ZHONGPIN INC. - FORM 10-Q - August 9, 2011

Attached files

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EX-32.1 - CERTIFICATION OF OUR CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ZHONGPIN INC.	v229469_ex32-1.htm
EX-31.2 - CERTIFICATION OF OUR CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ZHONGPIN INC.	v229469_ex31-2.htm
EX-31.1 - CERTIFICATION OF OUR CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ZHONGPIN INC.	v229469_ex31-1.htm
EX-32.2 - CERTIFICATION OF OUR CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ZHONGPIN INC.	v229469_ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

For the transition period from

Commission File Number :

001-33593

Zhongpin Inc.

(Exact name of registrant as specified in its charter)

Delaware		54-2100419
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

21 Changshe Road, Changge City, Henan Province, People’s Republic of China		461500
(Address of principal executive offices)		(Zip Code)

011 86 10-8286 1788

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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 shorter period that the registrant was required to submit and post such files). YES o NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

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

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

As of August 5, 2011, 40,355,502 shares of the registrant’s common stock were outstanding.

ZHONGPIN INC.

FORM 10-Q

INDEX

			Page
Part I	Financial Information

	Item 1.	Unaudited Financial Statements:

		Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010	2

		Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three-month and six-month periods ended June 30, 2011 and 2010	3

		Consolidated Statements of Cash Flows (unaudited) for the six-month periods ended June 30, 2011 and 2010	4

		Notes to Consolidated Financial Statements (unaudited)	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

	Item 4.	Controls and Procedures	37

Part II	Other Information

	Item 1.	Legal Proceedings	38

	Item 1A.	Risk Factors	38

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

	Item 3.	Defaults Upon Senior Securities	38

	Item 4.	(Removed and Reserved)	38

	Item 5.	Other Information	38

	Item 6.	Exhibits	38

Signatures			39

ZHONGPIN INC.

Part I - Financial Information

Item 1. Financial Statements

The accompanying unaudited consolidated balance sheets, statements of operations and comprehensive income, and statements of cash flows and the related notes thereto, have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. The financial statements reflect all adjustments, consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

The accompanying financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

The results of operations for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

ZHONGPIN INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in U.S. dollars)

	June 30, 2011		December 31, 2010
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	151,025,813	$	84,172,186
Restricted cash		59,325,039		17,527,056
Bank notes receivable		36,561,178		19,282,740
Accounts receivable, net of allowance for doubtful accounts of $2,411,634 and $1,708,479		43,350,904		30,784,463
Other receivables, net of allowance for doubtful accounts of $259,452 and $232,751		3,532,295		1,035,850
Purchase deposits		10,135,174		7,415,567
Inventories		30,707,050		26,534,014
Prepaid expenses		455,211		391,386
VAT recoverable		28,942,742		20,771,902
Allowance receivables		4,403,020		2,477,928
Deferred tax assets		407,030		397,744
Other current assets		408,120		442,080
Total current assets		369,253,576		211,232,916

Long-term investment		463,564		452,987
Property and equipment (net)		317,822,668		291,567,396
Deposits for purchase of land use rights		33,922,271		17,059,644
Construction in progress		68,763,722		30,433,905
Land use rights		87,566,648		86,475,708
Deferred charges		12,980		21,686
Other non-current assets		1,470,270		1,436,726
Total assets	$	879,275,699	$	638,680,968

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term loans	$	100,261,373	$	91,774,025
Bank notes payable		106,737,128		18,646,473
Long-term loans - current portion		10,962,161		14,943,260
Capital lease obligation - current portion		6,259,089		7,282,720
Accounts payable		22,883,904		8,551,003
Other payables		17,646,298		15,842,331
Accrued liabilities		11,395,950		9,794,474
Deposits from customers		9,518,469		8,255,194
Tax payable		1,312,350		1,604,847
Grant payable		772,606		-
Total current liabilities		287,749,328		176,694,327

Deferred tax liabilities		370,590		362,135
Deposits from customers - long-term portion		2,459,565		1,958,827
Capital lease obligation		2,661,450		4,999,454
Long-term loans		100,977,327		83,672,401
Total liabilities		394,218,260		267,687,144

Equity
Common stock: par value $0.001; 100,000,000 authorized; 40,355,502 and 35,338,160 shares issued and outstanding		40,356		35,338
Additional paid in capital		238,528,950		171,401,989
Retained earnings		206,177,481		169,979,344

Accumulated other comprehensive income		39,498,258		29,577,153
Total Zhongpin Inc. shareholders’ equity		484,245,045		370,993,824
Noncontrolling interest		812,394		-
Total shareholders’ equity		485,057,439		370,993,824
Total liabilities and shareholders’ equity	$	879,275,699	$	638,680,968

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

ZHONGPIN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Amount in U.S. dollars) (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Revenues
Sales revenues	$	366,452,560		$	215,072,583		$	652,235,781		$	419,357,498
Cost of sales		(327,306,939	)		(189,738,151	)		(577,173,910	)		(369,104,716	)
Gross profit		39,145,621			25,334,432			75,061,871			50,252,782

Operating expenses
General and administrative expenses		(7,022,657	)		(5,691,468	)		(13,450,203	)		(11,749,609	)
Selling expenses		(8,457,575	)		(4,638,672	)		(14,730,895	)		(8,975,500	)
Research & development expenses		(23,804	)		(35,871	)		(455,310	)		(76,723	)
Impairment loss		-			(1,007,447	)		-			(1,007,447	)
Total operating expenses		(15,504,036	)		(11,373,458	)		(28,636,408	)		(21,809,279	)

Income from operations		23,641,585			13,960,974			46,425,463			28,443,503

Other income (expense)
Interest income (expenses), net		(3,374,314	)		(1,900,389	)		(8,811,383	)		(3,335,850	)
Other income (expenses), net		(4,962	)		63,729			(31,994	)		628,792
Exchange gain (loss)		(40,413	)		41,039			(80,227	)		40,735
Government subsidies		337,286			1,244,925			1,451,907			1,870,081
Total other income (expense)		(3,082,403	)		(550,696	)		(7,471,697	)		(796,242	)

Net income before taxes		20,559,182			13,410,278			38,953,766			27,647,261
Provision for income taxes		(1,243,095	)		(1,044,833	)		(2,754,484	)		(2,031,353	)

Net income after taxes	$	19,316,087		$	12,365,445		$	36,199,282		$	25,615,908
Net income attributable to noncontrolling interest		(991	)		-			(1,145	)		-

Net income attributable to Zhongpin Inc. shareholders		19,315,096			12,365,445			36,198,137			25,615,908

Foreign currency translation adjustment	$	6,124,756		$	1,692,005		$	9,932,670		$	1,778,270
Foreign currency translation adjustment attributable to noncontrolling interest		(10,504	)		-			(11,565	)		-
Foreign currency translation adjustment attributable to Zhongpin Inc. shareholders		6,114,252			1,692,005			9,921,105			1,778,270

Comprehensive income	$	25,440,843		$	14,057,450		$	46,131,952		$	27,394,178
Comprehensive income attributable to noncontrolling interest		(11,495	)		-			(12,710	)		-
Comprehensive income attributable to Zhongpin Inc. shareholders		25,429,348			14,057,450			46,119,242			27,394,178

Basic earnings per common share	$	0.48		$	0.36		$	0.95		$	0.74
Diluted earnings per common share	$	0.48		$	0.35		$	0.95		$	0.73
Basic weighted average shares outstanding		40,355,502			34,725,104			38,115,633			34,720,312
Diluted weighted average shares outstanding		40,365,654			35,108,264			38,203,909			35,122,896

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

ZHONGPIN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amount in U.S. dollars) (Unaudited)

	Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net income	$	36,199,282		$	25,615,908
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation		8,201,482			6,093,089
Amortization of intangible assets		918,249			649,049
Provision for allowance for bad debt		677,259			597,245
Impairment loss		-			1,007,447
Other income		3,269			-
Stock-based compensation expense		775,316			1,075,636

Changes in operating assets and liabilities:
Accounts receivable		(12,378,014	)		(14,027,015	)
Other receivables		(2,467,032	)		(815,504	)
Purchase deposits		(2,519,411	)		1,649,138
Prepaid expenses		(55,591	)		(571,257	)
Inventories		(3,515,759	)		(10,090,670	)
Allowance receivables		(1,847,397	)		(4,414,158	)
Tax refunds recoverable		(7,604,190	)		(5,237,751	)
Other current assets		43,812			(16,025	)
Deferred charges		9,114			14,286
Accounts payable		13,983,083			13,086,579
Other payables		1,432,387			4,282,762
Grants payable		764,397			-
Accrued liabilities		1,367,026			1,453,078
Taxes payable		(326,461	)		(656,983	)
Deposits from clients		1,059,156			(949,361	)
Deposits from clients – Long term portion		450,169			499,881
Net cash provided by operating activities		35,170,146			19,245,374

Cash flows from investing activities:
Deposits for purchase of land use rights		(16,289,381	)		(12,007,724	)
Construction in progress		(60,971,828	)		(33,850,846	)
Additions to property and equipment		(3,722,560	)		(6,733,687	)
Additions to land use rights		-			(477,998	)
Proceeds on sale of fixed assets		29,029			-
Increase in restricted cash		(40,948,998	)		(7,895,117	)
Investment in a non-controlling entity		-			(439,515	)
Net cash used in investing activities		(121,903,738	)		(61,404,887	)

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

	Six Months Ended June 30,
	2011			2010
Cash flows from financing activities:
Proceeds from bank notes, net		70,074,526			7,884,362
Proceeds from (repayment of) short-term bank loans, net		6,277,182			(20,085,130	)
Proceeds from long-term loans		24,443,692			30,985,833
Repayment of long-term loans		(13,539,464	)		(3,009,908	)
Repayment of capital lease obligation		(3,609,637	)		(3,294,553	)
Proceeds from common stock		66,356,662			-
Proceeds from exercised warrants and option		-			213,350
Investment in a subsidiary by minority holder		802,617			-
Net cash provided by financing activities		150,805,578			12,693,954

Effects of rate changes on cash		2,781,641			231,350
Increase (decrease) in cash and cash equivalents		66,853,627			(29,234,209	)
Cash and cash equivalents, beginning of period		84,172,186			68,982,259
Cash and cash equivalents, end of period	$	151,025,813		$	39,748,050

Supplemental disclosures of cash flow information:
Cash paid for interest	$	8,076,330		$	4,006,111
Cash paid for income taxes	$	3,195,639		$	1,955,733

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

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS

Zhongpin Inc. (the “Company”) was established under the laws of the State of Delaware on February 4, 2003. The Company is a public holding company holding equity interests in its subsidiaries outside the U.S. Its operating subsidiaries are located in the People’s Republic of China (the “PRC”) and focus on two business divisions: pork and pork products, and vegetables and fruits. The pork and pork products division is involved primarily in the processing of live hogs into fresh, frozen and processed pork products which are sold domestically to branded stores, food retailers, food service distributors, restaurants, hotel chains and non-commercial food service establishments, such as schools, governments, healthcare facilities, the military and other food processors, as well as to certain international markets in a limited scope. The vegetables and fruits division is involved primarily in the processing of frozen vegetables and fruits that are sold to the Company’s branded stores and food retailers.

The Company holds a 100% interest in Falcon Link Investment Limited, a company organized under the laws of the British Virgin Islands (“Falcon”), through which the Company holds a 100% interest in its China-based subsidiaries, each of which was organized under the laws of China. The Company’s China-based subsidiaries include the following:

Name	Date of Incorporation	Registered Capital		Percentage of Ownership

Henan Zhongpin Food Company Limited	May 20, 2005	$	203,300,000 USD		100	%

Henan Zhongpin Food Share Company Limited (“Henan Zhongpin”)	Jan. 20, 2000	1,000,000,000 RMB ($146,492,243)			100	%(1)

Henan Zhongpin Import and Export Trading Company Limited	Aug. 11, 2004	5,060,000 RMB ($611,111)			100	%

Zhumadian Zhongpin Food Company Limited	June 7, 2006	60,000,000 RMB ($8,585,398)			100	%

Anyang Zhongpin Food Company Limited	Aug. 21, 2006	34,800,000 RMB ($5,094,422)			100	%

Henan Zhongpin Fresh Food Logistics Company Limited	Sept. 14, 2006	1,500,000 RMB ($189,665)			100	%

Deyang Zhongpin Food Company Limited	Sept. 25, 2006	15,000,000 RMB ($1,893,652)			100	%

Henan Zhongpin Business Development Company Limited	Sept. 27, 2006	5,000,000 RMB ($632,215)			100	%

Luoyang Zhongpin Food Company Limited (“Luoyang Zhongpin”)	Jan.18, 2007	60,000,000 RMB ($8,703,452)			100	%

Yongcheng Zhongpin Food Company Limited	Mar. 1, 2007	60,000,000 RMB ($8,783,487)			100	%

Tianjin Zhongpin Food Company Limited (“Tianjin Zhongpin”)	Sept. 14, 2007	100,000,000 RMB ( $14,639,145 )			100	%

Jilin Zhongpin Food Company Limited	Dec. 11, 2008	1,000,000 RMB ($145,688)			100	%

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Name	Date of Incorporation	Registered Capital	Percentage of Ownership

Henan Zhongpin Agriculture and Animal Husbandry Industry Development Company Limited	Dec. 26, 2008	10,000,000 RMB ($1,461,796)		100	%

Taizhou Zhongpin Food Company Limited	May 12, 2010	50,000,000RMB ($7,362,794)		100	%

Changchun Zhongpin Food Company Limited	Aug. 6, 2010	50,000,000 RMB ($7,382,253)		100	%

Henan Zhongpin Xinda Agriculture and Animal Husbandry Company Limited	June 1, 2011	15,000,000 RMB ($2,287,841)		65	%

Kunshan Zhongpin Cold Chain Logistics Company Limited	June 3, 2011	300,000,000 RMB ($46,356,388)		100	%

(1) Includes a 1.7% ownership interest of another six stockholders with respect to which Henan Zhongpin Food Company Limited is entitled to all economic benefits and the right to vote pursuant to the terms of a trust agreement with such stockholders.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Zhongpin Inc. and its wholly owned subsidiaries (collectively referred to herein as the “Company”). All significant intercompany accounts and transactions have been eliminated during the process of consolidation. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Foreign Currency Translations and Transactions

RMB, the national currency of China, is the primary currency of the economic environment in which the Company’s China-based subsidiaries are operating. The United States dollar (“U.S. dollar”) is the functional currency used by Falcon and Zhongpin Inc. to record all of their activities. The Company uses the U.S. dollar for financial reporting purposes.

The Company translates assets and liabilities into U.S. dollars using the middle rate published by the People’s Bank of China as of the balance sheet date. The consolidated statement of income is translated at average rates during the reporting period. Adjustments resulting from the translation of financial statements from RMB into U.S. dollars are recorded in stockholders' equity as part of accumulated comprehensive loss – translation adjustments. Gains or losses resulting from transactions in currencies other than RMB are reflected in income for the reporting period.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation of long-lived assets, allowance for doubtful accounts, reserves for inventory obsolescence, valuation allowances for value added tax (“VAT”) recoverable, and determination of stock based compensation.

Revenue Recognition

Revenues generated from the sales of various meat products and vegetables and fruits are recognized when these products are delivered to customers in accordance with previously agreed upon pricing and delivery arrangements, and the collectability of these sales is reasonably assured. Since the products sold by the Company are primarily perishable and frozen food products, the right of return is only for a few days and has been determined to be insignificant by the management of the Company. Accordingly, no provision has been made for returnable goods. Revenues presented on the consolidated statements of operations and comprehensive income are net of sales taxes.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with maturity of three months or less to be cash equivalents. The Company maintains its cash accounts at creditworthy financial institutions and closely monitors the movements of its cash positions.

Restricted Cash and Bank Notes Payable

Under the terms of the credit agreements with certain of its lenders, Henan Zhongpin has agreed to maintain with such lenders in a deposit account an amount of cash that will serve as collateral for its delivery of bank promissory notes of such lenders as payment instruments for its procurement purposes. The amount of bank promissory notes of such lenders that can be delivered by Henan Zhongpin can be up to twice the amount of such deposits. As such deposits may not be withdrawn by Henan Zhongpin without restriction, such cash deposits are presented as “restricted cash” on the consolidated balance sheets.

Bank Notes Receivable

The Company only accepts notes issued by banks in the normal course of business as payment for products sold by the Company. These bank notes receivable have maturity dates of up to 180 days and bear no interest. The Company can hold the bank notes until the maturity date and collect the amount from the issuing banks, or the Company can use these bank notes as a means for payment for goods or services received. The Company accrues no provision for these bank notes because such bank notes have little risk of default in China.

Accounts Receivable

During the normal course of business, the Company's policy is to ask customers to make deposits in reasonable and meaningful amounts on a case-by-case basis. For certain customers, the Company may extend unsecured credit.

The Company regularly evaluates and monitors the creditworthiness of each of its customers in accordance with the prevailing practice in the meat industry and based on general economic conditions in China. The Company maintains a general policy of providing 100% allowance for doubtful accounts in an amount equal to the aggregate amount of those accounts that are not collected within one year plus an amount equal to 5% of the aggregate amount of accounts receivable less than one year old. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also examines the credit terms of significant customers regularly and asks for more cash deposits if these customers appear to have any indicators of delaying their payments to the Company. Such deposits are usually applied for the collection of the outstanding accounts receivable during the year. With such a practice in place, the Company did not have any specific allowance for doubtful accounts provided against specific customers at June 30, 2011 and December 31, 2010, respectively.

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The following table presents allowance activities in accounts receivable.

	June 30, 2011		December 31, 2010

Beginning balance	$	1,708,479	$	1,132,038
Additions to allowance for bad debt		703,155		576,441
Ending balance	$	2,411,634	$	1,708,479

Inventories

Inventories are comprised of raw materials and low-value consumables, work-in-progress, and finished goods. Inventories are stated at the lower of cost or the market based on the weighted average method. Production cost components include the purchase cost of live hogs, direct labor, depreciation, packaging material, utility expense and other manufacturing overhead. By using a systematic costing system, the production cost is allocated to various products at the stage of work-in-progress and finished goods, respectively. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. The Company regularly inspects the shelf life of prepared foods and, if necessary, writes down their carrying value based on their salability and expiration dates into cost of goods sold.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are stated net of accumulated depreciation. Depreciation expense is determined using the straight-line method over the estimated useful lives of the assets, as follows:

		Estimated Useful Economic Life
Plants and buildings		5-30 years
Machinery and equipment		5-20 years
Office furniture and equipment		3-5 years
Vehicles		5 years

Maintenance and repairs are charged directly to expense as incurred, whereas improvements and renewals are generally capitalized in their respective property accounts. When an item is retired or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized and reflected as a line item before operating income (loss).

Land Use Rights

The Chinese government owns all of the parcels of land on which the Company's plants are built. In China, land use rights for commercial purposes are granted by the PRC government typically for a term of 40-50 years. The Company is required to pay a lump sum of money to the State Land and Resource Ministry of the applicable locality to acquire such rights. The Company capitalizes the lump sum of money paid and amortizes these land use rights by using the straight line method over the term of the land use license granted by the applicable governmental authority.

Construction in Progress and Interest Capitalization

Construction in progress is stated at cost. The cost accumulation process starts from the time the construction project is set-up and ends at the time the project has been put into service and all regulatory permits and approvals have been received. The Company borrows bank loans from time to time for these construction projects. The interest costs incurred for these construction projects have been capitalized during the construction process.

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of that asset. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, other receivables, advance to vendor, accounts payable and accrued liabilities, capital lease obligations and short-term and long-term loans are reasonable estimates of their fair value because of the short maturity of these items. The fair value of amounts due from/to related parties and stockholders are a reasonable estimate of their fair value as the amounts will be collected and paid off in a period less than one year. The carrying amounts of capital lease obligations approximate their fair value based on the Company’s current incremental borrowing rates for similar types of arrangements. Long-term debt approximates fair value since the bank term loans are fixed rate instruments and bear interests at the rate dictated and published by the People's Bank of China. The current rates published by the People's Bank of China approximate the interest rates of the loans outstanding.

Shipping and Handling Cost

All shipping and handling fees are included in selling expenses.

Value Added Tax

All China-based enterprises are subject to a VAT imposed by the PRC government on their domestic product sales. The output VAT is charged to customers who purchase goods from the Company and the input VAT is paid when the Company purchases goods from its vendors. Input VAT rates are 13% for most of the purchasing activities conducted by the Company. Output VAT rate is 13% for chilled pork products, frozen pork products and vegetable and fruit products, and 17% for prepared meat products. The input VAT can be offset against the output VAT. The VAT payable or recoverable balance presented on the consolidated balance sheets represents either the input VAT less than or larger than the output VAT. The debit balance represents a credit against future collections of output VAT instead of a receivable. On a semi-annual basis, the Company forecasts for each subsidiary separately the amount of sales revenue necessary to fully utilize the VAT recoverable. The factors considered in performing these forecasts include industry-specific and local economic conditions, as well as consumer behavior by the subsidiaries' designated geographical region and the demographics within those regions. Once the VAT recoverable for a subsidiary is determined to be non-recoverable in part or in full, the VAT recoverable is written-off as impairment loss.

Stock Compensation

The Company receives employee and certain non-employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity instruments. The Company accounts for stock compensation expense under the fair value recognition provisions of the Financial Accounting Standards Board, Accounting Standards Codification (ASC) Topic 718 (ASC 718), which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option pricing model.

Earnings Per Share

Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully-diluted earnings per share. All of such securities are included in the computation of diluted earnings per share. The number of shares of common stock underlying the outstanding stock warrants and options at June 30, 2011 and 2010 were 1,314,564 and 1,679,490, respectively, which were included in the computation of diluted earnings per share.

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Government Subsidies

The Company's subsidiaries in China receive government subsidies from local Chinese government agencies in accordance with relevant Chinese government policies. In general, the Company presents the government subsidies received as part of other income unless the subsidies received are earmarked to compensate a specific expense, which have been accounted for by offsetting the specific expense, such as research and development expense or interest expenses. Unearned government subsidies received are deferred for recognition until the criteria for such recognition could be met.

Research and Development Expenses

Research and development costs are expensed as incurred. Gross research and development expenses for new product development and improvements of existing products by the Company incurred for the three-month periods ended June 30, 2011 and 2010 were $23,804 and $35,871, respectively, and for the six-month periods ended June 30, 2011 and 2010 were $455,310 and $76,723, respectively.

Comprehensive Income (Loss)

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 220, Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general-purpose financial statements. The Company has chosen to report comprehensive income (loss) in the statements of operations and comprehensive income. Comprehensive income (loss) is comprised of net income and all changes to stockholders' equity except those due to investments by owners and distributions to owners.

Recently Adopted Accounting Pronouncements

Adoption of FASB ASU 2011-04

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement (Topic 820)”, which provided clarifications for Topic 820 and also included instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurement has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs, and is effective during interim and annual periods beginning after December 15, 2011 for public entities. Early application by public entities is not permitted, and the adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

Adoption of FASB ASU 2010-13

In April 2010, the FASB issued ASU No. 2010-13, "Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades," which addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this ASU should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. ASU 2010-13 is effective for interim and annual periods beginning on or after December 15, 2010 and did not have a material impact on the Company’s consolidated financial position or results of operations.

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Adoption of FASB ASU 2010-06

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”, which provides amendments to Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of FASB ASU 2010-06 did not have a material impact on the Company’s consolidated financial position or results of operations.

3. INVENTORIES

Inventories at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30, 2011		December 31, 2010
	(Unaudited)

Raw materials	$	6,613,777	$	6,934,521
Low value consumables and packing		1,647,976		1,506,700
Work-in-progress		4,432,361		2,719,933
Finished goods		18,012,936		15,372,860
Inventories	$	30,707,050	$	26,534,014

4. PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment at June 30, 2011 and December 31, 2010 is as follows:

	June 30, 2011			December 31, 2010
	(Unaudited)

Plants and buildings	$	239,605,746		$	214,765,759
Machinery and equipment		104,174,741			96,632,003
Office furniture and equipment		5,592,866			3,915,451
Vehicles		3,941,386			3,629,177
Accumulated depreciation		(35,492,071	)		(27,374,994	)
Total	$	317,822,668		$	291,567,396

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The depreciation and amortization expenses for the three-month periods ended June 30, 2011 and 2010 were $4,237,402 and $3,363,115, respectively, and for the six-month periods ended June 30, 2011 and 2010 were $8,201,482 and $6,093,089, respectively.

Of the above information, property, plant and equipment under the sale-leaseback agreement at cost at June 30, 2011 and December 31, 2010 was as follows:

	June 30, 2011			December 31, 2010
	(Unaudited)

Plants and buildings	$	694,285		$	695,424
Machinery and equipment		25,437,236			25,589,091
Office furniture and equipment		37,931			34,655
Vehicles		4,262			4,130
Accumulated depreciation		(2,896,207	)		(2,111,119	)
Total	$	23,277,507		$	24,212,181

The deferred losses included in the property and equipment balance were $2,085,494 and $2,784,665 at June 30, 2011 and December 31, 2010, respectively, and would be amortized over the lease term. Of the depreciation expenses, $756,068 and $727,979 were amortization of deferred loss and depreciation expense from assets under capital lease, respectively, for the six months ended June 30, 2011; $724,543 and $709,314 were amortization of deferred loss and depreciation expense from assets under capital lease, respectively, for the six months ended June 30, 2010.

5. LAND USE RIGHTS

The Company’s land use rights at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011			December 31, 2010
	(Unaudited)

Land use rights	$	92,392,380		$	90,284,405
Accumulated amortization		(4,825,732	)		(3,808,697	)
Total	$	87,566,648		$	86,475,708

The amortization expenses for the three months ended June 30, 2011 and 2010 were $462,058 and $321,659, respectively, and for the six-month periods ended June 30, 2011 and 2010 were $918,246 and $649,049, respectively.

6. CONSTRUCTION IN PROGRESS

Construction in progress at June 30, 2011 and December 31, 2010 consisted of the following:

Construction Project	Date or Estimated Date Put in Service(1)	June 30, 2011		December 31, 2010
Upgrade for export certification in Changge	March 2011	$	-	$	2,305,978
Zhengzhou office	April 2011		-		36,934
Distribution center in Changge	May 2011		--		19,393,985
Information system	July 2011		125,466		671,757
Replacement and maintenance in Changge industrial park	October 2011		105,893		305,533
Production facility for chilled and frozen pork in Taizhou	January 2012		19,895,492		2,566,868
Production facility for chilled and frozen pork in Changchun	January 2012		20,854,252		5,054,401
Zhongpin Xinda joint venture project	January 2012		248,161		--
Production facility for prepared pork products in Tianjin	April 2012		13,339,132		98,449
Production facility for prepared pork products in Changge (first phase)	April 2012		13,885,670		--
Upgrade for production facility in Anyang	July 2012		309,656		--

Total			68,763,722	$	30,433,905

Estimated cost to complete current construction in progress is $45.8 million.

(1)	Represents date all regulatory permits and approvals are received and project is placed in service. In certain cases, construction of a project may be substantially completed and the project may be operational during a testing period prior to such date.

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.	SHORT-TERM BANK LOANS

Short-term bank loans are due within one year. Of the $100.3 million aggregate principal amount of short-term bank loans at June 30, 2011, loans in the aggregate principal amount of $41.2 million were guaranteed by the Company’s subsidiaries in China, and loans in the aggregate principal amount of $23.2 million were guaranteed by Henan Huanghe Enterprises Group Co., Ltd., an unaffiliated third party. These loans bear interest at prevailing lending rates in China ranging from 5.00 % to 6.63% per annum.

8.	LONG-TERM BANK LOANS

Amounts outstanding under the Company’s long-term debt arrangements at June 30, 2011 and December 31, 2010 were as follows:

Bank	June 30, 2011			December 31, 2010
	(Unaudited)

China Construction Bank	$	13,906,916		$	13,589,623
Agriculture Bank of China		80,505,594			63,267,245
Rabobank Nederland Shanghai		—			4,529,874
Canadian Government Transfer Loan		1,270,593			1,343,429
China Merchants Bank		14,679,523			14,344,605
Changge Old Town		1,576,862			1,540,885
Current portion		(10,962,161	)		(14,943,260	)
Total long-term portion	$	100,977,327		$	83,672,401

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In June 2011, Henan Zhongpin entered into a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.7 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.40% per annum on June 30, 2011 and adjustable on the anniversary of date of the agreement based on the prime rate published by the People’s Bank of China for loans with the same or similar terms) and are payable in March and June 2013. Borrowings under the loan agreement are secured by the land use rights, property and plant of Henan Zhongpin.

In December 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 25 million ($3.9 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.40% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable on December 10, 2013. Borrowings under the loan agreement are secured by the land use rights, property and plant of Henan Zhongpin.

In September 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 75 million ($11.6 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.65% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on September 17, 2012, 2013 and December 27, 2014. Borrowings under the loan agreement are guaranteed by the Company’s wholly owned subsidiary, Yongcheng Zhongpin Food Company Limited.

In July 2010, Tianjin Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Tianjin Zhongpin may borrow up to RMB 300 million ($46.4 million). Tianjin Zhongpin drew down RMB 50 million ($7.7 million) in July 2010, RMB 80 million ($12.4 million) in November 2010 and RMB 110 million ($17.0 million) in May 2011. All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.65% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments in June 2012, 2013, 2014 and 2015. Borrowings under the loan agreement are secured by the land use rights, property and plant of Tianjin Zhongpin.

In June 2010, Henan Zhongpin entered into a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 40 million ($6.2 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (4.86% per annum on June 30, 2011) and are payable on June 29, 2013. Borrowings under the loan agreement are secured by the land use rights, property and plant of Henan Zhongpin.

In April 2010, in connection with the purchase of a piece of land from Changge Old Town, Changge Old Town extended a loan to Henan Zhongpin with a principal amount of RMB 10.2 million ($1.6 million) and bearing interest at the rate of 7.00% per annum payable on June 30, 2010 and each anniversary thereafter. Such loan does not have a fixed term and the principal amount of the loan should be repaid by Henan Zhongpin upon six months prior written notice from Changge Old Town.

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In March 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 55 million ($8.5 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.65% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on March 18, 2011, 2012, 2013 and 2014 and December 27, 2014. Borrowings under the loan agreement are secured by the land use rights, property and plant of Henan Zhongpin.

In February 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 71 million ($11.0 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.40% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable on February 3, 2013. Borrowings under the loan agreement are secured by the land use rights, property and plant of Henan Zhongpin.

In December 2009, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million ($10.8 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.65% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on December 27, 2011, 2012, 2013 and 2014. Borrowings under the loan agreement are secured by the land use rights, property and plant of Luoyang Zhongpin.

In November 2009, Henan Zhongpin entered into a loan agreement with China Merchants Bank pursuant to which Henan Zhongpin borrowed RMB 95 million ($14.7 million). The first 50% of the loan was drawn down in November 2009 and the remaining 50% of the loan was drawn down in March 2010. All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.65% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on November 26, 2012, 2013 and 2014. Borrowings under the loan agreement are guaranteed by Luoyang Zhongpin.

In May 2002, Henan Zhongpin entered into a loan agreement with Bank of Communications, Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the amount of $2,504,969 from the Canadian government. Under the terms of the loan agreement, 58% of the principal amount ($1,452,882) of this loan bears interest at the fixed rate of 6.02% per annum and remaining principal amount of this loan is interest free. The loan is repayable in a fixed amount of $145,671, which includes both principal and interest, that is payable on a semi-annual basis through November 15, 2041. Borrowings under the loan agreement are guaranteed by the Financing Department of Henan province.

9.	EQUITY TRANSACTIONS

On April 24, 2009, the Company granted stock options to its 22 employees to purchase an aggregate of 720,000 shares of the Company’s common stock, exercisable in accordance with the following schedule: 240,000 options vesting on April 24, 2010 with an exercise price of $8.93 per share, equal to the closing price of the Company’s common stock on April 24, 2009, 240,000 options vesting on April 24, 2011 with an exercise price of $13.42 per share, equal to the closing price of the Company’s common stock on April 23, 2010, the last trading day before April 24, 2010 (Saturday) and 240,000 options vesting on April 24, 2012 with an exercise price of $15.48 per share, equal to the closing price of the Company’s common stock on April 21, 2011, the last trading day before April 24, 2011 (Sunday). Each tranche of options expires on the fourth anniversary of its respective vesting dates.

The Company adopted the fair value recognition to measure and recognize compensation expense for all stock-based payment awards made to the Company’s employees and directors, including stock options and employee stock purchases. Stock-based compensation expense for stock options was based on the grant-date fair value. During the process of estimating the fair value of the stock options granted and recognizing share-based compensation, the following assumptions were adopted.

The fair value for these awards was estimated using the Black-Scholes option pricing model with the following weighted average assumptions, assuming no expected dividends:

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Six Months Ended June 30,
	2011			2010
Expected life (years)		3			3-5
Expected volatility		57.97	%		65.11	%
Risk-free interest rate		1.15	%		1.42	%
Dividend yield		—	%		—	%

The expected volatilities are based on the historical volatility of the Company’s common stock. The observation is made on a weekly basis. The observation period covered is consistent with the expected life of the options. The risk-free rate is consistent with the expected terms of the stock options and is based on the United States Treasury yield curve in effect at the time of grant. In estimating expected lives of the options, the Company considered the contractual and vesting terms of awards, along with historical experience; however, due to insufficient historical data from which to reliably estimate expected lives, the Company used estimates based on the “simplified method” set forth by the SEC in Staff Accounting Bulletin No. 107, where expected life is estimated by summing the award’s vesting term and contractual term and dividing that result by two. Insufficient historical data from which to reliably estimate expected lives is expected to exist for the foreseeable future due to different terms associated with awards granted in recent years, along with other factors.

During the three-month periods ended June 30, 2011 and 2010, the stock-based compensation expenses were $406,689 and $602,163, respectively, and for the six-month periods ended June 30, 2011 and 2010, the stock-based compensation expenses were $775,316 and $1,075,635, respectively.

10.	EARNINGS PER SHARE

The following table shows the computation of basic and diluted net earnings per share for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Numerator:
Net income attributable to common shareholders	$	19,315,096	$	12,365,445	$	36,198,137	$	25,615,908

Denominator:
Weighted average number of common shares outstanding – basic		40,355,502		34,725,104		38,115,633		34,720,312

Dilutive effect of stock options		10,151		383,160		88,275		402,584

Weighted average number of common shares outstanding – diluted		40,365,654		35,108,264		38,203,909		35,122,896

Basic earnings per share	$	0.48	$	0.36	$	0.95	$	0.74

Diluted earnings per share	$	0.48	$	0.35	$	0.95	$	0.73

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

All potentially dilutive securities were included in diluted earnings per share as the average market price is greater than the exercise price of the warrants and options outstanding.

11.	GOVERNMENT SUBSIDIES

The central and local government provided Henan Zhongpin with various subsidies to encourage its research and development activities, building new facilities using information technology, building cold chain logistics and distribution networks, and for other contributions to the local community, such as increasing employment opportunities. The government subsidies are generally classified as earmarked (such as research and development activities) or non-earmarked. The interest subsidies were earmarked to offset the Company’s interest expenses incurred in relation to the construction of its vegetable and fruit production facility. All subsidies were accounted for based on evidence that cash has been received and the earmarked activities have taken place. Subsidies earmarked for research and development activities were first offset against relevant research and development expenses incurred, and interest subsidies were offset against the relevant interest expense incurred. Non-earmarked subsidies are generally recognized as other income.

Government subsidies received by the Company during the three-month and six-month periods ended June 30, 2011 and 2010 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Deferred subsidies opening balance:
Interest subsidies	$	—	$	—	$	—	$	—
Earmarked subsidies		—		—		—		—
Non-earmarked subsidies		—		—		—		—
Total	$	—	$	—	$	—	$	—

Subsidies received:
Interest subsidies	$	—	$	—	$	—	$	307,045
Earmarked subsidies		772,606		—		772,606		—

Non-earmarked subsidies		337,286		1,244,925		1,451,907		1,870,081

Total	$	1,109,892	$	1,244,925	$	2,224,513	$	2,177,126

Subsidies recognized:
Interest subsidies	$	—	$	—	$	—	$	307,045
Earmarked subsidies		—		—		—		—
Non-earmarked subsidies		337,286		1,244,925		1,451,907		1,870,081

Total	$	337,286	$	1,244925	$	1,451,907	$	2,177,126

Deferred subsidies year ending balance:
Interest subsidies	$	—	$	—	$	—	$	—
Earmarked subsidies		772,606		—		772,606		—
Non-earmarked subsidies		—		—		—		—
Total	$	772,606	$	—	$	772,606	$	—

ZHONGPIN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Subsidies received and other income recognized are translated at the average exchange rate. The beginning and ending balances are translated at the period-end exchange rates.

12.	SEGMENT REPORTING

The Company operates in only one segment: meat production. The Company’s vegetable and fruit operations, both financially and operationally, do not represent a significant enough portion of its business to constitute a separate segment. However, the Company’s product lines are divided into two divisions: pork and pork products, and vegetables and fruits.

The pork and pork products division is involved primarily in the processing of live hogs into fresh, frozen and processed pork products. The pork and pork products division markets its products domestically to retail stores and to food retailers, food service distributors, restaurant operators and noncommercial food service establishments, such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as in certain international markets on a limited basis.

The vegetables and fruits division is involved primarily in the processing of fresh vegetables and fruits. The Company contracts with more than 100 farms in Henan province and nearby areas to produce high-quality vegetable varieties and fruits suitable for export purposes. The proximity of the contracted farms to operations ensures freshness from harvest to processing. The Company contracts with those farms to grow more than 35 categories of vegetables and fruits, including asparagus, sweet corn, broccoli, mushrooms, lima beans and strawberries.

	Sales by Division (U.S. dollars in millions)
	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Pork and Pork Products:
Chilled pork	$	213.2		$	114.3		$	381.8		$	229.0
Frozen pork		105.1			58.3			178.6			108.7
Prepared pork products		43.1			36.8			84.3			73.1
Vegetables and Fruits		5.1			5.7			7.5			8.6
Total	$	366.5		$	215.1		$	652.2		$	419.4

Cost of Sales:
Pork products	$	323.1		$	184.9		$	571.1		$	361.9
Vegetables and fruits	$	4.2		$	4.8		$	6.1		$	7.2

Gross Profit Margin:
Pork products		10.6	%		11.7	%		11.4	%		11.9	%
Vegetables and fruits		17.6	%		15.8	%		18.7	%		16.3	%

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

Disclosure Regarding Forward-Looking Statements

The statements contained in this Report with respect to our financial condition, results of operations and business that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Forward-looking statements 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 any such statements that are contained in this 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, 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 our company, 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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.

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 Report that are attributable to our company 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 release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this Report is a statement of our intention as of the date of this Report 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.

Overview

We are principally engaged in the meat and food processing and distribution business in China. Currently, we have 13 processing plants in China, located in Henan, Jilin and Sichuan provinces and in the municipality of Tianjin. Our current total production capacity for chilled pork and frozen pork is approximately 1,566 metric tons per average eight-hour day, or approximately 563,760 metric tons on an annual basis. In addition, we have production capacity for prepared meats of approximately 250 metric tons per day, or approximately 90,000 metric tons on an annual basis, and for vegetables and fruits of approximately 83.3 metric tons per eight-hour day, or approximately 30,000 metric tons on an annual basis. We also have annual production capacity for food oil (pork oil) of approximately 20,000 metric tons. We use state-of-the-art equipment in all of our processing facilities.

In December 2009, the PRC Ministry of Commerce issued the Hog Slaughtering Industry Development Guidelines for 2010−2015. The guidelines state that the government will control the number of slaughterhouses in China and specifically that there should be less than four slaughterhouses in urban areas of municipalities and cities with a resident population of five million or more, and less than two slaughterhouses in urban areas of other cities at or above the prefecture level.

In June 2010, the China Meat Association (“CMA”) announced the China Meat Industry Development Strategy Report for 2011−2015. In that report, CMA provided a development roadmap and targets for the meat industry for the coming five years:

By 2015, to decrease sales of room temperature pork to below 50% of total pork sales in cities at or above county level in China;

By 2015, to increase sales of chilled pork to around 30% of total pork sales in China;

By 2015, to decrease outstanding licenses for slaughterhouses from more than 21,000 to around 3,000 in China; and

To build pork and pork products production bases in North China, Northeast China, East China and Southwest China.

The report indicates to us that there is an opportunity to consolidate and integrate the industry for companies with strong brand recognition in China's meat industry, high quality facilities and products, strict quality control systems and cold chain logistics capabilities.

Government and consumers take food safety as one of their top priorities. With the PRC government’s support, the consolidation of the industry is accelerating.

Our growth strategy will include expanding our production capacity in certain strategic locations in response to the suggestions in the report. We plan to build new facilities for chilled and frozen pork, as well as new facilities for prepared pork products and cold chain logistic distribution centers. We may also explore opportunities to acquire companies with strong regional brand recognition that produce prepared pork products using high quality facilities. We expect that these new facilities, together with our existing ones, will help us to build “Zhongpin” into a stronger, national brand, increase our market share, revenues and net income and strengthen our ability to take advantage of consolidation opportunities in the meat industry in China.

We put the new facility in Tianjin with a production capacity of approximately 100,000 metric tons for chilled and frozen pork into operation in January 2010. The construction of phase two of the facility, with a production capacity of approximately 36,000 metric tons for prepared pork products started in October 2010. We expect to put it into operation in the third quarter of 2011

We are investing approximately $61.5 million to build a slaughtering and processing plant, low temperature prepared pork plant, logistics center, and research and development center in Nong'an county, Changchun, Jilin province of China. This facility will have a production capacity of approximately 70,000 metric tons for chilled pork, 25,000 metric tons for frozen pork, and 30,000 metric tons for prepared pork products. The construction work started in September 2010. We expect to put the new facility for chilled and frozen pork into operation in the fourth quarter of 2011 and the new facility for prepared pork products into operation in the third quarter of 2012.

We are investing approximately $63.0 million to build a production facility, warehouse and distribution center in Taizhou, Jiangsu province. This facility will have a production capacity of approximately 100,000 metric tons for chilled and frozen pork, of which 80% will be for chilled pork including easy-to-cook products and 20% for frozen pork, and 30,000 metric tons for prepared pork products. The construction work started in October 2010. We expect to put the new facility for chilled and frozen pork into operation in the fourth quarter of 2011 and the new facility for prepared pork products into operation in the first quarter of 2012.

We expect to invest approximately $58.5 million to build a new production, research and development, and training complex in Changge, Henan province excluding the cost of land use rights that we have already obtained. When completed, we anticipate that this new facility will have a production capacity of approximately 100,000 metric tons for prepared pork products. Adjacent to this new production facility, we also plan to develop a center for research and development, training, as well as quality control. Construction for the first phase with a production capacity of approximately 50,000 metric tons for prepared pork products started in the first quarter of 2011 and is scheduled to be completed by the fourth quarter of 2011, and we expect the second phase, also with a production capacity of approximately 50,000 metric tons for prepared pork products, to be completed by the fourth quarter of 2012. We plan to open the research and development and training center by the fourth quarter of 2012.

We set up a joint venture company with Henan Xinda Animal Husbandry Company Limited in June 2011. We own 65% of the joint venture company. The joint venture company will be financed by capital contributions and bank loans. We expect the new company will provide 20,000 sire boars annually. We are building infrastructures for sire boars breeding and plan to start operation in fourth quarter of 2011.

Our products are sold under the “Zhongpin” brand name. As of June 30, 2011, our wholesale customers included 56 international and domestic fast food companies in China, 93 processing factories and 1,532 school cafeterias, hotels, factory canteens, army bases, and government departments. As of such date, we also sold directly to 3,343 retail outlets, including supermarkets, within China.

We have established distribution networks in 20 provinces and in the four central government- administered municipalities of Beijing, Shanghai, Tianjin and Chongqing in the North, East, South and Mid-South regions of China, and have also formed strategic business alliances with leading supermarket chains within China. We also export our products to Europe, Hong Kong as well as other selected countries and regions in Asia.

As of June 30, 2011, we had 7,117 employees, of whom 5,364 were operating personnel, 1,304 were sales personnel, 123 were research and development personnel and 326 were administrative personnel. We are not subject to any collective bargaining agreement and we believe our relationship with our employees is good.

Critical Accounting Policies

Unless otherwise noted, all translations from RMB to U.S. dollars were made at the middle rate published by the People’s Bank of China, or the middle rate, as of June 30, 2011, which was RMB 6.4716 to $1.00. We make no representation that the RMB amounts referred to in this Quarterly Report on Form 10-Q could have been or could be converted into U.S. dollars at any particular rate or at all. On August 5, 2011, the middle rate was RMB6.4451 to $1.00.

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We continually evaluate our policies and estimation procedures. Estimates are often based on historical experience and on assumptions that are believed to be reasonable under the circumstances, but which could change in the future. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments, estimates and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe the following are our critical accounting policies:

Revenue Recognition. Revenues generated from the sale of various meat products and vegetables and fruits are recognized when these products are delivered to customers in accordance with previously-agreed-upon pricing and delivery arrangements, and the collectability of these sales is reasonably assured. Since the products sold by us are primarily perishable and frozen food products, the right of return is only for a few days and has been determined to be insignificant by our management. Accordingly, no provision has been made for returnable goods. Revenues presented on our consolidated income statements are net of sales taxes.

Accounts Receivable. During the normal course of business, our policy is to ask customers to make deposits in reasonable and meaningful amounts on a case-by-case basis. For certain customers, we may extend unsecured credit.

We regularly evaluate and monitor the creditworthiness of each of our customers in accordance with the prevailing practice in the meat industry, considering factors such as general economic conditions and industry-specific economic condition in China, historical customer performance, as well as anticipated customer performance. We maintain a general policy of providing 100% allowance for doubtful accounts in an amount equal to the aggregate amount of those accounts that are not collected within one year plus an amount equal to 5% of the aggregate amount of accounts receivable less than one year old. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. We also examine the credit terms of significant customers regularly and ask for more cash deposits if these customers appear to have any indicators of delaying their payments to us. Such deposits are usually applied towards the outstanding accounts receivable. With such a practice in place, we did not have any specific bad debt allowance provided against specific customers as of June 30, 2011.

Inventories. Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work-in-progress and finished goods are composed of direct material, direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.

Results of Operations

In 2011, we intend to continue to focus on the implementation of our strategic plan to sustain the growth we have experienced since becoming a U.S. public company in 2006. Over the next 12 months, we expect to continue to expand our distribution channel and develop new markets. Through our aggressive marketing campaign, we also expect to increase our brand awareness and customer loyalty. We also intend to further streamline our supply chain management to further advance and extend our unified, safe and efficient cold-chain logistics system. We also have invested in employee training and development to help sustain our rapid and healthy growth while maintaining a satisfactory profit margin.

Hog and pork prices increased approximately 60% in the second quarter of 2011, compared to the same period last year, primarily because the supply of hogs was lower than the demand in the market, and inflation pushed up the cost to raise hogs. However, the demand for our products was still strong. We expect that hog prices will drop in the third quarter and rebound to current levels during the fourth quarter of 2011.

Comparison of Three Months Ended June 30, 2011 and 2010

Revenue. Total revenue increased from $215.1 million for the three months ended June 30, 2010 to $366.5 million for the three months ended June 30, 2011, which represented an increase of $151.4 million, or approximately 70%. The increase in revenues during the second quarter of 2011 was primarily due to higher pork prices, increased sales volume in our meat and meat products divisions resulting from the effects of the continuing increases in the number of our retail channels, geographic expansion, and increased sales to chain restaurants, food service providers, and wholesalers and distributors in China. The following table presents our sales by product division for the three months ended June 30, 2011 and 2010.

	Sales by Division (unaudited)
	Three Months Ended June 30, 2011						Three Months Ended June 30, 2010
	Metric Tons		Sales Revenues (in millions)		Average Price/ Metric Ton		Metric Tons		Sales Revenues (in millions)		Average Price/ Metric Ton

Pork and Pork Products
Chilled pork		78,458	$	213.2	$	2,717		71,200	$	114.3	$	1,605
Frozen pork		39,729		105.1		2,645		39,084		58.3		1,492
Prepared pork products		20,463		43.1		2,106		18,747		36.8		1,963
Vegetables and Fruits		4,310		5.1		1,183		5,341		5.7		1,062
Total		142,960	$	366.5	$	2,564		134,372	$	215.1	$	1,601

The pork market in China is highly fragmented and in the markets in which we sell our products, no single supplier has a significant impact on the market price of pork or related pork products. We have been pricing our products based on the value of our brand, the quality of our products, hog prices in the applicable period and pricing trends for similar products in the regions in which we operate.

In the second quarter of 2011, we increased our sales of chilled pork products by approximately $98.9 million over the amount of our sales of such products in the second quarter of 2010. As shown in the table above, our average price during the second quarter of 2011 was approximately $2,717 per metric ton for chilled pork, compared to $1,605 during the second quarter of 2010, an increase of 69%. The number of metric tons of chilled pork sold during the second quarter of 2011 increased by 7,258, or 10% from the second quarter of 2010. Our total revenue increased primarily due to the increase in average selling prices of our chilled products as a result of fluctuations in the market price of pork or pork-related products and changes of our product mix among this product sector. Also the total revenue increased due to increased sales to existing customers, and increased volume of sales of our products as we entered new geographic markets, expanded our points of sales and acquired new customers.

In the second quarter of 2011, we increased our sales of frozen pork products by approximately $46.8 million over the amount of our sales of such products in the second quarter of 2010. Our average price during the second quarter of 2011 was approximately $2,645 per metric ton for frozen pork compared to $1,492 during the second quarter of 2010, an increase of 77%. The number of metric tons of frozen pork sold during the second quarter of 2011 increased by 645, or 2% from the second quarter of 2010. Our total revenue increased primarily due to the increase in the average price of pork in the second quarter of 2011 as a result of market fluctuations, increased sales to existing customers, and increased volume of sales of our products as we entered new geographic markets, expanded our points of sales, and acquired new customers.

In the second quarter of 2011, we increased our sales of prepared pork products by approximately $6.3 million over the amount of our sales of such products in the second quarter of 2010. Our average price during the second quarter of 2011 was approximately $2,106 per metric ton for prepared pork products compared to $1,963 during the second quarter of 2010, an increase of 7%. The number of metric tons of prepared pork products sold during the second quarter of 2011 increased by 1,716, or 9% from the second quarter of 2010. This product sector is becoming more important to our business as customers increasingly demand prepared pork products and are willing to pay higher average prices for the convenience of such products. We plan to gradually increase sales from prepared pork products by building up our brand recognition and expanding our capacities for this division.

The sales of meat and vegetable products are closely related to the particular regional markets in which our distribution channels are located. Therefore, the increase in metric tons sold for the second quarter of 2011 was partly attributable to our efforts to expand our distribution channels. The following table sets forth the changes in our distribution channels:

	Numbers of Stores and Cities Generating Sales Volume (unaudited)
	June 30,				Net			Percentage
	2011		2010		Change			of Change
Showcase stores		166		152		14			9	%
Branded stores		1,146		1,026		120			12	%
Supermarket counters		2,031		2,065		(34	)		(2	)%
Total		3,343		3,243		100			3	%

First-tier cities		29		29		—			0	%
Second-tier cities		132		127		5			4	%
Third-tier cities		427		401		26			6	%
Total cities		588		557		31			6	%

The expansion in our distribution channels and geographical coverage has been a significant factor in the increase in our sales volume. The following table shows our revenues by distribution channel for the second quarter of 2011 and 2010, respectively.

	Sales by Distribution Channel (Dollars in millions) (unaudited)
	Three months ended June 30,				Net		Percentage
	2011		2010		Change		of Change
Retail channels	$	121.7	$	85.7	$	36.0		42	%
Wholesalers and distributors		127.2		67.6		59.6		88	%
Restaurants and food services		111.4		60.0		51.4		86	%
Export		6.2		1.8		4.4		244	%
Total	$	366.5	$	215.1	$	151.4		70	%

The increase in sales to different distribution channels was mainly due to the following factors:

we have built up our brand image and brand recognition through general advertising display promotions and sales campaigns;

we have increased the number of stores and other channels through which we sell our products;

we believe consumers are placing increased importance on food safety and are willing to pay higher prices for safe food products; and

Pork prices increased starting in the middle of 2010 and reached a high in the second quarter of 2011

During the three months ended June 30, 2011, revenues from export sales increased to $6.2 million, which represented an increase of $4.4 million, or approximately 244%, as compared to the three months ended June 30, 2010.

Cost of Sales. Our cost of sales increased from $189.7 million for the three months ended June 30, 2010 to $327.3 million for the three months ended June 30, 2011, which represented an increase of $137.6 million, or approximately 73%. Our cost of sales primarily includes our costs of raw materials, labor costs and overhead. Of our total cost of sales, our costs of raw materials typically account for approximately 95% to 97%, our overhead typically accounts for 2% to 3.5% and our labor costs typically account for 1.5% to 1.7%, with slight variations from period to period. All of our meat products are derived from the same raw materials, which are live hogs. Our vegetable and fruit products are purchased from farmers located close to our processing facility in Changge City, Henan province. As a result, the purchasing costs of live hogs and vegetables and fruits represent substantially all of our costs of raw materials. The increase in our cost of sales was consistent with our increase in sales revenue.

	Cost of Sales by Division (unaudited)
	Three Months Ended June 30, 2011						Three Months Ended June 30, 2010
	Metric Tons		Cost of Sales (in millions)		Average Price/ Metric Ton		Metric Tons		Cost of Sales (in millions)		Average Price/ Metric Ton

Pork and Pork Products
Chilled pork		78,458	$	190.2	$	2,424		71,200	$	101.3	$	1,423
Frozen pork		39,729		98.1		2,469		39,084		53.9		1,379
Prepared pork products		20,463		34.8		1,701		18,747		29.8		1,590
Vegetables and Fruits		4,310		4.2		974		5,341		4.7		899

Total		142,960	$	327.3	$	2,289		134,372	$	189.7	$	1,412

Our gross profit margin (gross profit divided by sales revenue) decreased from 11.8% for the three months ended June 30, 2010 to 10.7% for the three months ended June 30, 2011. The decrease in our gross margin during the second quarter of 2011 was primarily due to (i) the competition in the market, (ii) the percentage increase in pork prices being less than the percentage increase in hog prices, which is the main part of cost of sales, (iii) the change of our product mix, and (iv) our strategic decision to take steps to increase our market share.

General and Administrative Expenses. General and administrative expenses increased from $5.7 million for the three months ended June 30, 2010 to $7.0 million for the three months ended June 30, 2011, which represented an increase of $1.3 million, or approximately 23%. As a percentage of revenues, general and administrative expenses decreased from 2.6% for the three months ended June 30, 2010 to 1.9% for the three months ended June 30, 2011.

The increase in general and administrative expenses during the three months ended June 30, 2011 was primarily the result of a $0.7 million increase in salary expense due to the expansion of our business, which required us to hire more employees, and an increase in the average salary we paid to our employees.

Selling Expenses. Selling expenses increased from $4.6 million for the three months ended June 30, 2010 to $8.5 million for the three months ended June 30, 2011, which represented an increase of $3.9 million, or approximately 85%. The increase in selling expenses was primarily the result of our increased sales of pork and pork products and was primarily due to a $1.1 million increase in transportation fees, a $1.1 million increase in advertising cost and promotions, and a $0.8 million increase in salaries. As a percentage of revenues, selling expenses increased from 2.2% for the three months ended June 30, 2010 to 2.3% for the three months ended June 30, 2011.

Interest Expense (net of interest income). Interest expense net of interest income increased from $1.9 million for the three months ended June 30, 2010 to $3.4 million for the three months ended June 30, 2011, which represented an increase of $1.5 million, or approximately 79%. The increase in interest expense was primarily the result of an increase of $38.5 million in long-term bank loans and an increase of $30.9 million in short-term bank loans, and an increase in interest rate by central bank of China. The increase was partly offset by increase in interest income due to increased bank deposits.

Other Income, Exchange Gain and Government Subsidies. Other income, exchange gain and government subsidies decreased from $1.3 million for the three months ended June 30, 2010 to $0.3 million for the three months ended June 30, 2011, which represented a decrease of $1.0 million. This decrease was primarily the result of a decrease in government subsidies. The changes in government subsidies are discussed in Note 11 of Notes to Consolidated Financial Statements.

Income Taxes. The effective tax rate in China on income generated from the sale of prepared products is 25% and there is no income tax on income generated from the sale of raw products, including raw meat products and raw vegetable and fruit products. The increase of $0.2 million in the provision for income taxes for the three months ended June 30, 2011 over the three months ended June 30, 2010 resulted from the increase sales of prepared meat products.

Comparison of Six Months Ended June 30, 2011 and 2010

Revenue. Total revenue increased from $419.4 million for the six months ended June 30, 2010 to $652.2 million for the six months ended June 30, 2011, which represented an increase of $232.8 million, or approximately 56%. The increase in revenues during the first half of 2011 was primarily due to higher pork prices, increased sales volume in our meat and meat products divisions resulting from the effects of the continuing increases in the number of our retail channels, geographic expansion and increased sales to chain restaurants, food service providers and wholesalers and distributors in China. The following table presents certain information regarding our sales by product division for the six months ended June 30, 2011 and 2010.

	Sales by Division (unaudited)
	Six Months Ended June 30, 2011						Six Months Ended June 30, 2010
	Metric Tons		Sales Revenues (in millions)		Average Price/ Metric Ton		Metric Tons		Sales Revenues (in millions)		Average Price/ Metric Ton

Pork and Pork Products
Chilled pork		148,557	$	381.8	$	2,570		135,618	$	229.0	$	1,689
Frozen pork		72,465		178.6		2,465		71,929		108.7		1,510
Prepared pork products		40,577		84.3		2,078		34,794		73.1		2,101
Vegetables and Fruits		7,597		7.5		987		9,292		8.6		926
Total		269,196	$	652.2	$	2,423		251,633	$	419.4	$	1,667

In the first half of 2011, we increased our sales of chilled pork products by approximately $152.8 million over the amount of our sales of such products in the first half of 2010. As shown in the table above, our average price during the first half of 2011 was approximately $2,570 per metric ton for chilled pork, compared to $1,689 during the first half of 2010, an increase of 52%. The number of metric tons of chilled pork sold during the first half of 2011 increased by 12,939, or 10% from the first half of 2010. Our total revenue increased due to the average price increase in the first half of 2011 as a result of market fluctuations, increased sales to existing customers, and increased volume of sales of our products as we entered new geographic markets, expanded our points of sales and acquired new customers.

In the first half of 2011, we increased our sales of frozen pork products by approximately $69.9 million over the amount of our sales of such products in the first half of 2010. Our average price during the first half of 2011 was approximately $2,465 per metric ton for frozen pork compared to $1,510 during the first half of 2010, an increase of 63%. The number of metric tons of frozen pork sold during the first half of 2011 increased by 536, or 1% from the first half of 2010. Our total revenue increased mainly due to the increase in the average price of pork in the first half of 2011 as a result of market fluctuations.

In the first half of 2011, we increased our sales of prepared pork products by approximately $11.2 million over the amount of our sales of such products in the first half of 2010. Our average price during the first half of 2011 was approximately $2,078 per metric ton for prepared pork products compared to $2,101 during the first half of 2010, a decrease of 1%. The number of metric tons of prepared pork products sold during the first half of 2011 increased by 5,783, or 17% from the first half of 2010. This product division is becoming more important to our business as customers increasingly demand prepared pork products and are willing to pay higher average prices for the convenience of such products. The average selling price of this product division dropped 1%compared to a 52% increase from the chilled pork division and a 63% increase from the frozen pork division. The decrease was mainly due to the change in our product mix and increasing competition in the market. In the first half of 2011, we sold more pork oil products than we did in the first half of 2010 since we put our pork oil facility into operation in April 2010. The average selling price of pork oil products is lower than that of prepared pork products. We plan to gradually increase sales from prepared pork products by building up our brand recognition and expanding our capacities for this division.

The following table shows our revenues by distribution channel for the first half of 2011 and 2010, respectively.

	Sales by Distribution Channel (Dollars in millions) (unaudited)
	Six Months Ended June 30,				Net		Percentage
	2011		2010		Change		of Change

Retail channels	$	229.4	$	170.3	$	59.1		35	%
Wholesalers and distributors		224.6		129.8		94.8		73	%
Restaurants and food services		188.6		116.2		72.4		62	%
Export		9.6		3.1		6.5		210	%
Total	$	652.2	$	419.4	$	232.8		56	%

we have built up our brand image and brand recognition through general advertising display promotions and sales campaigns;

we have increased the number of stores and other channels through which we sell our products;

we believe consumers are placing increased importance on food safety and are willing to pay higher prices for safe food products; and

Pork prices increased starting in the middle of 2010 and reached a high in the second quarter of 2011.

During the six months ended June 30, 2011, revenues from export sales increased to $9.6 million, which represented an increase of $6.5 million, or approximately 210%, as compared with the six months ended June 30, 2010.

Cost of Sales. Our cost of sales increased from $369.1 million for the six months ended June 30, 2010 to $577.2 million for the six months ended June 30, 2011, which represented an increase of $208.1 million, or approximately 56%. Our cost of sales primarily includes our costs of raw materials, labor costs and overhead. Of our total cost of sales, our costs of raw materials typically account for approximately 95% to 97%, our overhead typically accounts for 2% to 3.5% and our labor costs typically account for 1.5% to 1.7%, with slight variations from period to period. All of our meat products are derived from the same raw materials, which are live hogs. Our vegetable and fruit products are purchased from farmers located close to our processing facility in Changge City, Henan province. As a result, the purchasing costs of live hogs and vegetables and fruits represent substantially all of our costs of raw materials. The increase in our cost of sales was consistent with our increase in sales revenue.

	Cost of Sales by Division (unaudited)
	Six Months Ended June 30, 2011						Six Months Ended June 30, 2010
	Metric Tons		Cost of Sales (in millions)		Average Price/ Metric Ton		Metric Tons		Cost of Sales (in millions)		Average Price/ Metric Ton

Pork and Pork Products
Chilled pork		148,557	$	339.8	$	2,287		135,618	$	203.4	$	1,500
Frozen pork		72,465		165.9		2,289		71,929		100.2		1,393
Prepared pork products		40,577		65.4		1,612		34,794		58.4		1,678
Vegetables and Fruits		7,597		6.1		803		9,292		7.1		764
Total		269,196	$	577.2	$	2,144		251,633	$	369.1	$	1,467

Our gross profit margin (gross profit divided by sales revenue) decreased from 12.0% for the six months ended June 30, 2010 to 11.5% for the six months ended June 30, 2011. The decrease in our gross margin during the first half of 2011 was primarily due to (i) the competition in the market, (ii) the percentage increase in pork prices being less than the percentage increase in hog prices, which is the main part of cost of sales, (iii) the change of our product mix, and (iv) our strategic decision to take steps to increase our market share. As a result, our gross profit margin was lower than the level we would expect to achieve once we fully integrate our new production facilities and expand into new regional markets for our products. We intend to adjust our production levels and product mix and the percentages of our sales through our different sales channels in the coming quarters to increase our gross profit margin.

General and Administrative Expenses. General and administrative expenses increased from $11.7 million for the six months ended June 30, 2010 to $13.5 million for the six months ended June 30, 2011, which represented an increase of $1.8 million, or approximately 15%. As a percentage of revenues, general and administrative expenses decreased from 2.8% for the six months ended June 30, 2010 to 2.1% for the six months ended June 30, 2011.

The increase in general and administrative expenses during the six months ended June 30, 2011 was primarily the result of a $0.6 million increase in salary expense due to the expansion of our business, which required us to hire more employees. Also the increase was the result of a $0.5 million increase in depreciation and amortization, and a $0.4 million increase in social insurance.

Selling Expenses. Selling expenses increased from $9.0 million for the six months ended June 30, 2010 to $14.7 million for the six months ended June 30, 2011, which represented an increase of $5.7 million, or approximately 63%. The increase in selling expenses was primarily due to the increase in sales of pork and pork products and was primarily due to a $0.9 million increase in advertising and promotional fees, a $1.5 million increase in salaries and a $2.1 million increase in transportation fees. As a percentage of revenues, selling expenses increased from 2.1% for the six months ended June 30, 2010 to 2.3% for the six months ended June 30, 2011.

Interest Expense (net of interest income). Interest expense net of interest income increased from $3.3 million for the six months ended June 30, 2010 to $8.8 million for the six months ended June 30, 2011, which represented an increase of $5.5 million, or approximately 167%. The increase in interest expense was primarily the result of an increase of $38.5 million in long-term bank loans, an increase of $30.9 million in short-term bank loans, and an increase in interest rate by central bank of China. The increase was partly offset by increase in interest income due to increased bank deposits.

Other Income, Exchange Gain and Government Subsidies. Other income, exchange gain and government subsidies decreased from $2.5 million for the six months ended June 30, 2010 to $1.3 million for the six months ended June 30, 2011, which represented a decrease of $1.2 million. This decrease was primarily due to lower government subsidies and lower other income in the first half of 2011.

Income Taxes. The effective tax rate in China on income generated from the sale of prepared products is 25% and there is no income tax on income generated from the sale of raw products, including raw meat products and raw fruits and vegetable products. The increase of $0.7 million in the provision for income taxes for the six months ended June 30, 2011 over the six months ended June 30, 2010 resulted from the increased sales from prepared meat products.

Segment Information

Under generally accepted accounting principles in the United States, we operate in only one segment: meat production. Our vegetable and fruit operations, both financially and operationally, do not represent a significant enough portion of our business to constitute a separate segment. However, our product lines have been divided into two divisions: pork and pork products, and vegetables and fruits.

Our pork and pork products division is involved primarily in the processing of live hogs into fresh, frozen and processed pork products. Our pork and pork products division markets its products domestically to our retail stores, food retailers, food service distributors, restaurant operators and noncommercial food service establishments, such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets on a limited basis.

Our vegetables and fruits division is involved primarily in the processing of fresh vegetables and fruits. We contract with more than 100 farms in Henan province and nearby areas to produce high-quality vegetable varieties and fruits suitable for export. The proximity of the contracted farms to our operations ensures freshness from harvest to processing. We contract to grow more than 35 categories of vegetables and fruits, including asparagus, sweet corn, broccoli, mushrooms, lima beans, strawberries and capsicum.

The following tables show our sales in metric tons and production processed in metric tons by division for the three-month and six-month periods ended June 30, 2011 and 2010.

	Sales by Division (in metric tons)
	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Pork and Pork Products
Chilled pork		78,458		71,200		148,557		135,618
Frozen pork		39,729		39,084		72,465		71,929
Prepared pork products		20,463		18,747		40,577		34,794
Vegetable and Fruits		4,310		5,341		7,597		9,292
Total		142,960		134,372		269,196		251,633

	Production by Division (in metric tons)
	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Pork and Pork Products
Chilled pork		78,487		71,032		149,182		135,417
Frozen pork		36,434		45,315		71,700		85,793
Prepared pork products		21,455		18,500		42,065		34,374
Vegetable and Fruits		3,149		4,675		6,376		8,574
Total		139,525		139,522		269,323		264,158

Additional Operating Data

In assessing our existing operations and planning our future growth and the development of our business, management considers, among other factors, our revenue growth and growth in sales volume by market segment, as well as our sales by distribution channel and geographic market coverage.

The following table sets forth information with respect to the number of products we offered, the number of stores in our retail network and the number of provinces and cities in China in which we offered and sold our products at June 30, 2011 and December 31, 2010, 2009 and 2008.

			December 31,
	June 30, 2011		2010		2009		2008

Number of products		439		429		392		314
Number of retail stores		3,343		3,326		3,205		3,061
Expansion of Market Coverage
Number of provinces		24		24		24		24
Number of first-tier cities		29		29		29		29
Number of second-tier cities		132		130		120		106
Number of third-tier cities		427		421		383		324

Liquidity and Capital Resources

As of June 30, 2011 and December 31, 2010, we had cash and cash equivalents of $151.0 million and $84.2 million, respectively. As of June 30, 2011, we had working capital of approximately $81.5 million.

We have established and implemented corporate policies to manage our cash flows generated by our operating activities. We have established strict credit policies to manage the credit we give to our customers, and we give different credit terms to different types of customers in different sales channels. These credit terms are subject to negotiation if requested by our customers, but any adjustment must be approved by designated management. In general, we ask for credit terms from our suppliers. We generally pay for the hogs we purchase within one week after the hogs pass our health and quality examinations.

For the six months ended June 30, 2011, net cash provided by operating activities was $35.2 million, which represented an increase of $15.9 million as compared to the net cash provided by operating activities of $19.2 million for the same period of 2010. The increase was primarily due to a $4.2 million increase in cash flow from operating assets and liabilities, a $10.6 million increase in net income and a $1.2 million increase in non-cash items. Of the non-cash items, depreciation and amortization accounted for $2.4 million of change due to the fact that more plants, equipment and machinery were put into use.

Cash flow from changes in operating assets and liabilities increased approximately $4.2 million, as compared to the negative cash flow of $15.8 million from changes in operating assets and liabilities for the same period of the prior year. Of the $4.2 million increase, $6.6 million was attributable to the change of cash flow from inventories due to the fact that we lowered our inventory level this year because the pork price was increasing in the market . It was partly offset by $4.2 million changes on purchase deposit. We increased our payment to our suppliers to secure the supply of hogs.

Net cash used in investing activities was $121.9 million for the six months ended June 30, 2011, which represented an increase of $60.5 million as compared to the net cash of $61.4 million used in investing activities for the same period of the prior year. We spent $27.1 million more on the costs of construction for new production facilities, $33.1 million more on restricted cash and $4.3 million more on purchase deposit for land use rights during the first half of 2011 compared to the same period of 2010.

Net cash provided by financing activities was $150.8 million during the six months ended June 30, 2011, an increase of $138.1 million compared to the net cash of $12.7 million provided by financing activities for the same period of the prior year. We received $66.4 million more in net proceeds from issuing new shares of common stock, $62.2 million more in net proceeds from bank notes, $26.4 million more from short-term bank loans. The increase was partly offset by received $6.5 million less from long-term bank loans and repaid $10.5 million during the first half of 2011.

As of June 30, 2011, Henan Zhongpin had short-term and long-term bank and governmental loans in the aggregate amount of $212.2 million with interest rates ranging from 4.86% to 7.00% per annum, as shown below.

Bank	Amount Borrowed		Interest Rate			Maturity Date

Short-term Loans

China Everbright Bank		7,726,065		5.56	%	11/11/2011

China Construction Bank		7,726,065		5.28	%	07/25/2011
		6,180,852		5.00	%	11/11/2011

Agriculture Development Bank of China		4,427,268		6.56	%	07/08/2011
		3,090,425		6.56	%	09/28/2011

China Minsheng Bank		2,163,298		6.89	%	01/26/2012
		2,472,341		6.89	%	03/16/2012

China Merchants Bank		4,635,639		6.56	%	08/31/2011
		4,635,639		6.56	%	12/13/2011
		6,953,457		6.06	%	07/30/2011
		2,317,819		6.06	%	08/10/2011
		4,635,639		6.06	%	07/26/2011

Xuchang Commercial Bank		3,090,425		6.56	%	05/11/2011

Rabobank Nederland		7,726,065		6.71	%	06/21/2011
		7,726,065		6.41	%	06/30/2011

Zhongyuan Trust Co., Ltd.		24,723,407		5.96	%	09/28/2011

City Finance –short-term		30,904		0.00	%	Extendable
Total	$	100,261,373

Long-term Loan-Current portion

Canadian Government Transfer Loan		145,670		6.02	%	11/15/2011

Agriculture Bank of China		1,545,213		6.65	%	12/27/2011
		1,545,213		6.65	%	03/18/2012
		7,726,065		6.65	%	06/30/2012
Total	$	10,962,161

Long-term Loans

China Construction Bank		6,180,852		4.86	%	06/29/2013
		3,090,426		6.40	%	03/01/2013
		4,635,639		6.40	%	06/23/2013

Agriculture Bank of China		1,545,213		6.65	%	03/18/2013
		1,545,213		6.65	%	03/18/2014
		2,317,819		6.65	%	12/27/2014
		772,607		6.65	%	09/17/2012
		772,607		6.65	%	09/17/2013
		10,043,884		6.65	%	12/17/2014
		2,317,819		6.65	%	12/27/2012
		2,317,819		6.65	%	12/27/2013
		3,863,032		6.65	%	12/27/2014
		3,863,032		6.40	%	12/10/2013
		10,971,012		6.40	%	02/03/2013
		10,816,490		6.65	%	06/30/2013
		12,361,703		6.65	%	06/30/2014
		6,180,852		6.65	%	06/30/2015

China Merchants Bank		3,090,426		6.65	%	11/26/2012
		4,635,639		6.65	%	11/26/2013
		6,953,458		6.65	%	11/26/2014

Changge Old Town		1,576,862		7.00	%	Extendable

Canadian Government Transfer Loan		1,124,923		*		11/15/2041

Total	$	100,977,327

* 22% of the principal amount of this loan bears interest at the rate of 6.02% per annum and the remaining principal amount of this loan is interest free. All repayments are applied first to the interest-bearing portion of this loan.

Of our outstanding short-term loans as of June 30, 2011, $41.2 million aggregate principal amount of loans was guaranteed by our subsidiaries in China and $23.2 million aggregate principal amount of loans was guaranteed by Henan Huanghe Enterprises Group Co., Ltd., a group corporation that is not affiliated with our company or with any of our subsidiaries.

In April 2011, Henan Zhongpin signed a strategic cooperation frame agreement (the "Agreement") with China Construction Bank, Henan Branch (“CCB Henan”). Under the Agreement, CCB Henan will provide approximately RMB 10 billion ($1.5 billion) in loans and financial services to assist our growth. We need to negotiate separately with CCB Henan about interest rate and other terms for any loans under the Agreement,

In September 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 75 million ($11.6 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.65% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on September 17, 2012, 2013 and December 27, 2014. Borrowings under the loan agreement are guaranteed by our wholly owned subsidiary, Yongcheng Zhongpin Food Company Limited.

In July 2010, Tianjin Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Tianjin Zhongpin may borrow up to RMB 300 million ($46.4 million). Tianjin Zhongpin drew down RMB 50 million ($7.7 million) in July 2010, RMB 80 million ($12.2 million) in November 2010 and RMB 110 million ($17.0 million) in May 2011. All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.65% per annum on June 30, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments in June 2012, 2013, 2014 and 2015. Borrowings under the loan agreement are secured by the land use rights, property and plant of Tianjin Zhongpin.

We believe our existing cash and cash equivalents, together with our ability to secure bank borrowings, will be sufficient to finance our investment in new facilities, with budgeted capital expenditures of approximately $116.8 million over the next 12 months, and to satisfy our working capital needs. We intend to satisfy our short-term debt obligations that mature over the next 12 months through additional short-term bank loans, in most cases by rolling the maturing loans into new short-term loans with the same lenders as we have done in the past.

Contractual Obligations

For information on our contractual obligations, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Commitments.” as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Off-Balance Sheet Arrangements

We do not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Inflation and Seasonality

While demand for our products in general is relatively high before the Chinese New Year in January or February each year and lower thereafter, we do not believe our operations have been materially affected by inflation or seasonality.

Item 3. 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 China, with the exception of our export business and limited overseas purchases of raw materials. Most of our sales and purchases are conducted within China in RMB, which is the official currency of China. As a result, 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 the U.S. dollar 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. Although the PRC government has stated its intention to support the value of RMB, there can be no assurance that such exchange rate will not again become volatile or that RMB will not devalue significantly against the U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from our operations in China.

Interest Rate Risk. We are exposed to interest rate risk through our short-term and long-term loans. We have $100.3 million short-term bank loans and $101.0 million long-term bank loans outstanding as of June 30, 2011, and we have not used any derivative financial instruments or engaged in any interest rate hedging activities to manage our interest rate risk exposure. Our future interest expense on short-term or long-term bank loans may increase or decrease due to changes in market interest rates. We monitor interest rates in conjunction with our cash requirements to determine the appropriate level of bank loans relative to other sources of funds.

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 4. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that, as of the end of such period, our disclosure controls and procedures were effective to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

During the six months ended June 30, 2011, there were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) Not Applicable.

Item 3.

Defaults Upon Senior Securities

Not Applicable.

Item 4.

(Removed and Reserved)

Item 5.

Other Information

None.

Item 6.

Exhibits

The exhibits required by this item are set forth on the Exhibit Index attached hereto.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

Date: August 9, 2011	Zhongpin Inc.
	(Company)

	By:	/s/ Xianfu Zhu
		Xianfu Zhu
		Chief Executive Officer

	By:	/s/ Feng Wang
		Feng Wang
		Chief Financial Officer

Exhibit Index

Exhibit Number		Exhibit Title

31.1*		Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith

ZHONGPIN INC. - FORM 10-Q - August 9, 2011

Attached files

ZHONGPIN INC. Reports