protein is focused on enhancing hog production systems for Chinese and other Pan Asian clients based on modern western standards to increase productivity and ensure the highest bio-security health standards in the Pan Asian hog industry.  The joint venture was formed to take advantage of the commercialization and consolidation of the hog industry being fostered by the Chinese central and local governments.  We are the joint venture's first client.  AgFeed owns 65% of AgFeed International Protein, with the remaining 35% being owned 15.1% by certain affiliates and 19.9% by M2P2. On November 9, 2009, we began construction of our first large western model farm in Da Hua, China (Jiangxi Province). This is the first of six new farms that we will construct in southern China. AgFeed International Protein has completed all phases of design and blueprints for each of these farms and has been working with international and local construction firms to ensure success.
 
Hog Production
 
The 29 meat hog producing farms we own generate revenue primarily from the sale of meat hogs to processing plants. Our meat hogs are sold primarily in Jiangxi, Shanghai, Hainan, Guangxi, Fujian, Guangdong and other neighboring provinces.  Our breeder farms generate revenue primarily from the sale of breeder hogs to commercial hog farms and, to a lesser extent, the sale of meat hogs to processing plants.  Customers of Lushan and Gangda include large-scale hog farms, mid-scale hog farms and small-scale farms.  Our breeder hogs are sold throughout China, primarily in southeastern China.
 
Breeder hogs are either purebred hogs or crossbred hogs that have the genetic trait for mating.  We use hogs that contain this trait for breeding and also sell them to commercial meat hog farms throughout China so that the commercial farms may use the hogs in their own reproduction programs.  Commercial sows (parent stock) are used for gestating and producing piglets.   
 
Among the purebred hogs, our primary varieties are the Yorkshire, the Landrace and the Duroc.  The Yorkshire, which originated in England, is known for its rapid growth, high rate of lean meat and its reproductive capacity.  The Landrace, originated in Denmark, is also known for its rapid growth and its high rate of lean meat.  The Duroc, which originated in the United States, is considered a highly-successful male parent in crossbreeding.
 
 
10

 

Market Description
 
General
 
After 30 years of development, China's hog industry is rapidly maturing. At this stage disease control, price risk management and meticulous management are the foundation of competiveness. The ideal development is to form a fully integrated chain with feed, cultivation, breeding, processing and sale. In the next ten years the hog industry is expected to develop into a stage of industrial scale and branding.
 
China is the world’s biggest hog producer and pork consumer; the global pig meat market is dominated by China. According to statistics from the US Department of Agriculture, China produces 50% of all the pig meat production in the world. For 2009, China is expected to produce close to 47.0 million metric tons of an estimated world production of approximately 95.0 million metric tons.
 
According to the China Feed Industry Association, China has the world's largest and most profitable market for hog production, which processed 625 million hogs in 2009, compared to approximately 100 million in the US.  More than 1.2 billion Chinese consume pork as their primary source of meat.  62% of all meat consumed in China is pork. Chinese consumers consume more pork each year than the rest of the world combined. China’s pork consumption is forecast to increase to 47.0 million metric tons in 2010 up from 44.9 million metric tons in 2008, an increase of about 5%. Projected pork demand by 2015 is estimated to approach 68.0 million metric tons, an increase of 51%.
 
Urbanization and the growth of the middle class (250 million people in 2008) along with China's policies protecting the swine industry reflect the importance of hog production as a social, economic and security issue for the consumer market in China. Since the early 1990’s per capita pork consumption in China has increased from 10kg/year to 40kg/year. Demand for freshly slaughtered pork remains high in most Chinese market segments. Urbanization also gives rise to supermarket chains that contribute to the shaping of consumer demand for food safety and the evolution of the pork supply value chain.
 
China instituted a number of laws to induce swine production. On January 1, 2008, the State Council announced a new regulation exempting companies involved in hog rearing from corporate income tax. Additionally, the Food Safety Law, which became effective on June 1, 2009, allows the government to take affirmative action that will strengthen food safety control “from the production line to the dining table”. The Chinese Government created a hog futures exchange to permit hedging of contracts that became operational in 2009.  Further, the Chinese Government has developed a "Strategic Meat Reserve" that is stocked predominantly with pork reserves and a live herd of 500,000 pigs.  These policies and programs stress the value the central Chinese Government places on hog production.
 
Meat Hogs
 
According to the Foreign Agricultural Services, China is the world’s largest producer of pork and pork is the most widely-consumed meat in China.  The Foreign Agricultural Services determined that pork accounted for 65% of the total meat production in China in 2008. A 2008 Agricultural Report published by Purdue University forecasts that China’s pork imports in 2009 may increase by nine percent to 555,000 million metric tons slightly up from 505,000 million metric tons in 2008. Strong demand and short supply are forecast to drive imports, although it appears the recent downturn in the global economic picture will curtail the Chinese import of both frozen and live swine.  There are over 160 local pig breeds in China.  Chinese farms are looking to import foreign breeds that may improve the genetic profile of China's hog population, with the result being healthier animals and lower production costs.
 
Meat hog production in China is dominated by backyard farms (those that sell 5-10 hogs annually) and small farms (those that sell less than 100 hogs annually).  These farms accounted for an estimated 75% of all China hog production during 2008.  These farms sell their products to local rural markets.  The remaining 25% of China's hog production comes from larger farms - those that sell between 100 and 500 head a year account for 21% of the production, those that sell between 500 and 10,000 head account for an additional 3% and those that sell between 10,000 and 50,000 hogs account for the remaining 2% of the annual production.  Agfeed is one of the largest of the hog production businesses in China, selling over 680,000 hogs in 2009.
 
 
11

 
 
Suppliers
 
Feed is the most significant cost of operating a hog farm.  Historically, our hog farms purchased feed products and raw materials such as corn and soybeans from several feed suppliers under short-term contracts.  Under our ownership, the hog farms primarily use our premix as the base of their feed supply and enter into long-term contracts with the suppliers of feed additives in order to meet their feed requirements.  The use of our premix laid the groundwork for our hog farms to produce hogs that are accredited as "green" pork.
 
Research and Development
 
We have a seven member research and development team devoted to hog farming.  Two members of the team have doctorate degrees and three have masters degrees in veterinary science and/or animal breeding and genetics.  We are participants in two ongoing research programs.  We have been selected into the National Hog Production System, where individuals from China's top 52 hog farms share their expertise and research and development results.  We are also a member of the National Pig Genetics Association which focuses on the selection of high-lean meat breeder hogs and the other program focuses on improving the reproductive traits of breeder hogs.
 
Intellectual Property
 
Lushan has developed advanced mating technologies that are designed for foreign and domestic breeder hogs.  It employs proprietary techniques to manage mating patterns.  We do not hold any patents covering these technologies and have no present intention to apply for patents on them.
 
Government Regulation
 
Hog breeding is subject to substantial licensing requirements and regulation.  In order to sell breeder hogs in China a breeder hog farm must be awarded a breeder’s license by the local government authorities.  Only those breeder hog farms that have qualified staff, specialized equipment and are in segregated locations to avoid the spread of disease are eligible for licensing.  Meat hog farms do not require a license. The Agricultural Departments of Jiangxi and Guangxi Provinces issued Breeder Hog Farm Licenses to Lushan and Gangda
 
Competition
 
The hog production business in China is highly segmented.  As we discussed above, about 75% of the hogs produced in the country are produced by smaller farms, who sell their inventory to rural markets.  The remaining 25% of hog producers are spread throughout the entirety of China and the market for their inventory tends to be within their geographic territory.  We primarily market our products within Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces and the territory of the surrounding provinces that is close in proximity to our hog farms.  As a result, we compete broadly with the producers in these geographic regions.  Our hog production business occupies the whole of southeastern China, including the metropolitan areas of Shanghai and Hong Kong.
 
 
12

 
 
Employees
 
As of December 31, 2009, our hog farms had a total of 1,290 employees. The breakdown of our employees by location and department is:
 
   
Breeder Farms
   
Meat Hog
Producing Farms
 
General Management
    6       64  
Production Administration and Technicians
    22       265  
Research and Development
    2       0  
Farm Labor
    55       609  
 
Facilities
 
Breeder Farms
 
Lushan’s primary facility is a breeder hog farm located in the town of Hualin, Jiangxi Province.  The facility, which is situated on 258,000 square meters of developed land, is leased from the Chinese government for a period of 29 years and is scheduled to expire on April 13, 2034. Lushan’s breeder hog farm contains two separated areas, one for sows and the other for boars and gilts, with a total of 15,800 square meters of buildings.  Lushan pays a nominal annual rent under the terms of the lease.
 
Gangda, a wholly owned subsidiary of Guangxi Huijie, is a breeder farm located in Guigang, Guangxi Province. Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Gangda. Gangda contains two separated areas, one for sows and one for boars and gilts, with a total of 34,000 square meters of buildings. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through March 31, 2025.
 
Meat Hog Producing Farms
 
Wannian Xiandai Animal Husbandry Limited Liability Co. (“Wannian”), a wholly owned subsidiary of Nanchang Best, is located in Jiangxi Province.  Wannian subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from January 3, 2008.
 
Jiangxi Huyun Livestock Co., Ltd. (“Huyun”), a majority owned subsidiary of Nanchang Best, is located in Jiangxi Province. Huyun subleases the property from the other shareholders of Huyun and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from January 3, 2008.
 
Ganzhou Green Animal Husbandry Develop. Co., Ltd. (“Ganzhou”), a majority owned subsidiary of Nanchang Best, is located in Jiangxi Province.  Ganzhou subleases the property from the other shareholders of Ganzhou and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from January 4, 2008.
 
Gang Feng Animal Husbandry Co., Ltd. (“Gang Feng”), a wholly owned subsidiary of Nanchang Best, is located in the town of Jiangxi Province. Gang Feng subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 6 and 1/2 years from January 7, 2008.
 
Yichun Tianpeng Domestic Livestock Farm, Ltd. ("Yichun"), a majority owned subsidiary of Nanchang Best, is located in Jiangxi Province.  Yichun subleases the property from the other shareholders of Yichun and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from January 9, 2008.
 
 
13

 
 
Zhejiang Pinghu Yongxin Hog Farm (“Zhejiang Yongxin”), a wholly owned subsidiary of Nanchang Best, is located in Zhejiang Province.  Zhejiang Yongxin subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 12 years from April 18, 2008.
 
Shanghai Fengxian Hog Farm (“Shanghai Fengxian”), a wholly owned subsidiary of Nanchang Best, is located in Shanghai.  Shanghai Fengxian subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 14 years from May 1, 2008.
 
Shanghai Tuanxi Hog Farm (“Shanghai Tuanxi”), a wholly owned subsidiary of Nanchang Best, is located in Shanghai.  Shanghai Tuanxi subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system. The lease runs for 10 years from May 1, 2008.
 
Shanghai Senrong Hog Farm (“Shanghai Senrong”), a wholly owned subsidiary of Nanchang Best, is located in Shanghai.  Shanghai Senrong subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 1, 2008.
 
Fujian Xiamen Muxin Hog Farm (“Fujian Muxin”), a wholly owned subsidiary of Nanchang Best, is located in Fujian Province.  Fujian Muxin subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from April 30, 2008.
 
Xiamen Yuanshengtai Food Co., Ltd. (“Fujian Yuanshengtai”), a wholly owned subsidiary of Nanchang Best, is located in Fujian Province.  Fujian Yuanshengtai subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from April 30, 2008.
 
Jiangxi Zhiliang Hog Farm (Jiangxi Zhiliang”), a wholly owned subsidiary of Nanchang Best, is located in Jiangxi Province. Jiangxi Zhiliang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 22 years from April 30, 2008.
 
Shanghai WeiSheng Hog Raising Co., Ltd.(“Shanghai Weisheng”), a wholly owned subsidiary of Nanchang Best, is located in Shanghai.  Shanghai Weisheng subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 30 years from June 1, 2008.
 
Nanping Minkang Hog Farm (“Nanping Minkang”), a wholly owned subsidiary of Shanghai Best, is located in Fujian Province.  Nanping Minkang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from September 17, 2008.
 
Guangdong Lianjiang Xinfa Hog Farm (“Guangdong Xinfa”), a majority owned subsidiary of Guangxi Huijie, is located in Guangdong Province.  Guangdong Xinfa subleases the property from the other shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 12 years from May 30, 2008.
 
Guangxi Nanning Wanghua Hog Farm (“Guangxi Wanghua”), a wholly owned subsidiary of Guangxi Huijie, is located in Guangxi Province.  Guangxi Wanghua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.   The lease runs for 10 years from May 30, 2008.
 
 
14

 
 
Guangxi Linxing Hog Farm (“Guangxi Linxing”), a wholly owned subsidiary of Guangxi Wanghua, is located in Guangxi Province.  Guangxi Linxing subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from September 20, 2008.
 
Nanning Shunhua Hog Farm Co., Ltd. (“Nanning Shunhua”), a wholly owned subsidiary of Guangxi Wanghua, is located in Guangxi Province.  Nanning Shunhua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from October 28, 2008.
 
Nanning Shunan Hog Farm Co., Ltd.(“Nanning Shunan”), a wholly owned subsidiary of Guangxi Wanghua, is located in Guangxi Province.  Nanning Shunan subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 10 years from October 29, 2008.
 
Guangxi Gangxuan Hog Farm Co., Ltd. (“Guangxi Gangxuan”), a wholly owned subsidiary of Gangda, is located in Guangxi Province.  Guangxi Gangxuan subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system. The lease runs for 11 years from September 20, 2008.
 
Guangxi Xingye Guihong Hog Farm (“Guangxi Guihong”), a wholly owned subsidiary of Guangxi Huijie, is located in Guangxi Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Guangxi Guihong. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through May 30,2025.
 
Hainan Haikou Meilan Hog Farm (“Hainan Meilan”), a wholly owned subsidiary of Guangxi Huijie, is located in Hainan Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Hainan Meilan.  The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through April 12, 2033.
 
Hainan Haikou Wohao Hog Farm (“Hainan Wohao”), a wholly owned subsidiary of Guangxi Huijie, is located in Hainan Province.  Guangxi Huijie acquired all of the rights to the land, pig houses, office buildings, heating system, power and water supply system in our acquisition of Hainan Wohao. The right to use the land was granted by Housing Bureau and Land Administration Bureau of Guangxi Province through April 18, 2038.
 
Guangxi Guilin Fuzhi Hog Farm (“Guangxi Fuzhi”), a majority owned subsidiary of Guangxi Huijie, is located in Guangxi Province.  Guangxi Fuzhi subleases the property from the other shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 20 years from May 30, 2008.
 
Fujian Jianhua Hog Farm (“Fujian Jianhua”), a wholly owned subsidiary of Best Swine, is located in Fujian Province.  Fujian Jianhua subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from April 22, 2008.
 
Fujian Fengxiang Agribusiness Co., Ltd. (“Fujian Fengxiang”), a wholly owned subsidiary of Best Swine, is located in Fujian Province.  Fujian Fengxiang subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from April 30, 2008.
 
 
15

 
 
Nanping Kangda Animal Husbandry Co., Ltd. (“Nanping Kangda”), a wholly owned subsidiary of Best Swine, is located in Fujian Province.  Nanping Kangda subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 27, 2008.
 
Fujian Jianxi Breeder Hog Farm Co., Ltd. (“Fujian Jianxi”), a wholly owned subsidiary of Best Swine, is located in Fujian Province.  Fujian Jianxi subleases the property from the former shareholders and includes the land, pig houses, office buildings, heating system, power and water supply system.  The lease runs for 15 years from May 25, 2008.
 
Da Hua AgFeed Animal Husbandry Co., Ltd. (“Da Hua”) is located in Guangxi Province.  Da Hua leases the property from local farmers.  The property contains 387,000 square meters of land.  The lease runs for 30 years from October 2009.
 
Wuning Farm is located on land situated in Wuning County, Jiangxi Province.  Wuning Farm leases land from local village committee.  The lease runs for 30 years expiring in April 2038.  Wuning Farm contains two separated areas, one for sows and the other for boars and gilts, with a total of 23,675 square meters of buildings.  This farm is not yet stocked with livestock.
 
History
 
From incorporation to October 31, 2006, the business of our company, then known as Wallace Mountain Resources Corp., consisted of 18 unit mineral claims known as the South Wallace Mountain Project having a total surface area of approximately 946 acres. At that time the property was without known reserves and the proposed program was exploratory in nature. We paid a $3,000 retainer to the geologist to commence the Phase 1 exploration work on the claim.
 
On October 31, 2006, we entered into and closed a share purchase agreement with Nanchang Best and each of Nanchang Best’s shareholders. Pursuant to this agreement, we acquired all of the issued and outstanding capital stock of Nanchang Best from the Nanchang Best shareholders in exchange for 5,376,000 shares of common stock.
 
Contemporaneously, on October 31, 2006, we entered into and closed a share purchase agreement with Shanghai Best, and each of Shanghai Best’s shareholders. Pursuant to this agreement, we acquire all of the issued and outstanding capital stock of Shanghai Best from the Shanghai Best shareholders in exchange for 1,024,000 shares of common stock.
 
Concurrently with the closing of these transactions and as a condition thereof, we entered into an agreement with Robert Gelfand, our former President and Chief Financial Officer, pursuant to which Mr. Gelfand returned 2,600,000 shares of our common stock to the treasury for cancellation. Mr. Gelfand was not compensated in any way for the cancellation of his shares of our common stock. Upon completion of the foregoing transactions, we had an aggregate of 8,000,000 shares of common stock issued and outstanding. The shares of common stock issued to the shareholders of Nanchang Best and Shanghai Best were issued in reliance upon the exemption from registration provided by Regulation S under the Securities Act of 1933, as amended.
 
Subsequent to the acquisition of Nanchang Best and Shanghai Best, on October 31, 2006, Robert Gelfand resigned as our sole officer and Dr. Songyan Li was appointed as a director. On November 17, 2006, we declared a stock dividend of two additional shares of common stock for each share of common stock outstanding, and changed our name to AgFeed Industries, Inc.
 
 
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On December 20, 2006, we acquired all the outstanding shares of Guangxi Huijie for a total purchase price of 8,600,000 Chinese yuan renminbi ("RMB") (approximately US$1.1 million). We obtained the funds needed to complete this acquisition by borrowing RMB8,600,000 from Sunrise Capital International, Inc. This loan accrued interest at the rate of seven percent per annum and all accrued interest and the principal amount of this loan was due and payable on June 20, 2007. We were permitted to prepay this note without penalty and did so in March 2007. Mr. Sheng Zhou, the brother of our corporate secretary and treasurer, Feng Zhou, is a director of Sunrise Capital, which is owned by his sister-in-law, Ms. Chun Mei Chang.
 
On June 24, 2008, we completed the acquisition of premix feed company HopeJia for a negotiated purchase price of RMB28,600,000 (approximately US$4.2 million).
 
On November 9, 2007, we acquired 90% of the issued and outstanding capital stock of Lushan, a hog breeding operation. The aggregate purchase price was RMB20,112,020, equivalent to approximately US$2.7 million on the date of the transaction. In connection with this transaction, we also assumed and satisfied at closing RMB4,919,980 (approximately US$660,400) of indebtedness owed by Lushan.  The acquisition of Lushan marked our entrance into the hog production business.  Since November 2007, we have acquired 30 operating meat hog producing farms.
 
In January 2008, we acquired at least a majority interest in five additional hog farms.  Specifically:
 
 
·
we acquired 70% of the issued and outstanding capital stock of Wannian on January 3rd for RMB12,250,000 (approximately US$1.7 million); we acquired the remaining 30% equity interest in Wannian on September 8th for RMB6,012,500 (approximately US$0.9 million);
 
 
·
we acquired 70% of the issued and outstanding capital stock of Huyun on January 3rd for RMB6,482,000 (approximately US$0.9 million);
 
 
·
we acquired 60% of the issued and outstanding capital stock of Ganzhou on January 4th for RMB6,480,000 (approximately US$0.9 million);
 
 
·
we acquired all of the hogs and stock of Gang Feng on January 7th for RMB4,820,000 (approximately US$0.7 million); and
 
 
·
we acquired 55% of the issued and outstanding capital stock of Yichun on January 9th for RMB8,855,000 (approximately US$1.2 million).
 
On March 19, 2008, Best Swine was formed as a wholly-owned subsidiary of AgFeed.  Best Swine was incorporated under the laws of China on March 19, 2008 and is situated in Futian Township, Wuning County, Jiangxi Province, China and is in the business of raising, breeding and selling hogs for use in China’s pork production and hog breeding markets.
 
 
17

 
 
On April 30, 2008, we acquired all of the equity interest in an additional 16 hog farms.  Specifically, we acquired:
 
Name of Hog Farm
 
Purchase Price in RMB
 
Purchase Price in US$ (1)
         
Guangxi Wanghua
    26,030,000  
$3.7 million
Gangda
    14,520,000  
$2.1 million
Guangxi Guihong
    42,500,000  
$6.1 million
Hainan Meilan
    14,700,000  
$2.1 million
Hainan Wohao
    15,200,000  
$2.2 million
Guangxi Fuzhi
    12,000,000  
$1.7 million
Guangdong Xinfa
    11,000,000  
$1.6 million
Zhejiang Yongxin
    10,480,000  
$1.5 million
Shanghai Fengxian
    35,000,000  
$5.0 million
Shanghai Tuanxi
    7,000,000  
$1.0 million
Shanghai Senrong
    30,000,000  
$4.3 million
Fujian Muxin
    29,320,000  
$4.2 million
Fujian Yuanshengtai
    26,200,000  
$3.7 million
Fujian Jianhua
    32,000,000  
$4.6 million
Fujian Fengxiang
    8,100,000  
$1.2 million
Jiangxi Zhiliang
    8,000,000  
$1.1 million
           
(1) based on then-current conversion rate
 
On May 28, 2008, we acquired all of the equity interest in Nanping Kangda for RMB5,821,000 (approximately US$0.9 million) and all of the equity interest in Fujian Jianxi for RMB16,338,166 (approximately US$2.4 million).
 
On June 25, 2008, we acquired all of the equity interest in Shanghai Weisheng for RMB12,820,000 (approximately US$1.9 million).
 
In September 2008, we acquired all of the equity interest in three additional hog farms.  Specifically:
 
 
·
we purchased Nanping Minkang for RMB9,865,000 (approximately US$1.4 million) on September 8th; and
 
 
·
we purchased Nanning Shunan for RMB9,256,000 (approximately US$1.4 million) and Guangxi Gangxuan for RMB8,569,000 (approximately US$1.3 million) on September 10th.
 
In October 2008, we acquired all of the equity interest in two more hog farms.  Specifically:
 
 
·
on October 28th, we purchased Guangxi Linxing for RMB7,850,000 (approximately US$1.2 million); and
 
 
·
on October 29th, we purchased Nanning Shunhua for RMB8,260,000 (approximately US$1.2 million).
 
On April 15, 2009 we formed a strategic alliance with Hypor and on December 17, 2009, we formed Hypor AgFeed Breeding with Hypor to develop, operate and market Wuning Farms in Wuning, China.  Hypor AgFeed Breeding is owned 85% by AgFeed and 15% by Hypor.
 
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On July 13, 2009, we formed AgFeed International Protein, a joint venture with M2P2 which is focused on enhancing hog production systems for Chinese and other Pan Asian clients based on modern western standards to increase productivity and ensure the highest bio-security health standards in the Pan Asian hog industry.  We are the joint venture's first client.  AgFeed International Protein is owned 80.1% by AgFeed and certain affiliates and 19.9% by M2P2.
 
In December 2009, we began stocking the Gangda breeder farm, having completed the conversion of this farm from a meat producing hog farm to a breeder farm.  On November 10, 2009, we broke ground on the construction of Da Hua, the first of six currently planned Western-model farms to be built in the short term.  We also completed construction of Wuning Farms in November 2009 and anticipate commencing stocking of this facility shortly.
 
We own two breeder farms, 29 meat producing hog farms and five feed production operations.
 
 
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Item 1A.  Risk Factors
 
RISK FACTORS
 
Investment in our securities is subject to various risks, including risks and uncertainties inherent in our business.  The following sets forth factors related to our business, operations, financial position or future financial performance or cash flows which could cause an investment in our securities to decline and result in a loss.
 
General Risks Related to Our Business
 
Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.
 
Our future success will depend in substantial part on the continued service of our senior management and founders. The loss of the services of one or more of our key personnel could impede implementation and execution of our business strategy and result in the failure to reach our goals. We do not carry key person life insurance for any of our officers or employees. Our future success will also depend on the continued ability to attract, retain and motivate highly qualified personnel in the diverse areas required for continuing our operations. The rapid growth of the economy in the PRC has caused intense competition for qualified personnel. We cannot assure you that we will be able to retain our key personnel or that we will be able to attract, train or retain qualified personnel in the future.
 
We need to successfully integrate our acquired businesses.
 
We have made 30 acquisitions since entering the hog farm business in November 2007. Prior to that time, we had limited experience in growth through acquisition. Our future financial results depend upon our ability to successfully integrate the acquired businesses.  We also face pressure to adequately conduct our ongoing operations while working toward the integration of these businesses. While we are pleased with the progress of our integration efforts to date, there is no assurance that we will be able to complete the integration of the acquired businesses as projected or without disrupting other areas of our business that could have a negative effect on our future financial results.
 
Our acquisition strategy involves a number of risks. Even when an acquisition is completed, we may have integration issues that may not produce results as positive as management may have projected.
 
While we are taking a break from our acquisition program as we focus on integrating the companies we have acquired and increasing the efficiencies of our existing businesses,  we intend to grow through additional acquisitions in the future. Acquisitions involve a number of special risks, including:
 
 
·
failure of the acquired business to achieve expected results;
 
 
·
diversion of management’s attention;
 
 
·
failure to retain key personnel of the acquired business;
 
 
·
additional financing, if necessary and available, could increase leverage, dilute equity, or both;
 
 
·
the potential negative effect on our financial statements from the increase in goodwill and other intangibles; and
 
 
·
the high cost and expenses of completing acquisitions and risks associated with unanticipated events or liabilities.
 
 
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These risks could have a material adverse effect on our business, results of operations and financial condition.  In addition, our ability to further expand our operations through acquisitions may be dependent on our ability to obtain sufficient working capital, either through cash flows generated through operations or financing activities or both.  There can be no assurance that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
 
Even though we have curtailed our aggressive acquisition of established farms, we expect to face increased competition for acquisition candidates. We cannot guarantee that we will be able to identify, acquire, or manage profitably additional businesses in the event that we resume our acquisition program. In future acquisitions, we also could incur additional indebtedness or pay consideration in excess of fair value, which could have a material adverse effect on our business, results of operations and financial condition. In addition, we may inadvertently assume unknown liabilities in acquisitions that we complete. Assumption of unknown liabilities in acquisitions may harm our financial condition and operating results. Acquisitions may be structured in such a manner that would result in the assumption of unknown liabilities not disclosed by the seller or uncovered during pre-acquisition due diligence. These obligations and liabilities could harm our financial condition and operating results.
 
Volatile energy prices could adversely affect our operating results.
 
In the last few years, energy prices have risen dramatically and are now volatile, which has resulted in increased and unpredictable costs for our businesses and raw materials costs for our branded feed products. Rising energy prices could adversely affect demand for our feed products and increase our operating costs, both of which would reduce our sales and operating income.
 
We face risks associated with currency exchange rate fluctuations; any adverse fluctuation may adversely affect our operating margins
 
Almost all of our revenues are denominated in Renminbi. Conducting business in currencies other than US dollars subjects us to fluctuations in currency exchange rates that could have a negative impact on our reported operating results. Fluctuations in the value of the US dollar relative to other currencies impact our revenues, cost of revenues and operating margins and result in foreign currency translation gains and losses. If the exchange rate of the Renminbi is affected by lowering its value as against the US dollar, our reported profitability when stated in US dollars will decrease. Historically, we have not engaged in exchange rate hedging activities and have no current intention of doing so.
 
Risks Related to Our Animal Nutrition Business
 
We cannot be certain that our feed product innovations and marketing successes will continue.
 
We believe that our past performance has been based on, and our future success will depend upon, in part, our ability to continue to improve our existing feed products through product innovation and to develop, market and produce new feed products. We cannot assure you that we will be successful in introducing, marketing and producing any new feed products or feed product innovations, or that we will develop and introduce in a timely manner innovations to our existing feed products which satisfy customer needs or achieve market acceptance. Our failure to develop new feed products and introduce them successfully and in a timely manner could harm our ability to grow our business and could have a material adverse effect on our business, results of operations and financial condition.
 
We rely on independently owned wholesale distributors who do not exclusively offer our feed products to their customers.
 
The loss of, or significant adverse change in, our relationship with any of our key wholesale distributors of our feed products could cause our net sales, income from operations and cash flow to decline. The loss of, or reduction in, orders from any significant customer, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major customer could reduce our income from operations and cash flow.
 
 
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We may not be able to reach our revenue and net income targets due to unpredictable market conditions.
 
The primary end-user customers for our feed products are commercial hog farms, individual farmers and slaughterhouses. Although hog prices in the PRC reached multi-year highs last year, hog prices declined during the last six months of 2008 as China substantially increased its imports of pork products. In addition, the price for corn, an important element in feed, has been volatile. A combination of lower hog sale prices and higher feed costs could constrain demand for our feed products.
 
We are a major purchaser of many commodities that we use for raw materials and packaging, and price changes for the commodities we depend on may adversely affect our profitability.
 
We enter into contracts for the purchase of raw materials at fixed prices, which are designed to protect us against raw material price increases during their term. However, when necessary, we attempt to recover our commodity cost increases by increasing prices, promoting a higher-margin product mix and creating additional operating efficiencies. Nevertheless, the raw materials used in our feed business are largely commodities that experience price fluctuations caused by external conditions and changes in governmental agricultural programs.  We also use paper products, such as corrugated cardboard, aluminum products, films and plastics to package our feed products. Substantial increases in the prices of packaging materials or higher prices of our raw materials could adversely affect our operating performance and financial results. Commodity price changes may result in unexpected increases in raw material and packaging costs, and we may be unable to increase our prices to offset these increased costs without suffering reduced volume, revenue and income. Any substantial fluctuation in the prices of raw materials, if not offset by increases in our sales prices, could adversely affect our profitability.
 
Outbreaks of livestock disease can adversely affect sales of our products.
 
Outbreaks of livestock diseases can significantly affect demand for our feed products. An outbreak of disease could result in governmental restrictions on the sale of livestock products to or from customers, or require our customers to destroy their flocks. This could result in the cancellation of orders of feed products by our customers and create adverse publicity that may have a material adverse effect on the agricultural products industry and our ability to market our products successfully.
 
Our products and processes can expose us to product liability claims.
 
Product liability claims or product recalls can adversely affect our business reputation and expose us to increased scrutiny by local, provincial, and central governmental regulators. The packaging, marketing and distribution of agricultural feed products entail an inherent risk of product liability and product recall and the resultant adverse publicity. We may be subject to significant liability if the consumption of any of our products causes injury, illness or death of livestock, other animals or humans. We could be required to recall certain of our feed products in the event of contamination or damage to the products. In addition to the risks of product liability or product recall due to deficiencies caused by our production or processing operations, we may encounter the same risks if any third party tampers with our feed products. We cannot assure you that we will not be required to perform product recalls, or that product liability claims will not be asserted against us in the future. Any claims that may be made may create adverse publicity that would have a material adverse effect on our ability to market our feed products successfully or on our business, reputation, prospects, financial condition and results of operations. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on us and could prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms.
 
 
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We may not be able to obtain regulatory approvals for our feed products.
 
The manufacture and sale of agricultural products in the PRC is regulated by the central government and the local provincial governments. Although our licenses and regulatory filings are current, the uncertain legal environment in the PRC and within our industry may make us vulnerable to local government agencies or other parties who wish to renegotiate the terms and conditions of, or terminate their agreements or other understandings with us.
 
We require various licenses and permits to operate our business, and the loss of or failure to renew any or all of those licenses and permits could require us to suspend some or all of our production or distribution operations.
 
In accordance with the laws and regulations of the PRC, we are required to maintain various licenses and permits in order to operate our feed business. We are required to comply with applicable hygiene and food safety standards in relation to our feed production processes. Our premises and transportation vehicles are subject to regular inspections by the regulatory authorities for compliance with applicable regulations. Failure to pass these inspections, or the loss of or failure to renew our licenses and permits, could require us to temporarily or permanently suspend some or all of our feed production or distribution operations, which could disrupt our operations and adversely affect our revenues and profitability.
 
 
Competition in the agricultural feed industry, especially with companies with greater resources, may make us unable to compete successfully in these industries, which could adversely affect our business.
 
In general, the competitive factors in the agricultural feed industry in the PRC include:
 
 
·
price;
 
·
product quality;
 
·
brand identification;
 
·
breadth of product line; and
 
·
customer service.
 
To the extent that our products and services do not exhibit these qualities, our ability to compete will be hindered.
 
Concerns with the safety and quality of agricultural feed products could cause customers to avoid our products.
 
We could be adversely affected if our customers and the ultimate consumers of our feed products lose confidence in the safety and quality of various feed products. Adverse publicity about these types of concerns, such as the recent publicity concerning the use of the substance melamine in milk and infant formula, may discourage our customers from buying our products or cause production and delivery disruptions. Any negative change in customer perceptions about the safety and quality of our feed products could adversely affect our business and financial condition.
 
 
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If our feed products become adulterated or misbranded, we would need to recall those items and may experience product liability claims if consumers are injured as a result.
 
Animal feed products occasionally contain contaminants due to inherent defects in those products or improper storage or handling. Under adverse circumstances, animal feed manufacturers may need to recall some of their products if they become adulterated or misbranded, and may also be liable if the consumption of any of their products causes injury. While we have never been required to recall any of our feed products and we maintain insurance that we believe is adequate to cover this type of loss, a widespread product recall could result in changes to one or more of our business processes, product shortages, loss of customer confidence in our food or other adverse effects on our business. If we are required to defend against a product liability claim, whether or not we are found liable under the claim, we could incur substantial costs, our reputation could suffer and our customers might substantially reduce their existing or future orders from us.
 
We may not be able to adequately protect and maintain our intellectual property, trademark, and brand names.
 
Our continued success will depend on our ability to continue to develop and market additive premix, concentrates and complete feeds products. We currently have not applied for patents for our products or formulas, as our management believes an application for such patents would result in public knowledge of our proprietary technology and formulas. Since we do not have patent protection for our technology or formulas, we may not be able to protect our rights to this intellectual property if our competitors discover or illegally obtain this technology or formulas. Our inability to protect our rights to this intellectual property may adversely affect our ability to prevent competitors from using our products and developments.
 
Some of our significant customer and supplier contracts are short-term.
 
Some of our feed customers and suppliers operate through purchase orders or short-term contracts. Although we have long-term business relationships with many of our feed customers and suppliers and alternative sources of supply for key items, we cannot be sure that any of these customers or suppliers will continue to do business with us on the same basis. Additionally, although we will try to renew these contracts as they expire, there can be no assurance that these customers or suppliers will renew these contracts on terms that are favorable to us, if at all. The termination of or modification to any number of these contracts may adversely affect our business and prospects, including our financial performance and results of operations.
 
Risks Related to Our Commercial Hog Production Business
 
Our limited operating history in hog production makes it difficult to evaluate our future prospects and results of operations.
 
We have a limited operating history in the hog production business. While we are a leader in the feed product industry, the current management team does not have the same depth of experience in the hog farming business. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving markets such as the market for breeding and selling hogs in the PRC. Some of these risks and uncertainties relate to our ability to:
 
 
·
attract additional customers and increase spending per customer;
 
·
increase awareness of our brand and continue to develop customer loyalty in the hog farming line of business;
 
·
respond to competitive market conditions;
 
·
respond to changes in our regulatory environment;
 
·
maintain effective control of our costs and expenses;
 
·
raise sufficient capital to sustain and expand our business; and
 
·
attract, retain and motivate qualified personnel.
 
If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
 
 
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Health risks to hogs and quality concerns could adversely affect production and our business.
 
We take precautions to ensure that our hogs are healthy. Nevertheless, we are subject to risks relating to our ability to maintain animal health and control diseases.  Disease can reduce the number of offspring produced, hamper the growth of the hogs to finished size and require in some cases the destruction of infected hogs, all of which could adversely affect our ability sell our hogs.  Adverse publicity concerning any disease or heath concern could also cause customers to lose confidence in the safety and quality of our hogs.  For example, blue ear disease, or PRRS, could result in significant loss in production of hogs.  The PRC lost over 10 million pigs to PRRS in 2006 and 2007.  Additionally, since our hogs will be fed almost exclusively with our feed products, safety and quality concerns over our feed products will also adversely affect the sales of our hogs.
 
We may not be able to maintain the necessary hog farming licenses.
 
Hog breeding is subject to substantial licensing requirements and regulation.  In order to sell breeder hogs in the PRC a breeder hog farm must be awarded a breeder’s license by the local government authorities.  Only those breeder hog farms that have qualified staff, specialized equipment and are in segregated locations to avoid the spread of disease are eligible for licensing.  Meat hog farms do not require a license.  Currently, we have obtained licenses to own and operate Lushan and Gangda, our breeder hog farms.  We need to maintain the licenses we have and, if we pursue acquisitions of other breeder hog farms, we will need to obtain additional licenses to operate those farms. Our future success in the hog farming industry depends on our ability to acquire such licenses and permits to expand our business.
 
Our hog production business could be adversely affected by fluctuations in pork and commodity prices.
 
The price at which we sell our hogs is directly affected by the supply and demand for pork products and other proteins in the PRC, all of which are determined by the constantly changing market forces of supply and demand as well as other factors over which we have little or no control.  A downward fluctuation in the demand for pork may adversely impact our quarterly and annual results of operations for the hog farming business. Although hog prices in the PRC reached multi-year highs last year, hog prices declined during the last six months of 2008 as China substantially increased its imports of pork products. In addition, the price for corn, an important element in feed, has been volatile. Lower hog sale prices, higher feed costs, or both would have a negative effect on our results of operations.  
 
Risks Related to Conducting Our Business in China
 
We are subject to economic and political risks in China over which we have little or no control, and may be unable to alter our business practice in time to avoid the possibility of reduced revenues.
 
All of our business is conducted in China. Doing business outside the United States, and particularly in China, subjects us to various risks and uncertainties, including changing economic and political conditions, major work stoppages, exchange rate controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and may be unable to anticipate changes in international economic and political conditions. Therefore, we may be unable to alter our business practice in time to avoid the possibility of reduced revenues.
 
 
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China’s economic policies could affect our business.
 
All of our assets are located in China and all of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China.  While China’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of the PRC, but they may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations. The economy of the PRC has been changing from a planned economy to a more market-oriented economy. In recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance in business enterprises. However, a substantial portion of productive assets in the PRC are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over the PRC’s economic growth through the allocation of resources, the control of payment of foreign currency-denominated obligations, the setting of monetary policy and the provision of preferential treatment to particular industries or companies.
 
If the Chinese government finds that the structure for operating our Chinese businesses do not comply with Chinese governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
 
All of our operations are conducted through our subsidiaries in China. If we, our subsidiaries, or our corporate structure is found to be in violation of any existing or future PRC laws or regulations (for example, if we are deemed to be holding equity interests in an entity in which direct foreign ownership is restricted) the relevant PRC regulatory authorities, including the administration of industry and commerce, the administration of foreign exchange and relevant agencies of the Ministry of Commerce, would have broad discretion in dealing with such violations, including:
 
 
·
revoking business and operating licenses
 
·
confiscating income and imposing fines and other penalties
 
·
requiring us to restructure our corporate structure or operations
 
·
restricting or prohibiting our use of proceeds from our financings to finance our business and operations in China
 
·
imposing conditions with which we or our subsidiaries may not be able to comply
 
·
forcing us to relinquish our interests in our subsidiaries
 
The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business.
 
We may have difficulty establishing adequate management, legal and financial controls in China.
 
China historically has not adopted a Western style of management, financial reporting concepts and practices, modern banking, computer or other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in China. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, and instituting business practices that meet Western standards. We may also experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records.
 
Our bank accounts are not insured or protected against loss.
 
We maintain our cash with various banks and trust companies located in China. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust company.
 
 
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As we have limited business insurance coverage in China, any loss which we suffer may not be insured or may be insured to only a limited extent.
 
The insurance industry in China is still in an early stage of development and insurance companies located in China offer limited business insurance products. In the event of damage or loss to our properties, our insurance may not provide as much coverage as if we were insured by insurance companies in the United States.
 
Tax laws and regulations in China are subject to substantial revision, some of which may adversely affect our profitability
 
The Chinese tax system is in a state of flux, and it is anticipated that China's tax regime will be altered in the coming years. Tax benefits that we presently enjoy may not be available in the wake of these changes, and we could incur tax obligations to our government that are significantly higher than anticipated. These increased tax obligations could negatively impact our financial condition and our revenues, gross margins, profitability and results of operations may be adversely affected as a result.
 
We may face judicial corruption in China.
 
Another obstacle to foreign investment in China is corruption. There is no assurance that we will be able to obtain recourse in any legal disputes with suppliers, customers or other parties with whom we conduct business, if desired, through China’s poorly developed and sometimes corrupt judicial systems.
 
We may face obstacles from the communist system in China.
 
Foreign companies conducting operations in China face significant political, economic and legal risks. The Communist regime in China, including a cumbersome bureaucracy, may hinder Western investment.
 
If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.
 
At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our common stock.
 
The government of China could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of our and your investment.
 
Our business is subject to significant political and economic uncertainties and may be affected by political, economic and social developments in China. Over the past several years, the government of China has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The government of China may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice.
 
Changes in policies, laws and regulations or in their interpretations or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, or devaluations of currency could cause a decline in the price of our common stock, should a market for our common stock ever develop. Nationalization or expropriation could even result in the total loss of your investment.
 
 
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The nature and application of many laws of China create an uncertain environment for business operations and they could have a negative effect on us.
 
The legal system in China is a civil law system. Unlike the common law system, the civil law system is based on written statutes where decided legal cases have little value as precedents. In 1979, China began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could cause a decline in the price of our common stock. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.
 
 
We are a holding company and conduct substantially all of our business through our operating subsidiaries in China. We will of necessity rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our Chinese subsidiaries are also required to set aside at least 10% of their after-tax profit based on Chinese accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of their registered capital. These reserves are not distributable as cash dividends. In addition, they are required to allocate a portion of its after-tax profit to its staff welfare and bonus fund at the discretion of its board of directors. Moreover, if our subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends and other distributions to us could materially and adversely limit our ability to make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
 
Chinese regulations relating to the establishment of offshore special purpose companies by Chinese residents and registration requirements for employee stock ownership plans or share option plans may subject our China resident shareholders to personal liability and limit our ability to acquire Chinese companies or to inject capital into our operating subsidiaries in China, limit our subsidiaries’ ability to distribute profits to us, or otherwise materially and adversely affect us.
 
The State Administration of Foreign Exchange (SAFE) issued a public notice in October 2005, requiring PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China, referred to as an “offshore special purpose company,” for the purpose of acquiring any assets of or equity interest in PRC companies and raising funds from overseas. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend his or her SAFE registration with the local SAFE branch, with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. To further clarify the implementation of Circular 75, the SAFE issued Circular 124 and Circular 106 on November 24, 2005 and May 29, 2007, respectively. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE authorities. If the PRC subsidiaries of the offshore parent company do not report to the local SAFE authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions. Some of our PRC resident beneficial owners have not registered with the local SAFE branch as required under SAFE regulations. The failure or inability of these PRC resident beneficial owners to comply with the applicable SAFE registration requirements may subject these beneficial owners or us to fines, legal sanctions and restrictions described above.
 
 
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In addition, the National Development and Reform Commission ("NDRC") promulgated a rule in October 2004, or the NDRC Rule, which requires NDRC approvals for overseas investment projects made by PRC entities. The NDRC Rule also provides that approval procedures for overseas investment projects of PRC individuals must be implemented with reference to this rule. However, there exist extensive uncertainties in terms of interpretation of the NDRC Rule with respect to its application to a PRC individual’s overseas investment, and in practice, we are not aware of any precedents that a PRC individual’s overseas investment has been approved by the NDRC or challenged by the NDRC based on the absence of NDRC approval. Our current beneficial owners who are PRC individuals did not apply for NDRC approval for investment in us. We cannot predict how and to what extent this will affect our business operations or future strategy. For example, the failure of our shareholders who are PRC individuals to comply with the NDRC Rule may subject these persons or our PRC subsidiary to certain liabilities under PRC laws, which could adversely affect our business.
 
Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
 
The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all of our revenues in RMB. Under our current structure, our income is primarily derived from dividend payments from our subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB are to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The Chinese government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. Since our revenues are denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenues to fund business activities outside of China that require foreign currencies.
 
Changes in China’s currency policies may cause a target business’s ability to succeed in the international markets to be diminished.
 
Historically, China “pegged” its currency to the U.S. dollar. This meant that each unit of PRC currency had a set ratio for which it could be exchanged for United States currency, as opposed to having a floating value like other countries’ currencies. Many countries argued that this system of keeping China currency low when compared to other countries gave PRC companies an unfair price advantage over foreign companies. Due to mounting pressure from outside countries, China recently reformed its economic policies to establish a floating value. As a result of this policy reform, we may be adversely affected since the competitive advantages that existed as a result of the former policies will cease. We cannot assure you that we will be able to compete effectively with the new policies in place.
 
 
29

 

If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
 
If you are a United States holder, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
 
The admission of China into the World Trade Organization could lead to increased foreign competition for us.
 
Domestic competition in the animal feed industry is largely fragmented and foreign competition is minimal. However, as a result of China becoming a member of the World Trade Organization (“WTO”), import restrictions on agricultural products are expected to be reduced. The lowering of import restrictions and the WTO’s requirement for a reduction of import tariffs as a condition of membership may result in an increase of foreign products, and could in turn lead to increased competition in the domestic agricultural market.
 
Risks Related to Our Securities
 
It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China.
 
As our executive officers and several of our directors, including the chairman of our Board of Directors, are Chinese citizens, it may be difficult, if not impossible, to acquire jurisdiction over these persons in the event a lawsuit is initiated against us and/or our officers and directors by a shareholder or group of shareholders in the United States. Also, because our operating subsidiaries and assets are located in China, it may be extremely difficult or impossible for investors to access those assets to enforce judgments rendered against us or our directors or executive officers by United States courts. In addition, the courts in China may not permit the enforcement of judgments arising out of United States federal and state corporate, securities or similar laws. Accordingly, United States investors may not be able to enforce judgments against us for violation of United States securities laws.
 
Our common stock price is subject to significant volatility, which could result in substantial losses for investors.
 
During the eight month period ended August 28, 2007, the high and low bid prices of our common stock on the Over-The-Counter Bulletin Board (“OTCBB”) were $8.25 per share and $1.85 per share, respectively. Since our commencement of trading on the Nasdaq Stock Market on August 29, 2007 through March 3, 2010, the high and low sales prices of our common stock were $21.31 and $0.90. Prices for our shares are determined in the marketplace and may accordingly be influenced by many factors, including, but not limited to:
 
 
·
the depth and liquidity of the market for the shares;
 
·
quarter-to-quarter variations in our operating results;
 
·
announcements about our performance as well as the announcements of our competitors about the performance of their businesses;

 
30

 

 
·
investors’ evaluations of our future prospects and the food industry generally;
 
·
changes in earnings estimates by, or failure to meet the expectations of, securities analysts;
 
·
our dividend policy; and
 
·
general economic and market conditions.
 
In addition, the stock market often experiences significant price fluctuations that are unrelated to the operating performance of the specific companies whose stock is traded. These market fluctuations could adversely affect the trading price of our shares.
 
The price at which investors purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. Investors may be unable to sell their shares of common stock at or above their purchase price, which may result in substantial losses.
 
Future sales of shares of our common stock by our shareholders could cause our stock price to decline.
 
We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time. As of March 3, 2010, we had 44,903,263 shares of common stock issued and outstanding, 760,000 of which shares are subject to the lapsing of certain restrictions. An aggregate of 2,807,638 shares of our common stock are issuable upon conversion of our outstanding convertible notes or upon exercise of our outstanding warrants and an aggregate of 180,000 shares of our common stock are issuable upon exercise of our outstanding options. Sales of shares of our common stock in the public market covered under an effective registration statement, or pursuant to Rule 144, or the perception that those sales may occur, could cause the trading price of our common stock to decrease or to be lower than it might be in the absence of those sales or perceptions.
 
We may issue additional shares of our capital stock or debt securities to raise capital or complete acquisitions, which would reduce the percentage equity interest of our shareholders.
 
Our certificate of incorporation authorizes the issuance of up to 75,000,000 shares of common stock, par value $0.001 per share. As of March 3, 2010, there were approximately 27,109,099 authorized and unissued shares of our common stock which have not been reserved and accordingly, are available for future issuance. We entered into an Equity Credit Agreement in September 2009 with an institutional investor pursuant to which we have the right, but not the obligation, to require the investor to purchase shares of our common stock from time to time. The maximum aggregate value of the shares that may be issued under the Equity Credit Agreement is $50 million. Based on the closing price of our common stock on March 3, 2010, assuming the maximum takedown under the Equity Credit Agreement, approximately 10.4 million additional shares could be issued. We are not obligated to issue any shares. Although we have not entered into any other agreements as of this date to issue our unreserved shares of common stock, we may issue a substantial number of additional shares of our common stock to complete a business combination or to raise capital in the private or public markets. The issuance of additional shares of our common stock:
 
 
·
may significantly reduce the equity interest of investors in this offering; and
 
 
·
may adversely affect prevailing market prices for our common stock.
 
 
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The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may cause us to incur substantial expenditures and may discourage lawsuits against our directors, officers and employees.
 
Our articles of incorporation contain specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders, to the extent provided by Nevada law. We may also have or may create contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
 
Our management owns a significant amount of our common stock, giving them influence or control in corporate transactions and other matters, and their interests could differ from those of other shareholders.
 
Our principal executive officers and directors beneficially own approximately 26% of our outstanding common stock. As a result, they are in a position to significantly influence the outcome of matters requiring a shareholder vote, including the election of directors, the adoption of any amendment to our articles of incorporation or bylaws, and the approval of significant corporate transactions. Their control may delay or prevent a change of control on, terms favorable to our other shareholders and may adversely affect your voting and other shareholders rights.
 
Our articles of incorporation, our bylaws and provisions of Nevada law could make it more difficult for a third party to acquire us, even if doing so could be in our shareholders’ best interest.
 
Provisions of our articles of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be in the best interest of our shareholders. It could be difficult for a potential bidder to acquire us because our articles of incorporation and bylaws contain provisions that may discourage takeover attempts. These provisions may limit shareholders’ ability to approve a transaction that shareholders may think is in their best interests. These provisions include a requirement that certain procedures must be followed before matters can be proposed for consideration at meetings of our shareholders.
 
Provisions of Nevada’s business combinations statute also restrict certain business combinations with interested shareholders. We have elected not to be governed by these provisions in our amended and restated articles of incorporation. However, this election may not be effective unless we meet certain conditions under the Nevada statute.
 
Capital outflow policies in China may hamper our ability to declare and pay dividends to our shareholders.
 
The PRC has adopted currency and capital transfer regulations. These regulations may require us to comply with complex regulations for the movement of capital. Although our management believes that we will be in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, we may not be able to pay dividends to our shareholders outside of China. In addition, under current Chinese law, we must retain a reserve equal to 10 percent of net income after taxes, not to exceed 50 percent of registered capital. Accordingly, this reserve will not be available to be distributed as dividends to our shareholders. We presently do not intend to pay dividends in the foreseeable future. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business.
 
Risk Associated with the Global Economy
 
Deterioration of economic conditions could negatively impact our business.
 
Our business may be adversely affected by changes in global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects of governmental initiatives to manage economic conditions. Any such changes could adversely affect the demand for our products or the cost and availability of our needed raw materials, thereby negatively affecting our financial results.
 
 
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The recent disruptions in credit and other financial markets and deterioration of global economic conditions, could, among other things:
 
 
·
make it more difficult or costly for us to obtain financing for our operations or investments or to finance debt in the future;
 
 
·
impair the financial condition of some of our customers, suppliers or counterparties to our derivative instruments, thereby increasing bad debts or non-performance by suppliers; and
 
 
·
negatively impact demand for pre-mix feed or hog products, which could result in a reduction of sales, operating income and cash flows.
 
Item 1B. Unresolved Staff Comments.
 
None
 
Item 2. Properties.
 
We lease our headquarters office, located at at Rm. A1001-1002, Tower 16, Hengmao Int'l Center, 333 S. Guangchang Rd., Nanchang, Jiangxi Province, PRC 330003. The annual rent on this space is approximately $28,000 and the lease runs for two years through April 28, 2010. A full description of our feed facilities is set forth under "Item 1. Business, Animal Nutrition Business, Facilities" on pages 8 and 9 and a full description of our hog farm facilities is set forth under "Item 1. Business, Commercial Hog Production Business, Facilities" on pages 12 through 16.
 
Item 3. Legal Proceedings.
 
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2009.
 
 
33

 

PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
Through August 28, 2007 our common stock was quoted on the Over-the-Counter Bulletin Board under the symbol "AGFI.OB."  Our common stock is currently traded on the Nasdaq Global Market under the symbol "FEED."  The following table sets forth, for the periods indicated, the quarterly high and low selling prices for our common stock as reported by Nasdaq.
 
   
For the Year Ended December 31,
 
   
2009
   
2008
 
   
High
   
Low
   
High
   
Low
 
First Quarter
  $ 2.95     $ 0.90     $ 13.75     $ 8.40  
Second Quarter
  $ 7.96     $ 2.11     $ 21.31     $ 11.61  
Third Quarter
  $ 6.80     $ 4.10     $ 14.95     $ 7.55  
Fourth Quarter
  $ 5.70     $ 4.00     $ 8.09     $ 1.10  

The closing price for our common stock on March 3, 2010 was $4.60.
 
Holders
 
The number of record holders of our common stock as of March 3, 2010 was 79.
 
Dividend Policy
 
 
 
We adopted the AgFeed Industries, Inc. 2008 Long-Term Incentive Plan at our 2008 Annual Meeting of Shareholders.  Prior to that time, we did not have a formal equity compensation plan in effect for employees or directors.  
 
 
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The following table provides information as of December 31, 2009 about our common stock that may be issued upon the exercise of options and rights granted to employees or members of our Board of Directors:
 
Equity Compensation Plan Information
 
Plan Category
 
(a)
Number of
securities
to be issued
upon

exercise of
outstanding
options,
warrants
and rights
   
(b)
Weighted-
average
exercise
price
of
outstanding
options,
warrants
and rights
   
(c)
Number of
securities
remaining
available
for future
issuance
under

equity
compensation
plans
(excluding
securities
reflected
in column (a))
 
Equity compensation plans approved by security holders
    190,000     $ 8.3695       50,000  
Equity compensation plans not approved by security holders (1)
    20,000     $ 8.85           -0-  
Total
    210,000     $ 8.4152       50,000  
 

(1)
Includes options granted to two of our independent directors in 2007 outside any plan.  
 
 
35

 

Stock Price Performance Graph

A five-year comparison of the performance of our common stock with a broad equity market index and a peer group is set forth below.  The broad equity market index used is the Nasdaq Composite Index and the peer group is the Russell 2000 Index(1).  The below comparison assumes $100 was invested on November 17, 2006 and dividends are reinvested for all years ending December 31.

 
   
11/17/2006
   
12/31/2006
   
12/31/2007
   
12/31/2008
   
12/31/2009
 
Agfeed Industries, Inc
  $ 100     $ 67     $ 282     $ 54     $ 167  
Nasdaq Composite Index
  $ 100     $ 99     $ 108     $ 63     $ 93  
New Peer Group - Russell 2000 Index
  $ 100     $ 100     $ 97     $ 63     $ 79  
Old Peer Group - CBOE China Index
  $ 100     $ 114     $ 152     $ 88     $ 142  

(1)
Commencing with this Annual Report, we have elected to change our peer group to the Russell 2000 Index (New Peer Group). This peer group consists of the smallest securities based on a combination of their market cap and current index membership.  The top ten companies included in the Russell 2000 Index are Human Genome Sciences, Inc., 3Com Corp., Assured Guaranty, Ltd., Tupperware Corp., E*Trade Financial Corp., Solera Holdings, Inc., Bally Technologies, Inc., Highwoods Properties, Inc., Skyworks Solutions, Inc. and Informatica Corp.

In 2008, our peer group (Old Peer Group) was the CBOE China Index, which is comprised of Aluminum Corp of China Ltd., Baidu.com - Spon ADR, Cnooc Ltd., China Telecom Corp Ltd., China Mobile Ltd., China Unicom Ltd., Ctrip.com International, China Yuchai International Ltd., Focus Media Holding Limited, Huaneng Power International Inc., China Life Insurance, Nam Tai Electronics Inc., Netease.com, Inc., Petrochina Co Ltd., Sina Corp., Semiconductor Manufacturing International Corp., Shanda Interactive Entertainment Ltd., China Petroleum & Chemical Corp., Sohu.com Inc., and Suntech Power Holdings Co.

We believe that the companies included in the New Peer Group are more reflective of our position within the marketplace, and therefore will provide a more meaningful comparison of stock performance.  We have included the New Peer Group in the graph to show what the comparison to those companies would have been if the New Peer Group had been in place during the period shown in the graph.

Purchases of Equity Securities
We did not purchase any shares of our common stock during the fourth quarter of 2009.
 
 
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Item 6.  Selected Financial Data.
 
   
For the Year Ended December 31,
 
   
2009
   
2008
   
2007
 
Net Revenue
  $ 173,203,271     $ 143,661,485     $ 36,163,339  
                         
Cost of Revenue
    146,568,116       109,224,565       25,763,479  
                         
Gross profit
    26,635,155       34,436,920       10,399,860  
                         
Operating expenses
    14,043,067       9,695,989       4,079,089  
                         
Income from operations
    12,592,088       24,740,931       6,320,771  
                         
Non-operating income (expense)
    (1,270,186 )     (6,783,375 )     148,921  
                         
Income before provision for income taxes
    11,321,902       17,957,556       6,469,692  
                         
Provision (benefit) for income taxes
    1,142,105       587,222       (193,203 )
                         
Net income including noncontrolling interest
    10,179,797       17,370,334       6,662,895  
                         
Net income (loss) attributed to noncontrolling interest
    (168,569 )     421,519       -  
                         
Net income attributed to AgFeed
  $ 10,348,366     $ 16,948,815     $ 6,662,895  
                         
Weighted average shares outstanding :
                       
Basic
    40,978,457       31,557,742       26,093,376  
Diluted
    41,214,070       31,713,977       26,174,973  
                         
Earnings per share:
                       
Basic
  $ 0.25     $ 0.54     $ 0.26  
Diluted
  $ 0.25     $ 0.53     $ 0.25  
                         
We believe that "adjusted net income," "adjusted earnings per share" and "earnings per share based on income from operations," when taken in conjunction with reported results, provide a useful measure of financial performance since they eliminate the impact of certain non-recurring, non-cash charges. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Additionally, the non-GAAP financial measures used by AgFeed may not be comparable to non-GAAP financial measures used by other companies.
 
Adjusted Net Income and Earnings Per Share
 
For the Year Ended December 31,
 
   
2009
   
2008
   
2007
 
                   
Net Income attributed to AgFeed Adjustments
  $ 10,348,366     $ 16,948,815     $ 6,662,895  
Interest and financing costs related to conversion of convertible debentures
  $ 1,022,626     $ 5,704,358       -  
Foreign currency loss
    17,943     $ 559,299       -  
                         
Adjusted Net Income
  $ 11,388,935     $ 23,212,472     $ 6,662,895  
                         
Basic Weighted Shares Outstanding
    40,978,457       31,557,742       26,093,376  
Adjusted Earnings per Share
  $ 0.28     $ 0.74     $ 0.26  
                         
Earnings per share based on income from operations
  $ 0.31     $ 0.78     $ 0.24  
 
 
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The information contained in this section has been derived from the consolidated financial statements of AgFeed. Information contained herein should be read together with AgFeed’s financial statements and related notes included elsewhere in this annual report.
 
Dollar amounts set forth in this Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" are in thousands (000s) unless otherwise indicated.
 
Overview
 
We are engaged in the animal nutrition premix, concentrate and complete feeds) business and commercial hog production business in China through our operating subsidiaries.
 
Our animal nutrition business consists of the research and development, manufacture, marketing and sale of premix, concentrate and complete feed for use in the domestic animal husbandry markets almost exclusively for hog production in China. Premix is an animal feed additive that is broadly used in commercial animal production worldwide. We have been almost exclusively in the premix feed business since 1995 and now operate five premix, concentrate and complete feed manufacturing facilities located in the cities of Nanchang, Shandong, Shanghai, Nanning, and Hainan. We are aggressively expanding our concentrate and complete feed lines to meet the growing demand of commercial producers as they modernize their production technology and focus on the requirements of the food safety laws.
 
We entered the hog breeding and production business in November 2007. In this business, we mainly produce hogs for processing and sell breeding stock. We currently have two breeder farms and 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces.
 
We have developed a system of centralized raw material purchases, accounting and internal control management, corporate marketing strategies and brand building. We have created, and centrally manage, an animal disease control response team. This team consists of experienced Chinese and international hog industry professionals that are used by each of our subsidiaries across both of our lines of business. Our increased size and economies of scale benefit us greatly in both raw materials cost savings and administrative efforts.
 
We had revenues of $173.20 million for the year ended December 31, 2009 compared to revenues of $143.66 million for the year ended December 31, 2008. The increase (20.6%) was the result of expanding market share in our feed business and the hog farm acquisitions and expansions we made beginning in late 2007 and throughout 2008.
 
Animal Nutrition Business
 
We manufacture, distribute, market and sell three main product lines - premix, concentrate and complete feeds for use in all stages of a pig’s life. We conduct these operations through our subsidiaries Nanchang Best, Shanghai Best, Guangxi Huijie, Shandong Feed, and HopeJia. We also provide educational, technical and veterinary support to our customer base
 
Our feed operating companies operate manufacturing facilities in Nanchang, Shanghai, Nanning, Shandong, and Hainan provinces, primarily serving the hog industry. Each subsidiary independently conducts local marketing and sales efforts under the direction of a central executive management team. Nanchang Best and Guangxi Huijie are primarily responsible for our ongoing research and development efforts and share their expertise in this area with all of our manufacturing operations.
 
During 2009, we added 282 independent owned feed distribution chain stores now totaling 1,302 that sell our products exclusively. During the year we added 120 commercial farms now totaling 780. 75% of China’s total annual hog production is supplied by backyard and small farms that raise less than 100 hogs per year per family. Through our network of distributors and direct sales, we are able to market our premix feed to the producers of more than 65% of China’s annual hog production.
 
 
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We are one of a handful of companies that received “Green Certification” from the Minister of Agriculture of PRC for our premix products under the brand label “BEST.” This means that these products are safe, environmentally friendly, and can effectively promote the healthy growth of pigs. According to current government regulations, pork cannot be accredited by the government as “green” unless it is produced using government certified green feed. Having our feed certified as green requires us to adhere to strict operational controls and procedures. This green certification laid the foundation for our hog farms to produce hogs providing high quality “Green” pork products. It is also an incentive for other commercial hog farms to enter into sales contracts with our feed operations.
 
We invest capital in research and development to maintain and improve on a superior quality product while experimenting with environmentally sensitive premix formulas. We will continue to invest up to 1% of our revenues to increasing our long-term profitability and competitiveness.
 
Revenue increased to $63.65 million in 2009 from $51.75 million in 2008 fully recognizing sales from the feed division to the hog division. This is driven by our aggressive expansion into concentrate and complete feed lines.
 
According to the Access Asia Limited 2008 market analysis in their study titled “Fresh & Processed Meat in China 2009,” food preferences are changing rapidly in China. Chinese people now eat much more meat than previously. But there is also a growing diversity in the average diet. The fresh meat market is expected to grow over 23% from 2009 to 2013. This market value is estimated to be over $70.0 billion by 2013. Pork will continue to be 62.5% of all fresh meat sold. Poultry, lamb, veal, mutton and beef will constitute 36% of the growth. In view of this we decided to explore the expansion and funding to serve the animal nutrition products needed for this growing market.
 
Hog Production Business
 
In our hog production business, we have grown our business through strategic acquisitions of current producing commercial hog farms and organic growth. We own two breeder hog farms and 29 meat producing hog farms located in Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces, which are strategically located in or near the largest pork consumption areas in the PRC.
 
We entered the hog farming business on November 9, 2007 as a result of our acquisition of ninety percent (90%) of the capital stock of Lushan. Lushan owns and operates a breeder hog farm in Jiangxi Province. Lushan is a mid-scale hog farm engaged in the business of raising, breeding and selling hogs in the PRC for use in the pork production market in the PRC. In 2008, we acquired at least a majority interest in 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces through our subsidiaries - Nanchang Best, Shanghai Best, Guangxi Huijie and Best Swine. Our meat hog producing farms generate revenue primarily from the sale of meat hogs to processors. Our meat hogs are sold primarily in Jiangxi, Shanghai, Hainan, Guangxi, Fujian, Guangdong and other neighboring provinces. In November 2009, we opened our first "Western-model" farm in the city of Da Hua, Guangxi Province. In December 2009 we began stocking a second breeder farm in the city of Gangda, Guangxi Province. We also completed the construction of a nucleus farm in the city of Wuning, Jiangxi Province in November 2009. This farm will be developed and operated by Hypor AgFeed Breeding.
 
Our breeder farms generate revenue primarily from the sale of breeder hogs to commercial hog farms and, to a lesser extent, the sale of meat hogs to hog slaughterhouses. They also generate revenue by providing consulting services to hog farmers in the areas of feed production, feed formulation and veterinary services. Our customers include large-scale hog farms, mid-scale hog farms and small-scale farms. Our breeder hogs are sold throughout the PRC, primarily in southeastern China.
 
 
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Capital spending for 2009 consisted of approximately $4.9 million on building renovations and $2.61 million on equipment purchases and environmental expenditures. Our current capital spending plans over the next two years include an estimated $4.2 million for bio security, $4.0 million for environmental compliance and projects and $8.3 million for genetics programs. In 2009, we sold approximately 681,000 head with an average selling price of $161 per head at an average weight of 87.9kg (193 lbs.) as compared to sales of 410,000 hogs with an average selling price of $219 per head for 2008 at an average weight of 92.5kg (218.2 lbs.), a difference of $25.00 less per hog this year.
 
On April 15, 2009 we formed a strategic alliance with Hypor. The alliance has four phases: (1) upgrading the genetic base of our existing herds; (2) creating a sow farrow-to-finish nucleus facility (Wuning Farms) to supply superior breeding stock to be utilized in our production systems and for sale to outside commercial hog farms; (3) establishing high health, top quality genetics to the farms being developed by AgFeed International Protein; and (4) developing gene transfer centers to maximize the use of the top performing boars in China across AgFeed's production system. On December 17, 2009, we formed Hypor AgFeed Breeding Company with Hypor to develop, operate and market a genetic nucleus farm in Wuning, China. Hypor AgFeed Breeding is owned 85% by us and 15% by Hypor.
 
On July 13, 2009, we formed AgFeed International Protein with M2P2, a joint venture focused on enhancing hog production systems for Chinese and other Pan Asian clients based on modern western standards to increase productivity and ensure the highest bio-security health standards in the Pan Asian hog industry. The joint venture was formed to take advantage of the commercialization and consolidation of the hog industry being fostered by the Chinese central and local governments. We are AgFeed International Protein's first client. We own 65% of AgFeed International Protein, certain affiliates own an additional 15.1% and M2P2 owns the remaining 19.9%. On November 9, 2009, construction began on of our first large western model farm in Da Hua, China (Jiangxi Province). This is the first of six farms that will be constructed in South China that will house an additional 20,000 genetically superior sows and 400 boars. When fully operational, we anticipate that these farms will produce 500,000 pigs per year. It is anticipated that the cost to build the six farms will be approximately $50 million over the next two years. AgFeed International Protein has completed all phases of design and blueprints for these farms and has been working with international and local construction firms to ensure success.
 
Our current strategic plan calls for development of a platform for the production and sale of approximately 2.5 million hogs into the Chinese market between 2009 and the end of 2011. The key element to this future growth is scientific breeding, which is underscored by our arrangement with Hypor. In April 2009 we began this by stocking the 1,200 sow farrow-to-finish Lushan Breeding Farm with the Hypor Large White Pureline Sows, the Hypor Landrace Pureline Boars and the Duroc Terminal Sire. In November 2009, we began stocking our second breeder farm, Gangda Farm, with like genetics
 
Our investment plans also include modernization of our existing pork production facilities, investment in reporting and cash management systems and the training of our employees, and the development of enhanced environmental and health safety programs including upgraded bio security measures. These actions are part of our effort to improve on the standards of the new China Food Safety Law that was implemented on June 1, 2009 and to ensure the production of consistently high quality, safe pork.
 
According to the China Feed Industry Association, China has the world's largest and most profitable market for hog production, which processed 625 million hogs in 2009, compared to approximately 100 million in the US. More than 1.2 billion Chinese consume pork as their primary source of meat. 62% of all meat consumed in China is pork. Chinese consumers consume more pork each year than the rest of the world combined. China’s pork consumption is forecast to increase to 47.0 million metric tons in 2010 up from 44.9 million metric tons in 2008, an increase of about 5%. Projected pork demand by 2015 is estimated to approach 68.0 million metric tons, an increase of 51%
 
The Chinese government supports hog producers with favorable tax status and subsidies, insurance, vaccines, caps on feed costs and land use grants. Hog production is exempt from all taxes and sow owners receive government grants and subsidies. The Food Safety Law, which went into effect on June 1, 2009, provides a legal basis for the government to strengthen food safety control “from the production line to the dining table.”
 
 
40

 

The importance the PRC puts on hog production is exemplified by the adoption of new policies and enactment of new laws benefiting hog producers. In January 2008, the Chinese central government instituted a set of measures that could prevent large declines in hog prices with the view of stabilizing hog production and hog prices in order to protect the interest of hog farms. In July 2008, the NDRC announced that they were channeling $5.6 billion RMB for livestock farm construction and another $2.8 billion RMB to support live pig production.
 
Critical Accounting Policies
 
In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make certain estimates and assumptions that affect the amounts reported therein.  Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events.  However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions.  If there is a significant unfavorable change to current conditions, it will likely result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time.  Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.
 
Use of Estimates.  Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to impairment of long-lived assets and allowance for doubtful accounts.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
 
Areas that require estimates and assumptions include valuation of accounts receivable and inventory, determination of useful lives of property and equipment, estimation of certain liabilities and sales returns.
 
Allowance For Doubtful Accounts.  We continually monitor customer payments and maintain a reserve for estimated losses resulting from our customers’ inability to make required payments. In determining the reserve, we evaluate the collectability of our accounts receivable based upon a variety of factors. In cases where we become aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due. For all other customers, we recognize allowances for doubtful accounts based on our historical write-off experience in conjunction with the length of time the receivables are past due, customer credit worthiness, geographic risk and the current business environment. Actual future losses from uncollectible accounts may differ from our estimates.

Inventories.  Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. We evaluate our ending inventories for estimated excess quantities and obsolescence. Our evaluation includes the analysis of future sales demand by product, within specific time horizons. Inventories in excess of projected future demand are written down to net realizable value. In addition, we assess the impact of changing technology on inventory balances and writes-down inventories that are considered obsolete. Inventory obsolescence and excess quantities have historically been minimal.
 
 
41

 

Long-Lived Assets. We periodically assess potential impairments to our long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires, among other things, that an entity perform an impairment review whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Factors we considered include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends. When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, we recognize an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair market value of the asset, based on the fair market value if available, or discounted cash flows. To date, there has been no impairment of long-lived assets.
 
Property and Equipment. Useful lives of property and equipment is based on historical experience and industry norms. Changes in useful lives due to changes in technology or other factors can affect future depreciation estimates.
 
Revenue Recognition. Our revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (SAB) 104. Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of AgFeed exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. We are not subject to VAT withholdings. We give volume rebates to certain customers based on volume achieved.
 
We make estimates and judgments when determining whether the collectability of revenue from customers is reasonably assured. Management estimates regarding collectability impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectability could differ from actual events, thus materially impacting our financial position and results of operations.
 

Recent Accounting Pronouncements
 
On July 1, 2009, we adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”).  ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC registrants, guidance issued by the SEC.  The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC.  The Codification is amended to effect non-SEC changes to authoritative GAAP.  Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Consolidated Financial Statements.
 
 
42

 

In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. We are currently evaluating the impact of this ASU on our consolidated financial statements.
 

Results of Operations
 
Comparison of Years Ended December 31, 2009 and December 31, 2008
 
   
Years Ended December 31,
   
$
   
%
 
   
2009
   
2008
   
Change
   
Change
 
Revenues
  $ 173,203,271     $ 143,661,485     $ 29,541,786       20.56  
Cost of goods sold
    146,568,116       109,224,565       37,343,551       34.19  
Gross profit
    26,635,155       34,436,920       (7,801,765 )     (22.66 )
Operating expenses
    14,043,067       9,695,989       4,347,078       44.83  
Interest and financing costs
    1,022,626       5,704,358       (4,681,732 )     (82.07 )
Net income
    10,348,366       16,948,815       (6,600,449 )     (38.94 )
 
Revenues. The increase was due to volume sales of both hogs and animal feed products. Hog sales of 681,000 for year ended December 31, 2009 exceeded total hog sales of 410,000 hogs for the year ended December 31, 2008. Animal feed sales volume for year ended December 31, 2009 exceeded 117,000 metric tons representing a 56% increase in volume over the comparative period of 2008. However, the increase in revenue described above was offset by lower sales prices, an increase in ingredient costs, consumer reaction to the H1N1A scare and the country wide drought.
 
Cost of Goods Sold. We experienced increases in the unit cost of goods sold for our two business lines during the year ended December 31, 2009 compared to the same period in 2008. These raw materials constitute approximately 60 - 75% of our raw material costs. Corn and soybean meal cost rose 0.2% and 4%, respectively, versus the year ended December 31, 2008. China has implemented programs to mitigate additional price increases in order to stabilize these markets.
 
In order to provide excellent customer service and differentiate ourselves from our competition, at our customers’ request, we supply them with customized formulations of our products. In any given month, the cost of various additives used in our production fluctuates, which can result in temporary increases in the unit cost of goods sold. These increased costs offset our increases in revenues. Even though this may have an adverse effect on our short term profits, we take the long-term view that this practice results in increased customer loyalty, builds the AgFeed brand and will ultimately lead to increased sales and gross profits. In addition, we are presently experiencing more stable pricing in these additives, which we anticipate will stabilize our cost of goods sold.
 
 
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Gross Profit. Gross margins decreased to 15.4% from 24.0% during the year ended December 31, 2009 as compared to the same period in 2008. The decrease in gross margin can be attributed to the increase in the cost of hog feed that began in the last half of 2008 and continued into 2009 and a reduction in the selling price for our hogs. The increase in the cost of hog feed was offset somewhat by actions taken in the first quarter of 2009, including expansion of our product distribution channels, and our entry into long-term contracts for key product ingredients which locked in favorable cost savings.
 
Selling, General and Administrative Expenses. Selling, general and administrative expense includes overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting, legal and offices expenses. Our selling expenses for the year ended December 31, 2009 were only slightly less than the corresponding period in 2008. General and administrative expenses for our feed segment increased by approximately $301,000 or approximately 14% from the corresponding period in 2008 principally due to the overall expansion of our feed business and the increase of our allowance for doubtful accounts. Our corporate expenses also increased by approximately $1,315,000 due to higher professional fees. General and administrative expenses for our hog farms for the year ended December 31, 2009 increased by approximately $2,739,000 for 108% over the corresponding period in 2008 to due to more hog farms being in operations in 2009.
 
Interest and Financing Costs. We incurred interest and financing costs of $1.02 million and $5.70 million during the year ended December 31, 2009 and 2008, respectively, principally as a result of the issuance of $19 million principal amount of convertible notes issued during February 2008. During the year ended December 31, 2009 and 2008, $2.8 million and $15.2 million, respectively, of the convertible notes were converted into shares of common stock which resulted in accelerated amortization of the debt discounts and debt issue costs associated with the convertible debt.
 
Due to appreciation in RMB against the USD in 2008, we incurred a loss on foreign translation of $0.56 million during the year ended December 31, 2008, as we could not timely convert USD deposits into RMB as a result of bank policies and banking rules in the PRC. This was a one time, non-recurring charge. Foreign currency translation losses in 2009 were not significant
 
Income Taxes. Hog production is an income tax exempt sector in China and sow owners receive government grants and subsidies. Some of our feed manufacturing companies benefit from exemption from value-added tax.
 
Net Income. The decrease in our net income was due to the increase in cost of goods sold and higher operating expenses. We continued to benefit from the tax-exempt status for our hog production business. The higher sales and the benefits from economies of scale in our business resulting in a modest increase in operating efficiency was offset by higher cost of sales and a charge to earnings to reflect the increase in our derivative liability. We continued to benefit from the tax-exempt status for our hog production business.
 
 
44

 

Comparison of Years Ended December 31, 2008 and December 31, 2007
   
Years Ended December 31,
   
$
   
%
 
   
2008
   
2007
   
Change
   
Change
 
Revenues
  $ 143,661,485     $ 36,163,339     $ 107,498,146       297.26  
Cost of goods sold
    109,224,565       25,763,479       83,461,086       323.95  
Gross profit
    34,436,920       10,399,860       24,037,060       231.13  
Operating expenses
    9,695,989       4,079,089       5,616,900       137.70  
Interest and financing costs
    5,704,358       153,723       5,550,635       3,610.80  
Net income
    16,948,815       6,662,895       10,285,920       154.38  

Revenues. Compared to the same period in 2007, the increase in revenues was due to an increase in the volume of feed products that we sold and the acquisition of our hog farms. The increase in feed product sales was a result of expanding our distribution channels by the opening of additional exclusive distribution stores for our products. We experienced favorable market conditions that increased the demand for our feed products. A stronger “AgFeed” brand name allowed us to successfully increase our price twice in the second quarter of 2008. Due to softening in the market for hog prices, we experienced a decrease in the selling price for our hogs during the second half of 2008. However, as a result of economies of scale, we were able to cut hog production cost through centralized raw materials purchases, sales and marketing channels, and finance and internal control management.
 
Cost of Goods Sold . We experienced increases in the unit cost of goods sold for our two business lines during the year ended December 31, 2008 compared to the same period in 2007. The cost of goods sold included costs in both premix feed and hog production. These raw materials constitute approximately 60 - 75% of our raw material costs.
 
Gross Profit. Gross margins decreased to 23.97% from 28.76% during the year ended December 31, 2008 as compared to the same period last year. The decrease in gross margin can be attributed to the increase in the cost of hog feed during the 2008 last two quarters, and a substantial general sell-off of swine inventory resulting in falling prices after the 2008 Olympics ended. This was modified somewhat by actions taken in the first half of 2008, including expansion of our product distribution channels, and our entry into long-term contracts for key product ingredients which locked in favorable cost savings.
 
Selling, General and Administrative Expenses. General and administrative expense includes overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting, legal and offices expenses. The increase in our selling, general and administrative expense also reflects the addition of our new subsidiaries, which had a total of approximately $9.7 million in selling, general and administrative expenses during 2008. Selling expenses for the period increased by 46.32% due to costs associated with the aggressive expansion into markets in neighboring provinces, and the costs associated with the absorption of our new subsidiaries.
 
Interest and Financing Costs. We incurred interest and financing costs of approximately $5.7 million during 2008, principally as a result of the issuance of $19 million principal amount of convertible notes issued during February 2008. $15.2 million of the convertible notes were converted into shares of common stock, resulting in the non-recurring accelerated amortization of the debt issuance costs and debts discounts amounting to approximately $5.8 million.
 

 
45

 

Hog production is an income tax exempt sector in China and sow owners receive government grants and subsidies. Our feed manufacturing companies benefit from exemption from value-added tax.
 
Net Income. The increase in our net income was due to higher sales and the benefits from economies of scale in our business resulting in a modest increase in operating efficiency. This was offset by one time, non-operational related charges and interest expenses associated with the conversion of a portion of the $19 million of convertible notes by investors during 2008. We continued to benefit from the tax exempt status for our hog production business.
 
 
There were no off-balance sheet arrangements during the year ended December 31, 2009 that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.  
 
Liquidity and Capital Resources
 
At December 31, 2009, we had $36.6 million in cash and cash equivalents on hand.
 
 
On April 16, 2008, we entered into a Securities Purchase Agreement with institutional investors in connection with a registered direct offering of securities providing for the issuance of 625,000 shares of our common stock at price of $16.00 per share for aggregate gross proceeds of $10,000,000.  We paid $703,472 in costs related to this offering.
 
On April 22, 2008, we entered into Securities Purchase Agreements with institutional investors in connection with a registered direct offering of securities providing for the issuance of 1,322,836 shares of the Company’s Common Stock at $19.05 per share for aggregate gross proceeds of $25.2 million.  We paid $1,772,752 in costs related to this offering.

 On December 29, 2008, we completed a financing and raised gross proceeds of $8.75 million through the sale to institutional investors of 5 million newly issued common stock units at $1.75 per unit under an effective Form S-3 Registration Statement. Each unit consists of one share of newly issued common stock and a warrant to purchase 0.7 of a share of common stock for $2.50 a share, which is exercisable over a five-year period.  We paid costs related to this offering of $1,227,616.
 
From October 6, 2008 through October 31, 2008, the Company repurchased 367,295 shares of our common stock for $1,811,746. No additional shares have been repurchased.
 
On May 8, 2009, we closed a private placement by issuing 2,329,645 shares of common stock for gross proceeds of $10 million to certain institutional investors.  We also issued 1,164,822 common stock purchase warrants to the investors and 244,613 common stock purchase warrants to the placement agent for the transaction.  The warrants are exercisable immediately have an exercise price of $4.50 per share and expire on May 8, 2014. We paid costs related to this offering of $1.1 million.

On September 9, 2009, we entered into an Equity Credit Agreement with an institutional investor, which was amended and restated as of November 9, 2009, providing for, among other things, the issuance of shares of its common stock at any time and from time to time during the next two years for gross proceeds of up to $50,000,000. In connection with the closing of the transaction, we also issued warrants to purchase an additional 400,000 shares of its common stock during a five year period at an exercise price of $5.75 per share.  This transaction closed on September 9, 2009.  No shares have been issued under the terms of the Equity Credit Agreement.
 
 
46

 

During 2009, certain warrant holders exercised 3,225,004 warrants that resulted in gross proceeds of $8,062,510.
 
As of December 31, 2009, we had short-term loans outstanding of $4,401,000. The loan was entered into during the second quarter of 2009 and is due in May 2010.
 
 
We used approximately $10.0 million in investing activities during the year ended December 31, 2009; of which $9.8 million was for the acquisition of property and equipment. We also sold our interest in two subsidiaries for $835,770.
 
We generated $17.8 million in cash from financing activities as a result of the sale of 2,329,645 shares of our common stock for gross proceeds of $10 million and the exercise of 3,225,004 warrants for proceeds of $8.1 million.    We generated cash of $4.5 million from issued short-term loans and used cash of $2.5 million was for the purchase of the noncontrolling interest in four subsidiaries.   
 
At December 31, 2009, our accounts receivable balance was approximately $14.4 million, an increase of $4.9 million from December 31, 2008.
 
Our principal demands for liquidity are to increase capacity, purchase raw materials, distribute our products, consolidate our existing farm operations and make strategic acquisitions or investments in our industry as opportunities present themselves, as well as general corporate purposes.   We intend to use the net proceeds from the latest PIPE for the development of our genetics program and other growth initiatives. We may seek additional funds from the capital markets to further support our genetics program to increase hog production and profitability.  We expect our genetics program to be accretive to earnings in the near future.

We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations and funds raised through cash investments. 

The majority of our revenues and expenses were denominated in RMB, the currency of the PRC.  There is no assurance that exchange rates between the RMB and the USD will remain stable.
 
Contractual Obligations
 
No contractual obligation occurred during the year ended December 31, 2009 and therefore it is not expected to have any effect on our liquidity and cash flow in future periods.
 
Inflation and Seasonality
 
Demand for our products remains fairly consistent throughout the year and we do not believe our operations have been materially affected by inflation or seasonality.
 
 
47

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
 
Disclosures About Market Risk
 
We may be exposed to changes in financial market conditions in the normal course of business.  Market risk generally represents the risk that losses may occur as a result of movements in interest rates and equity prices.  We currently do not use financial instruments in the normal course of business that are subject to changes in financial market conditions.
 
Currency Fluctuations and Foreign Currency Risk
 
Substantially all of our operations are conducted in the PRC, with the exception of our limited export business and overseas purchases of raw materials.  Most of our sales and purchases are conducted within the PRC in RMB, which is the official currency of the PRC.  The effect of the fluctuations of exchange rates is considered minimal to our business operations.
 
Substantially all of our revenues and expenses are denominated in RMB.  However, we use US dollars for financial reporting purposes.  Conversion of RMB into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system.  Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from its operations in the PRC.
 
Interest Rate Risk
 
We have interest rate risk related to the short-term notes entered into during the quarter ended September 30, 2009; however, we do not believe this interest risk is significant.
 
Credit Risk
 
We have not experienced significant credit risk, as most of our customers are long-term customers with superior payment records.  Our receivables are monitored regularly by our credit managers.
 
Item 8.  Financial Statements and Supplementary Data.
 
 
 
 Page 
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheet at December 31, 2009 and 2008
F-2
Consolidated Statements of Income and Other Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007
F-3
Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 2009, 2008 and 2007
F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
F-5
Notes to Consolidated Financial Statements
F-6 to F-29
 
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None.
 
 
48

 

Item 9A. Controls and Procedures
 
Disclosure Controls and Procedures.
 
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10K.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and or the Board of Directors of AgFeed; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of AgFeed’s assets that could have a material effect on the interim or annual consolidated financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
 
Under the supervision and with the participation of our chief executive officer and chief financial officer, management conducted an evaluation of the effectiveness of AgFeed’s internal control over financial reporting as of December 31, 2009, using the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Based on this evaluation, our management concluded that our internal control over financial reporting was effective and that there was no material weakness or significant deficiency discovered as of December 31, 2009.
 
Management’s evaluation of the effectiveness of AgFeed’s internal control over financial reporting as of December 31, 2009 has been audited by Goldman Parks Kurland Mohidin LLP, an independent registered public accounting firm, as stated in their report included on page F-1.
 
 
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Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over-financial reporting.

Item 9B.  Other Information.
 
None.
 
 
50

 

PART III
 
Item 10.  Directors, Executive Officers and Corporate Governance.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2009.
 
Item 11.  Executive Compensation.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2009.
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2009.
 
Item 13.  Certain Relationships and Related Transactions, and Director Independence.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of 2009.
 
Item 14.  Principal Accounting Fees and Services.
 
The information required by this Item is incorporated by reference to the information contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which we will file with the SEC within 120 days after the end of fiscal 2009.
 
PART IV
 
Item 15.  Exhibit, Financial Statement Schedules.
 
(a)(1) Financial Statements
 
See Item 8, "Financial Statements and Supplementary Data."
 
(a)(2) Financial Statement Schedules
 
All financial statement schedules for AgFeed and its subsidiaries have been included in the consolidated financial statements or the related notes or they are either inapplicable or not required.
 
(a)(3) Exhibits
 
The exhibits required by this item are set forth on the Exhibit Index attached hereto.
 
 
51

 

AgFeed Industries, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended December 31, 2009, 2008, and 2007

Contents

 
Page
   
Report of Independent Registered Public Accounting Firm
F-1
   
Financial Statements:
 
   
Consolidated Balance Sheets as of December 31, 2009 and 2008
F-2
   
Consolidated Statements of Income and Other Comprehensive Income for the years ended December 31, 2009, 2008 and 2007
F-3
   
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2009, 2008 and 2007
F-4
   
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007
F-5
   
Notes to Consolidated Financial Statements
F-6 to F-29
 
 
 

 

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of
AgFeed Industries, Inc
 
We have audited the accompanying consolidated balance sheets of AgFeed Industries, Inc. and subsidiaries (Company) as of December 31, 2009 and 2008, and the related consolidated statements of income and other comprehensive income, stockholders’ equity, and cash flows for the years ended December 31, 2009, 2008 and 2007. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the Note 15 to the financial statements. We have audited AgFeed Industries, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). AgFeed Industries, Inc.‘s management is responsible for these financial statements, financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Management’s Report on Internal Control is included in item 9A of AgFeed Industries, Inc.’s Form 10-K for the year ended December 31, 2009. Our responsibility is to express an opinion on these financial statements, financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding on internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our audits.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AgFeed Industries, Inc. and subsidiaries as of December 31, 2009, and 2008, and the consolidated results of their operations and their cash flows for the years ended December 31, 2009 , 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America. In our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
 
F-1

 

Management excluded certain newly acquired entities from its assessment of internal control over financial reporting. These entities constitute 6% of total assets as of December 31, 2009 and 0% and (7%) of revenue and net income, respectively, for the year ended December 31, 2009. Our opinion on internal control over financial reporting also excludes these entities.

Goldman Parks Kurland Mohidin LLP
Encino, California
March 3, 2010
 
 
F-2

 

AgFeed Industries, Inc. and Subsidiaries
Consolidated Balance Sheet
as of December 31, 2009 and 2008
 
   
2009
   
2008
 
             
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 36,578,457     $ 24,839,378  
Restricted cash
    1,001,697       -  
Accounts receivable, net of allowance for doubtful accounts of $415,765 and $520,413
    14,397,793       9,462,380  
Advances to suppliers
    1,173,941       518,829  
Other receivables
    2,186,643       2,066,030  
Inventory
    23,835,412       20,616,560  
Prepaid expenses
    1,325,150       1,166,646  
Debt issue costs
    34,706       246,223  
                 
Total current assets
    80,533,799       58,916,046  
                 
PROPERTY AND EQUIPMENT, net
    26,991,851       20,810,094  
CONSTRUCTION-IN-PROCESS
    7,615,132       10,853,389  
INTANGIBLE ASSETS
    43,808,499       43,833,705  
OTHER ASSETS
    3,998,739       2,641,902  
                 
TOTAL ASSETS  
  $ 162,948,020     $ 137,055,136  
                 
LIABILITIES AND EQUITY
               
                 
CURRENT LIABILITIES:
               
Short-term loan
  $ 4,401,000     $ -  
Accounts payable
    6,162,385       5,214,596  
Other payables
    1,892,858       5,766,741  
Unearned revenue
    582,266       321,664  
Accrued expenses
    83,649       164,558  
Accrued payroll
    975,485       818,052  
Tax and welfare payable
    396,370       465,875  
Interest payable
    120,419       121,139  
                 
Total current liabilities
    14,614,432       12,872,625  
                 
CONVERTIBLE NOTES, net of debt discount of $81,675 and $579,444
    918,325       3,220,556  
                 
TOTAL LIABILITIES
    15,532,757       16,093,181  
                 
COMMITMENTS AND CONTINGENCIES (Note 11)
    -       -  
                 
EQUITY:
               
AgFeed stockholders' equity:
               
Common stock, $0.001 per share; 75,000,000 shares authorized; 44,510,558 issued and 44,143,263 outstanding at December 31, 2009 38,300,436 issued and 37,933,141 outstanding at December 31, 2008
    44,511       38,300  
Additional paid-in capital
    109,281,086       90,903,261  
Other comprehensive income
    4,176,450       4,167,217  
Statutory reserve
    4,685,115       3,236,054  
Treasury stock (367,295 shares)
    (1,811,746 )     (1,811,746 )
Retained earnings
    31,210,563       22,311,258  
Total AgFeed stockholders' equity
    147,585,979       118,844,344  
Noncontrolling interest (deficit)
    (170,716 )     2,117,611  
Total equity
    147,415,263       120,961,955  
                 
TOTAL LIABILITIES AND EQUITY   $
    162,948,020     $ 137,055,136  

The accompanying notes are an integral part of these consolidated financial statements.

 
F-3

 

AgFeed Industries, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31, 2009, 2008 and 2007
 
   
2009
   
2008
   
2007
 
                   
Revenues
  $ 173,203,271     $ 143,661,485     $ 36,163,339  
                         
Cost of goods sold
    146,568,116       109,224,565       25,763,479  
                         
Gross profit
    26,635,155       34,436,920       10,399,860  
                         
Operating expenses
                       
Selling expenses
    3,934,047       3,941,247       2,693,613  
General and administrative expenses
    10,109,020       5,754,742       1,385,476  
Total operating expenses
    14,043,067       9,695,989       4,079,089  
                         
Income from operations
    12,592,088       24,740,931       6,320,771  
                         
Non-operating income (expense):
                       
Other expense
    (442,635 )     (710,683 )     160,496  
Interest income
    213,018       190,965       142,148  
Interest and financing costs
    (1,022,626 )     (5,704,358 )     (153,723 )
Foreign currency transaction loss
    (17,943 )     (559,299 )     -  
                         
Total non-operating income (expense)
    (1,270,186 )     (6,783,375 )     148,921  
                         
Income before provision for income taxes
    11,321,902       17,957,556       6,469,692  
                         
Provision (benefit) for income taxes
    1,142,105       587,222       (193,203 )
                         
Net income including noncontrolling interest
    10,179,797       17,370,334       6,662,895  
                         
Less: Net income (loss) attributed to noncontrolling interest
    (168,569 )     421,519       -  
                         
Net income attributed to AgFeed
    10,348,366       16,948,815       6,662,895  
                         
Other comprehensive income
                       
Foreign currency translation gain (loss)
    9,233       3,386,310       664,061  
                         
Comprehensive Income
  $ 10,357,599     $ 20,335,125     $ 7,326,956  
                         
Weighted average shares outstanding :
                       
Basic
    40,978,457       31,557,742       26,093,376  
Diluted
    41,214,070       31,713,977       26,174,973  
                         
Earnings per share attributed to AgFeed common stockholders:
                       
Basic
  $ 0.25     $ 0.54     $ 0.26