GSP-2, INC. - FORM 10-Q - November 21, 2011

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - GSP-2, INC.	Financial_Report.xls
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - GSP-2, INC.	f10q0911ex32i_gsp2.htm
EX-10.1 - ENGLISH TRANSLATION OF THE TRANSFER AGREEMENT DATED AS OF MARCH 1, 2011 BETWEEN HENGCHANG AGRICULTURE AND JILING NONGKE HIGH-TECH INDUSTRY DEVELOPEMNT CO., LTD - GSP-2, INC.	f10q0911ex10i_gsp2.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - GSP-2, INC.	f10q0911ex31i_gsp2.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - GSP-2, INC.	f10q0911ex31ii_gsp2.htm
EX-10.2 - ENGLISH TRANSLATION OF THE LINE OF CREDIT CONTRACT DATED FEBRUARY 28, 2011 BETWEEN HENGCHANG AGRICULTURE AND JILIN GONGZHULING RURAL COOPERATIVE AGRICULTURAL CREDIT UNION BANK - GSP-2, INC.	f10q0911ex10ii_gsp2.htm
EX-10.3 - LINE OF CREDIT CONTRACT DATED MARCH 28, 2011 BETWEEN HENGCHANG AGRICULTURE AND CHINA CONSTRUCTION BANK - GSP-2, INC.	f10q0911ex10iii_gsp2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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

For the transition period from to

Commission File Number: 000-27195

GSP-2, INC.

(Exact name of registrant as specified in its charter)

Nevada		27-3120288
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Gongzhuling State Agriculture Science and Technology Park, location of 998 kilometers, Line 102, Gongzhuling city, Jilin province, China		N/A
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (86) 4346278415

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, and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨

Accelerated Filer ¨

Non-Accelerated Filer ¨

Smaller Reporting Company x

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

There were 13,800,000 shares of the Registrant’s Common Stock outstanding at November 18, 2011.

GSP-2, INC. AND SUBSIDIARIES

FORM 10-Q

September 30, 2011

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010 (Audited)	1
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)	2
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)	2
	Notes to Unaudited Consolidated Financial Statements.	4

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	20
Item 3	Quantitative and Qualitative Disclosures About Market Risk.	31
Item 4	Controls and Procedures.	32
PART II - OTHER INFORMATION

Item 5	Other Information
Item 6.	Exhibits.	33

CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements ” Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on February 11, 2011, as amended by Amendment No. 1 on Form 8-K/A filed with the SEC on March 31, 2011, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and in other filings that we make with the SEC. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Report.

PART 1— FINANCIAL INFORMATION

Item 1.

Financial Statements.

GSP-2 INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

	September 30		December 31
	2011		2010
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	14,624,060	$	12,867,137
Restricted cash		-		109
Accounts receivable		20,105,837		15,617,336
Advance payments to suppliers		13,668,130		-
Prepaid taxes		-		440,477
Inventories		14,942,455		6,510,886
Biological assets		323,464		-
Prepaid expenses and other assets		644,578		22,818

Total Current Assets		64,308,524		35,458,763

PROPERTY AND EQUIPMENT - net		12,777,530		8,786,661

OTHER ASSETS:
Loan receivable		-		6,049,790
Investment in related party company		156,206		-
Land use rights, net		12,977,904		2,674,006

Total Other Assets		13,134,110		8,723,796

Total Assets	$	90,220,164	$	52,969,220

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable - current portion	$	15,620,607	$	-
Accounts payable		1,350,300		6,029,060
Facility and land use right payable		16,033,643		-
Advances from customers		12,258,470		7,957,658
Other Payable		270,147		94,620
Taxes Payable		675,911		-
Due to related parties		4,088,264		4,222,574

Total Current Liabilities		50,297,342		18,303,912

LOANS PAYABLE, net of current portion		-		1,512,447

Total Liabilities		50,297,342		19,816,359

SHAREHOLDERS' EQUITY:

Preferred stock ($0.001 par value; 10,000,000 shares authorized, none issued
and outstanding)		-		-
Common Stock ($0.001 par value, 100,000,000 shares authorized, 13,800,000 and 12,800,000
shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively)		13,800		12,800
Additional paid-in capital		8,731,420		5,658,339
Retained earnings		28,363,794		25,856,413
Statutory reserves		347,445		342,957
Accumulated other comprehensive income - foreign currency translation adjustment		2,466,363		1,282,352

Total Shareholders' Equity		39,922,822		33,152,861

Total Liabilities and Shareholders' Equity	$	90,220,164	$	52,969,220

See notes to consolidated financial statements

GSP-2 INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER30, 2011 and 2010
(Unaudited)

	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2011			2010			2011			2010
REVENUES	$	27,789,275		$	3,854,803		$	46,804,017		$	44,218,895

COST OF REVENUES		25,979,766			3,779,021			42,430,937			39,431,508

GROSS PROFIT		1,809,509			75,782			4,373,080			4,787,387

OPERATING EXPENSES:
Selling		174,849			18,379			342,652			2,458,258
General and administrative		294,618			62,399			833,674			319,913
Total Operating Expenses		469,467			80,778			1,176,326			2,778,171

INCOME (LOSS) FROM OPERATIONS		1,340,042			(4,996	)		3,196,754			2,009,216

OTHER INCOME (EXPENSES):
Interest income		385			16			20,501			420
Interest expense		(239,337	)		(36,564	)		(682,121	)		(101,097	)
Other income (expense)		(10,273	)		2,217			(12,046	)		3,567
Total Other Expenses		(249,225	)		(34,331	)		(673,666	)		(97,110	)

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		1,090,817			(39,327	)		2,523,088			1,912,106

PROVISION FOR INCOME TAXES		11,220			-			11,220			-

NET INCOME (LOSS)	$	1,079,597		$	(39,327	)	$	2,511,868		$	1,912,106

COMPREHENSIVE INCOME:
NET INCOME (LOSS)	$	1,079,597		$	(39,327	)	$	2,511,868		$	1,912,106

OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain		404,437			397,430			1,184,012			445,486
COMPREHENSIVE INCOME	$	1,484,034		$	358,103		$	3,695,880		$	2,357,592

EARNINGS PER SHARES:

Basic and diluted	$	0.08		$	(0.00	)	$	0.18		$	0.15

WEIGHTED AVERAGE NUMBER OF SHARES:

Basic and diluted		13,800,000			12,800,000			13,649,817			12,800,000

See notes to consolidated financial statements

GSP-2 INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 and 2010
(Unaudited)

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,511,868		$	1,912,106
Adjustments to reconcile net income to net cash
Used in operating activities:
Depreciation		390,478			320,976
Amortization of land use rights		61,181			52,331
Changes in operating assets and liabilities:
Accounts receivable		(4,230,796	)		7,497,100
Prepaid taxes		447,639			815,220
Inventories		(5,012,278	)		8,061,248
Prepaid and other current assets		(611,065	)		(418,427	)
Advance payments to suppliers		(13,449,200	)		-
Accounts payable		(2,696,667	)		316,972
Other payable		29,479			(8,958	)
VAT and service taxes payable		665,085			503,640
Advances from customers		3,975,068			(25,990,252	)

NET CASH USED IN OPERATING ACTIVITIES		(17,919,208	)		(6,938,044	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Receipt from collections of loans receivable		3,074,080			17,604,600
Increase in loan receivable		-			(5,868,200	)
Investments in related party company		(153,704	)		-
Purchase of property and equipment		(315,611	)		(105,770	)
Purchase of land use rights		(153,704	)		(246,934	)

NET CASH PROVIDED BY INVESTING ACTIVITIES		2,451,061			11,383,696

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable		40,270,458			1,467,050
Proceeds from capital contribution		3,074,081			-
Payments of loans payable		(26,437,094	)		-
Payments to related party advances		(125,955	)
Proceeds from related party advances		-			1,070,284

NET CASH PROVIDED BY FINANCING ACTIVITIES		16,781,490			2,537,334

EFFECT OF EXCHANGE RATE ON CASH		443,579			222,676

NET INCREASE IN CASH		1,756,922			7,205,662

CASH - beginning of period		12,867,137			4,783,680

CASH - end of the period	$	14,624,059		$	11,989,342

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	682,121		$	101,097
Income taxes	$	-		$	-
Non-cash investing and fiancing activites:
Receipt of inventory to offset loan receivable	$	3,074,081		$	2,003,040
Receipt of biological assets to offset accounts receivable	$	318,283			-
Acquisition of property and related land use right and
construction in progress for payable	$	13,678,220		$	-

See notes to consolidated financial statements

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 –

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

GSP-2, Inc. (the “Company”) was incorporated under the laws of the State of Nevada on December 31, 2009 as a blank check development stage company formed for the purpose of acquiring an operating business, through a merger, stock exchange, asset acquisition or similar business combination. On February 11, 2011, the Company completed the reverse acquisition of Shiny Gold Holdings Limited (“Shiny Gold”) through a share exchange transaction (the “Share Exchange”) whereby the Company acquired all of the issued and outstanding ordinary shares of Shiny Gold in exchange for 12,800,000 shares of our common stock, which shares constituted approximately 92.8% of our issued and outstanding shares, as of and immediately after the consummation of the Share Exchange. As a result of the Share Exchange, Shiny Gold became the Company’s wholly owned subsidiary and the former shareholders of Shiny Gold became the Company’s controlling stockholders. The Share Exchange was treated as a reverse acquisition, with Shiny Gold as the acquirer and the Company as the acquired party. Through its affiliated companies and subsidiaries, the Company is now a China-based agriculture company which engages in research and genetic development of corn seed, cultivation, production, purchasing, storage, and distribution of corn and other agriculture products. The Company sells high quality agricultural products as raw materials for commercial livestock feeding and other renewable energy uses.

Shiny Gold was formed under the laws of the British Virgin Islands on May 20, 2010. Shiny Gold owns all of the share capital of Heng Chang HK Produce (HK) Investments, Ltd., a Hong Kong company (“Heng Chang HK”). Heng Chang HK owns all of the share capital of Siping Hengchang Business Consultants Co., Ltd. (“Hengchang Business Consultants”), a wholly foreign owned enterprise located in the PRC. On February 10, 2011, Hengchang Business Consultants entered into a series of agreements (the “Contractual Arrangements”) with each of Jilin Hengchang Agriculture Development Co., Ltd. (“Hengchang Agriculture”) and Jilin Hengjiu Grain Purchase and Storage Co., Ltd. (“Hengjiu”) (together, the “Operating Companies”) and their respective shareholders. The following is a summary of each of the Contractual Arrangements:

●

Exclusive Business Cooperation Agreement. Pursuant to the Exclusive Business Cooperation Agreement between the Operating Companies and Hengchang Business Consultants, Hengchang Business Consultants provides the Operating Companies with exclusive technical, consulting and other services in relation to the principal business of the Operating Companies. In consideration, the Operating Companies pay Hengchang Business Consultants fees equal to 100% of the Operating Companies’ net income, subject to certain adjustments.

●

Shareholders’ Equity Interest Pledge Agreement. Pursuant to the Shareholders’ Equity Interest Pledge Agreement between Hengchang Business Consultants, the Operating Companies and the shareholders of the Operating Companies, the Operating Companies’ shareholders agreed to pledge all of their current and future equity interests in the Operating Companies as security for payment of the consulting and service fees by the Operating Companies under the Exclusive Business Cooperation Agreement.

●

Exclusive Option Agreement. Under the Exclusive Option Agreement between Hengchang Business Consultants, the Operating Companies and the shareholders of the Operating Companies, the Operating Companies shareholders granted to Hengchang Business Consultants an irrevocable and exclusive right to purchase, or designate one or more persons to purchase all or part of the equity interest held by the shareholders in the Operating Companies to the extent that such purchase does not violate any PRC law or regulations then in effect. Hengchang Business Consultants and the Operating Companies shareholders shall enter into further agreements based on the circumstances of the exercise of the option, including price.

●

Power of Attorney. Under the Power of Attorney executed by the shareholders of the Operating Companies, the Operating Companies’ shareholders irrevocably and exclusively appointed Hengchang Business Consultants as their exclusive agent with respect to all matters concerning the shareholders, including but not limited to: 1) attending the Operating Companies’ shareholder meetings; 2) exercising all of the shareholders’ rights and voting rights; and 3) designating and appointing on behalf of the shareholders the legal representative, executive director and other senior management members of the Operating Companies.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 –

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Hengchang Agriculture is a Chinese limited liability company and was formed under laws of the People’s Republic of China (the “PRC”) on September 9, 2004 under the name of Jilin Hengchang Foodstuff Purchasing and Storage Co. Ltd. (“Hengchang Purchasing”) with registered capital of RMB 5.0 million (approximately $729,000). On August 12, 2010, pursuant to the Limited Liability Corporation Modification Registration Application filed with the Siping City Administration for Industry & Commerce, Hengchang Purchasing’s name was changed to Hengchang Agriculture. Hengchang Agriculture is primarily engaged in the business of development, purchasing and distribution of agricultural products including corn, soybean, and crop seeds. .

Hengjiu is a PRC limited liability company formed under laws of the PRC on August 10, 2009 with a registered capital of RMB 1.0 million (approximately $146,000). In July 2011, the registered capital of Hengjiu was increased from RMB 1.0 million (approximately $146,000) to RMB 21.0 million (approximately $3.1 million). The increased registered capital was contributed from Yushan Wei, Chief Executive Officer and Chairman of the Company, and Yufeng Wei, Chief Operating Officer of the Company, for RMB 10.7 million (approximately $1.6 million) and RMB 10.0 million (approximately $1.5 million), respectively. Hengjiu is primarily engaged in the grain storage business.

Hengchang Agriculture’s Chairman of the Board of Directors and 52% majority shareholder, Mr. Yushan Wei is also Hengjiu’s Chairman of the Board of Directors and principal shareholder. Almost all of Hengjiu’s assets are used in Hengchang’s business operations and controlled and managed by Mr. Wei. Shiny Gold controls and receives the economic benefits of the Operating Companies’ business operations through the Contractual Arrangements, but does not own any equity interests in the Operating Companies. In addition, as a result of the Contractual Arrangements, the Operating Companies are deemed to be Shiny Gold’s variable interest entities and, accordingly, Shiny Gold consolidates the Operating Companies’ results, assets and liabilities into its financial statements.

Basis of presentation

Management acknowledges its responsibility for the preparation of the accompanying financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the years presented. The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). This basis differs from that used in the statutory accounts of our subsidiaries in China, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with U.S. GAAP.

The Company’s consolidated financial statements include the accounts of its affiliate, Hengjiu, which is under common control with Hengchang Agriculture. All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 8K/A report for the year ended December 31, 2010.

The accompanying unaudited condensed consolidated financial statements for GSP-2, Inc., its subsidiaries and variable interest entities, have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Shiny Gold, Heng Chang HK and Hengchang Business Consultants, as well as the financial statements of Hengchang Agriculture and Hengjiu. All significant intercompany accounts and transactions have been eliminated in consolidation.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 –

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates.

Fair value of financial instruments

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses, and amounts due to related parties approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any non-financial assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with the accounting guidance.

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

Cash and cash equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions in the PRC. Balances in banks in the PRC are uninsured.

Concentrations of credit risk

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s cash is maintained with state-owned banks within the PRC of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company's sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 –

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounts receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At September 30, 2011 and December 31, 2010, the Company does not, based on a review of its outstanding balances, have any allowance for doubtful accounts.

Advance payments to suppliers

Advance payments to suppliers represent the cash paid in advance for purchasing of inventory items from suppliers. The advance payments are meant to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $13,668,130 and $0 at September 30, 2011 and December 31, 2010, respectively.

Inventories

Inventories, consisting of raw materials and finished goods, which primarily consists of corn are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. The Company does not have any inventory reserve at September 30, 2011 and December 31, 2010.

Biological assets

Biological assets are purchased male and female lines of parent corn seeds for cross-pollinating. Management believes the parent will produce seed products which when sold to their customers, will allow the Company’s customers to grow faster and better quality crops. The Company has contracted to have a third party using the purchased parent corn seeds to grow hybrid seed products. The costs to purchase and ship these seeds to the third party are capitalized as biological assets until they become commercially viable. The third party is responsible for growing hybrid seed products and all other costs including labor to cultivate the seedlings, fertilizer and other products used to grow the seedlings and resulting plants and sell the hybrid seed products to the Company at harvest. The cost of the parent corn seeds and the cost of purchasing the hybrid seed products will be allocated into inventory when the Company receives the commercially viable seed products. If management determines that biological assets are not growing in accordance to desired results, at such time, management impairs the biological assets to the extent that desired results are not achieved. As of September 30, 2011 and December 31, 2010, the biological assets were $323,464 and $0, respectively.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Additions and major replacements and improvements to plant and equipment accounts are recorded at cost. The cost of repairs and maintenance is expensed as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Included in property and equipment is construction-in-progress which consists of leasehold improvements and equipment pending installation and includes the costs of construction and installation and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use. Depreciation is computed using the straight-line method (after taking into account their respective estimated residual value) over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 –

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

	Useful Life	Residual
Buildings and building improvements	8 – 20 Years		5	%
Manufacturing equipment	5 – 10 Years		5	%
Office equipment and furniture	4 – 10 Years		5	%
Vehicles	4 – 10 Years		5	%

Land use rights, net

All land in the PRC is owned by the PRC government and cannot be sold to any individual or company. The Company has recorded the amounts paid to the PRC government to acquire long-term interests to utilize land underlying the Company’s facilities as land use rights. This type of arrangement is common for the use of land in the PRC. Land use rights are amortized on the straight-line method over the terms of the land use rights.

Impairment of long-lived assets

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charges for the period ended September 30, 2011 and 2010.

Income taxes

The Company is governed by the Income Tax Law of the People’s Republic of China. The Company accounts for income taxes using the liability method prescribed by ASC 740 “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

Pursuant to accounting standards related to the accounting for uncertainty in income taxes, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.

Advances from customers

Advances from customers consist of prepayments from customers for merchandise that had not yet been shipped. The Company recognizes the deposits as revenue as customers take delivery of the goods, in accordance with its revenue recognition policy. At September 30, 2011 and December 31, 2010, advances from customers amounted to $12,258,470 and $ 7,957,658 respectively.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 –

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company derives its revenue primarily from the sale of corn crop, soybean crop and branded corn seeds. The sales price of product sold is stated in the sales contract and is final and not subject to adjustment. The Company generally does not accept sales returns and does not provide customers with price protection. The Company assesses a customer’s creditworthiness before accepting sales orders. Based on the above, the Company records revenue related to product sales upon delivery of the product to the customers.

Shipping costs

Shipping costs are included in selling expenses and totaled $94,746 and $28,583 for the three months ended September 30, 2011 and 2010, respectively, and $203,474 and $2,314,292 for the nine months ended September 30, 2011 and 2010, respectively.

Variable Interest Entities

Pursuant to Accounting Standards Codification, we are required to include in our consolidated financial statements the financial statements of variable interest entities (“VIEs”). The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity. The Hengchang Agriculture and Hengjiu are considered VIEs, and we are the primary beneficiary.

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company is the local currency, the Chinese Renminbi (“RMB”). Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter any material transaction in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

Asset and liability accounts at September 30, 2011 and December 31, 2010 were translated at 6.4018 RMB to $1.00 and at 6.6118 RMB to $1.00, respectively. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the periods ended September 30, 2011 and 2010 were 6.50601 RMB and 6.8164 RMB to $1.00, respectively. Cash flows from the Company's operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Accumulated other comprehensive income

Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the periods ended September 30, 2011 and 2010, comprehensive income includes net income and unrealized gains from foreign currency translation adjustments.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 –

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Related parties

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

Reclassification

Certain prior year general and administrative expenses were reclassified as cost of revenues to confirm to the current year presentation. These changes had no impact on the total revenues, operating income, net income, earnings (loss) per share or the balance sheet.

Income per share of common stock

ASC 260 “Earnings Per Share,” requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of common shares issuable upon the conversion of series A preferred stock (using the if-converted method) and common stock warrants (using the treasury stock method). The following table presents a reconciliation of basic and diluted net income per share:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011		2010			2011		2010
Net income available to common shareholders for basic and diluted net income per common share	$	1,079,597	$	(39,327	)	$	2,511,868	$	1,912,106

Weighted average common shares outstanding –basic and diluted		13,800,000		12,800,000			13,649,817		12,800,000

Net income per common share – basic and diluted	$	0.08	$	0.00		$	0.18	$	0.15

For purposes of determining whether a post-balance sheet event should be evaluated to determine whether it has an effect on the financial statements for the period ending September 30, 2011, subsequent events were evaluated by the Company as of the date on which the unaudited consolidated financial statements were issued.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements

In September 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2010-25, Plan Accounting—Defined Contribution Pension Plans (Topic 962): Reporting Loans to Participants by Defined Contribution Pension Plans (“ASU 2010-25”). ASU 2010-25 clarifies how loans to participants should be classified and measured by defined contribution plans and how IFRS compare to these provisions. The amendments in this update are effective for fiscal years ending after December 15 2010. The Company’s adoption of ASU 2010-25 did not have material impact on the Company’s consolidated financial statements.

In December 2010, FASB issued ASU 2010-28, Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 modified Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. For public entities, the amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company does not expect that the adoption of ASU 2010-28 will have a material impact on the Company’s consolidated financial statements.

In December 2010, FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”). ASU 2010-29 specifies that, if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 is effective prospectively for business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company does not expect that the adoption of ASU 2010-29 will have a material impact on the Company’s consolidated financial statements.

In January 2011, FASB issued ASU 2011-01, Receivables (“Topic 310”) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (“ASU 11-01”). ASU 11-01 temporarily deferred the effective date for disclosures related to troubled debt restructurings (“TDRs”) to coincide with the effective date of the ASU, discussed below, related to troubled debt restructurings.

In April 2011, FASB issued ASU 2011-02, Receivables (“Topic 310”) - A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU 11-02”). ASU 11-02 amends the content in ASC 310 related to identifying TDRs and effectively nullifies ASU 2011-01. This ASU removes the deferral of the TDR disclosure requirements of ASU 2010-20 for public entities and thus establishes the effective date for those disclosures. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011, and is to be applied retrospectively to modifications occurring on or after the beginning of the fiscal year of adoption. Early adoption is permitted. The Company does not expect that the adoption of ASU 11-02 will have a material impact on the Company’s financial position, results of operations, or cash flows.

In May 2011, FASB issued amendments to the FASB Accounting Standard Codification (ASC) relating to fair value measurements, ASU 2011-04, Fair Value Measurement, ASC Topic 820. The amendments clarify the application of existing fair value measurement requirements and results in common measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The Company will apply these amendments prospectively beginning in the first quarter of fiscal 2012. Management does not believe that the adoption of this ASU will have a material impact on the Company’s financial position, results of operations, or cash flows.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 1 –

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In June 2011, FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220). This amendment gives an entity two options to present the total of comprehensive income, the components of net income, and the components of other comprehensive income. An entity can elect to present comprehensive income in either (1) a single continuous statement of comprehensive income, or (2) in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The Company will apply this amendment beginning in the first quarter of 2012. Management does not believe that the adoption of this ASU will have a material impact on the Company’s financial position, results of operations, or cash flows.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

NOTE 2 – ACCOUNTS RECEIVABLE

At September 30, 2011 and December 31, 2010, accounts receivable consisted of the following:

	September 30, 2011		December 31, 2010
		(Unaudited)
Accounts receivable	$	20,105,837	$	15,617,336
Less: allowance for doubtful accounts		-		-
	$	20,105,837	$	15,617,336

Included in accounts receivable is $15,218,375 and $14,738,043 at September 30, 2011 and December 31, 2010 which is due from Defeng Seed Co., Ltd. (“Defeng”) (see Note 17). These receivables are collateralized by equity interests in Defeng. At September 30, 2011 and December 31, 2010, the Company does not, based on a review of its outstanding balances, have any allowance for doubtful accounts.

NOTE 3 - INVENTORIES

At September 30, 2011 and December 31, 2010, inventories consisted of the following:

	September 30, 2011		December 31, 2010
		(Unaudited)
Packaging materials	$	140,689	$	46,810
Finished goods		14,801,766		6,464,076
		14,942,455		6,510,886
Less: reserve for obsolete inventory		-		-
	$	14,942,455	$	6,510,886

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 4 – LOAN RECEIVABLE

Loan receivable consisted of non-interest bearing loans to a third-party individual who has a personal relationship with the Company’s chief executive officer. These loans are unsecured and generally have no specific repayments terms. The Company has collected the loan receivable in full through inventory and cash collections during the nine months ended September 30, 2011. At September 30, 2011 and December 31, 2010, loans receivable consisted of the following:

	September 30, 2011		December 31, 2010
		(Unaudited)
Zhuang Weizhou	$	-	$	6,049,790

NOTE 5 – ADVANCE PAYMENTS TO SUPPLIERS

Advance payments to suppliers represent the cash paid in advance for purchasing of inventory items from suppliers. The advance payments are meant to ensure preferential pricing and delivery. At September 30, 2011 and December 31, 2010, advance payments to suppliers consisted of the following:

	September 30, 2011		December 31, 2010
	(Unaudited)
Advance payments to corn suppliers	$	6,464,155	$	-
Advance payments to corn seed suppliers		7,185,479		-
Other		18,496		-
	$	13,668,130	$	-

NOTE 6 - PROPERTY AND EQUIPMENT

At September 30, 2011 and December 31, 2010, property and equipment consist of the following:

			September 30,			December 31,
			2011			2010
	Useful Life		(Unaudited)
Office equipment and furniture	4-10 Years		$	38,017		$	35,282
Manufacturing equipment	5 - 10 Years			703,659			207,375
Vehicles	4 - 10 Years			1,175,336			840,002

Construction in progress		-		3,592,611			3,177,752
Buildings and building improvements	8 - 20 Years			8,587,068			5,419,283
				14,096,691			9,679,694
Less: accumulated depreciation				(1,319,161	)		(893,033	)
			$	12,777,530		$	8,786,661

For the nine months ended September 30, 2011 and 2010, depreciation expense amounted to $390,478 and $320,976, of which $321,824 and $247,090 is included in cost of sales, respectively. For the three months ended September 30, 2011 and 2010, depreciation expense amounted to $154,492 and $117,465, of which $128,192 and $94,417 is included in cost of sales, respectively.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 6 - PROPERTY AND EQUIPMENT (continued)

The Company entered into a construction agreement to construct a grain storage facility (“Grain Storage Construction”) in 2010. Upon completion of the construction in progress, the assets will be classified to its respective property and equipment category. Future payments under the Grain Storage Construction agreement amounted to $2,602,958. The Company expects to complete the construction in early 2012.

The Company signed an asset transfer agreement to purchase Jiling National Agriculture Technology Demonstration Park (“Demonstration Park”) for RMB 87 million (approximately $13.6 million) in March 2011 and the assets were fully transferred in August 2011. Included in the purchase price, approximately 22.2 million RMB (approximately $3.5 million) was related to the property and equipment and RMB 64.8 million was related to the land use rights (approximately $10.1 million).

NOTE 7- INVESTMENT IN RELATED PARTY COMPANY

Mr. Yushan Wei, Mr. Yufeng Wei and Hengchang Agriculture formed a PRC limited company, Jiling Hengchang Fertilizer Co., Ltd. (“Henghcang Fertilizer”), under laws of the PRC on July 11, 2011 with a registered capital RMB 5.0 million (approximately $0.8 million). Mr. Yushan Wei, Mr. Yufeng Wei, and Hengchang Agriculture contributed RMB 2.1 million (approximately $323,000), RMB 1.9 million (approximately $292,000) and RMB 1.0 million (approximately $156,000), respectively, to Hengchang Fertilizer as registered capital. As of September 30, 2011, Hengchang Fertilizer did not have any operations. The investment in Hengchang Fertilizer is recorded at cost on the accompanying balance sheet. Hengchang Agriculture intends to acquire 100% of the ownership in Hengchang Fertilizer by December 31, 2011.

NOTE 8 – LAND USE RIGHTS

There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. In 2009, the Company acquired land use rights for approximately $2,165,000 for 123,000 square meters located in Gongzhuling, Jilin, China. The Company is currently developing this land and constructing a grain storage and logistics center. In connection with the Demonstration Park purchase (see Note 6) in 2011, the Company obtained land use rights for approximately $10.1 million for 180,000 square meters located in Gongzhuling, Jilin, China. The Company’s land use rights have terms that expire in January 2058 through September 2061. The Company amortizes these land use rights over the term of the respective land use rights. The lease agreement does not have any renewal options.

At September 30, 2011 and December 31, 2010, land use rights consist of the following:

		September 30, 2011			December 31, 2010
	Useful Life	(Unaudited)
Land use rights	50 years	$	13,142,611		$	2,773,279
Less: accumulated amortization			(164,707	)		(99,273	)
		$	12,977,904		$	2,674,006

Amortization of land use rights attributable to future periods is as follows:

Twelve months ending September 30:
2012	$	262,852
2013		262,852
2014		262,852
2015		262,852
2016		262,852
Thereafter		11,663,644
	$	12,977,904

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 8 –

LAND USE RIGHTS (continued)

For the nine months ended September 30, 2011 and 2010, amortization expense amounted to $61,181 and $52,331, respectively. For the three months ended September 30, 2011 and 2010, amortization expense amounted to $31,740 and $4,655, respectively.

NOTE 9 –

ADVANCES FROM CUSTOMERS

At September 30, 2011 and December 31, 2010, advances from customers consisted of the following:

	September 30, 2011 (Unaudited)		December 31, 2010
Guangxi Zhuang Autonomous Region National Liuzhou Grain Repository	$	9,361,385	$	553,902
Nanning Grain Repository		-		7,251,012
Zhejiang Xinxin Feed Co., Ltd.		2,215,361		-
Xiamen Kangxi Group Co., Ltd.		296,885
Others		384,837		152,744
Total	$	12,258,470	$	7,957,658

NOTE 10 –

RELATED PARTY TRANSACTIONS

Due to related party

At September 30, 2011 and December 31, 2010, due to related parties consisted of the following:

	September 30, 2011 (Unaudited)		December 31, 2010
Hengchang Fertilizer	$	781,030	$	-

Wei Yushan (majority shareholder and chief executive officer)		3,307,234		4,222,574

Total	$	4,088,264	$	4,222,574

From time to time, the Company’s chief executive officer advanced funds to the Company for working capital purposes. These advances are non-interest bearing, unsecured and payable on demand. Hengchang Fertilizer advanced funds to the Company for working capital purposes, and the Company expects to repay the payable amount to Hengchang Fertilizer in full by December 2011.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 11 –

LOANS PAYABLE

At September 30, 2011 and December 31, 2010, loans payable consisted of the following:

	September 30, 2011 (Unaudited)		December 31, 2010
Loan payable to Jilin Gongzhuling Rural Cooperative Bank, due on October 27, 2012 with annual interest at the banks base interest rate plus 80% (10.5 % at December 31, 2010 ) secured by assets of the Company.	$	-	$	1,512,447

Loan payable to Jilin Gongzhuling Rural Cooperative Bank Nanweizi Branch, due on July, 2012 with annual interest at the banks base interest rate plus 50% (9.84% at September 30, 2011) secured by assets of the Company.		3,124,122		-

Loan payable to China Construction Bank, due in April 2012 with annual interest at the banks base interest rate plus 30% (8.53% at September 30, 2011 ) secured by assets of the Company.		12,496,485		-

	$	15,620,607	$	1,512,447

The Company has a credit line facility with the availability to borrow up to RMB 20 million (approximately $3.1 million) through February 2014 with Jilin Gongzhuling Rural Cooperative Bank Nanweizi Branch (the “Cooperative Line”). Under the Cooperative Line, each borrowing cannot be less than RMB 5.0 million (approximately $0.8 million) and the loan cannot be repaid within 120 days or outstanding for longer than 12 months. The Company also has a credit line facility with the availability to borrow up to RMB 80 million (approximately $12.5 million) through April 2012 with China Construction Bank. At September 30, 2011, the Company has drawn the maximum amount available under the two credit line facilities.

NOTE 12 – FACILITY AND LAND USE RIGHTS PAYABLE

At September 30, 2011, facility and land use rights payable was related to the Grain Storage Construction and Demonstration Park purchase (Note 6). In according to the construction process, accrued payable under the Grain Storage Construction amounted to $2,443,382. The Company expects to pay for the Grain Storage Construction in full after its completion in early 2011. The payable amount related to the Demonstration Park agreement was $13,590,261. Accordingly to the Demonstration Park agreement, the Company was obligated to pay the purchase price in October 2011. The Company has obtained a verbal agreement with the seller to extend the payment date to December 2011.

NOTE 13 – INCOME TAXES

The Company accounts for income taxes pursuant to the accounting standards that requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets is dependent upon future earnings, if any, of which the timing and amount are uncertain.

Under the Income Tax Laws of PRC, Chinese companies are generally subject to an income tax at an effective rate of 25%, on income reported in the statutory financial statements after appropriate tax adjustments. The PRC local government has provided various incentives to companies in order to encourage economic development. Such incentives include reduced tax rates and other measures. Hengjiu is not subject to any tax incentives. Hengchang Agriculture has a status as an agricultural preliminary processor pursuant to the PRC tax code, and Hengchang Agriculture is exempt from income tax.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 13 – INCOME TAXES (continued)

The table below summarizes the reconciliation of the Company’s unaudited income tax provision (benefit) computed at the China statutory rate and the actual tax provision:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011			2010		2011			2010
Income tax provision at China statutory rate of 25%	$	304,983		$	-	$	713,420		$	478,027
Permanent difference - China tax exemption		(293,763	)		-		(702,200	)		(478,027	)
Total provision for income tax	$	11,220		$	-	$	11,220		$	-
Basic and diluted net income per share effect	$	0.02		$	0.00	$	0.04		$	0.04

NOTE 14 – STOCKHOLDERS’ EQUITY

Recapitalization

On February 11, 2011, pursuant to a Share Exchange Agreement (See Note 1), the Company issued 12,800,000 ordinary shares to the shareholders of Shiny Gold, their designees or assigns in exchange for all of the issued and outstanding capital stock of Shiny Gold. Following the Share Exchange, there are 13,800,000 Ordinary Shares of the Company issued and outstanding.

NOTE 15 – STATUTORY RESERVES

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with PRC Corporation Law. Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC Company Law until the reserve is equal to 50% of the entities’ registered capital or members’ equity. Hengchang Agriculture did not make any such appropriation for the nine months ended September 30, 2011 and 2010 since the reserve balance as of December 31, 2009 reached 50% of its registered capital. Hengjiu made $4,488 and $0 as statutory reserves for the nine months ended September 30, 2011 and 2010, respectively. The accumulated balance of the statutory reserve of the Company as of September 30, 2011 and December 31, 2010 was $347,445 and $342,957, respectively.

In accordance with the PRC laws and regulations, the Company is restricted in their ability to transfer a portion of its net assets to the Company’s owner in the form of dividends. This portion $347,445 and $342,957 as of September 30, 2011 and December 31, 2010, respectively, represents the accumulated balance of statutory reserve maintained by the Company.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 16 – CONCENTRATION AND CREDIT RISKS

As of September 30, 2011 and December 31, 2010, the Company held cash in the PRC banks of $14,624,060 and $12,867,137, respectively that is uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits only with financial institutions in the PRC with acceptable credit rating.

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Customers

Three customers and two customers accounted for approximately 100% of the Company’s revenue during the three months periods ended September 30, 2011 and 2010. Three customers and two customers accounted approximately 100% of the Company’s revenue during the nine month periods ended September 30, 2011 and 2010. At September 30, 2011 and December 31, 2010, these customers represented 24.3% and 0% of the Company's total accounts receivable as of September 30, 2011 and December 31, 2010, respectively.

Suppliers

Four suppliers accounted approximately for 84.8% and 76.9% during the three month and nine month periods ended September 30, 2011 respectively, the Company’s purchases. The Company did not have any supplier accounted for more than 10% of its total purchase during the three month and nine month periods ended September 30, 2010. The Company did not have accounts payable as of September 30, 2011 and December 31, 2010 to these suppliers.

NOTE 17 – COMMITMENETS AND CONTINGENCIES

Agreement

On January 31, 2011, the Company entered into an agreement with the shareholders of Jilin Defeng Seed Co, Ltd. (“Defeng”), a Chinese limited liability company formed under laws of the PRC on September 29, 2003. Pursuant to the Agreement, within 12 months after the execution of this Agreement, the Company shall have the option to purchase a 70% equity interest in Defeng through the issuance of additional shares of stock of Defeng, and the shareholders of Defeng will retain a 30% equity interest in Defeng. Within 12 months after the execution of this Agreement, if the Company exercises its option to purchase the 70% equity interest in Defeng, it shall contribute certain land use right and real property rights related to the land locating at the east of 7th Road of the Linxi Development Zone, the total value of which are approximately 40,000,000 RMB (approximately $5,800,000), and 30,000,000 RMB (approximately $4,400,000) in cash as its investment into Defeng. The shareholders of Defeng shall use Defeng’s existing fixed assets and intangible assets (including but not limited to Seed Property Rights, Operating Rights and Sales Network), the total value of which are approximately 30,000,000 RMB (approximately $4,400,000) as its investment into Defeng. The registered capital of Defeng is currently RMB 30,000,000 and the shareholders of Defeng hold 100% equity interest in Defeng. After the Company’s investment into Defeng, the total registered capital of Defeng will be increased up to RMB 100,000,000 (approximately $14,700,000) of which the Company and the shareholders of Defeng shall maintain 70% and 30% respectively. Defeng is engaged in the production of crossbred corn and the wholesale sale of crop seeds.

In 2009, in accordance with a Seed Purchase Agreement between the Company and Defeng dated on April 5, 2009, the Company was entrusted by Defeng to plant main crop parental seeds. Under such arrangement, Defeng sells parental seeds to the Company at an agreed price; the Company arranges the planting of these seeds in accordance with plans formulated by Defeng and the Company sells all seeds produced to Defeng at an agreed price. Under PRC law, production of main crop parental seeds requires the Seed Production License, which may be obtained by the entity that entrusts the seeds production or the entity that is entrusted to conduct the production. Defeng has one Seed Production License. The Company entered into crop seed production contracts with local farmers. According to these contracts, the local farmers use the rented land to plant seeds and they provide all seeds planted and cultivated to the Company. The Company pays the local farmers contract fees and provides the local farmers with fertilizer and the parental seeds.

GSP-2, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

NOTE 17 – COMMITMENETS AND CONTINGENCIES (continued)

Cooperatives

In July 2011, seven PRC individuals and Hengchang Agriculture formed Jiling Hengchang Planting Specialty Cooperative (“Hengchang Planting”) in Jinling province, P.R.C. Hengchang Planting is an agricultural cooperative association owned by its member-growers for the purpose of pooling its member’s farming material purchases, providing and developing member’s farming equipments and technology, and selling members’ crop products. The total registered capital of Hengchang Planting is RMB 1.0 million (approximately $154,000) and Hengchang Planting has not received the registered capital. Hengchang Agriculture will contribute to Hengchang Planting RMB 200,000 (approximately $31,000) as registered capital. Hengchang Planting did not have operations at September 30, 2011.

In July 2011, seven PRC individuals and Hengchang Agriculture formed Jiling Hengchang Mechanized Planting Specialty Cooperative (“Hengchang Mechanized Planting”) in Jinling province, P.R.C. Hengchang Mechanized Planting is an agricultural cooperative association owned by its member-growers for the purpose of pooling its member’s farming material purchases and providing and developing member’s mechanized farming equipments and technology. The total registered capital of Hengchang Mechanized Planting is RMB 2.0 million (approximately $308,000) and Hengchang Mechanized Planting has not received the registered capital. Hengchang Agriculture will contribute to Hengchang Planting RMB 600,000 (approximately $93,000) as registered capital. Hengchang Mechanized Planting did not have operations at September 30, 2011.

NOTE 18 – SUBSEQUENT EVENTS

The Company evaluates subsequent events for purposes of recognition or disclosure in the financial statements up through the date the financial statements are issued. No subsequent event items were identity after the date of these financial statements and through the date the financial statements were available to be issued.

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of GSP-2, Inc. and its consolidated subsidiaries. In addition, unless the context otherwise requires and for the purposes of this Report only:

●	“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

●	“Heng Chang HK” refers to Heng Chang HK Produce (HK) Investments, Ltd., a Hong Kong company;

●	“Hengchang Agriculture” refers to Jilin Hengchang Agriculture Development Co., Ltd., a PRC company;

●	“Hengchang Business Consultants” refers to Siping Hengchang Business Consultants Co., Ltd., a PRC company;

●	“Hengjiu” refers to Jilin Hengjiu Grain Purchase and Storage Co., Ltd., a PRC company;

●	“Operating Companies” refers to Hengchang Agriculture and Hengjiu;

●	“PRC” refers to the People’s Republic of China; and

●	“Shiny Gold” refers to Shiny Gold Holdings Limited, a British Virgin Islands company.

The following discussion and analysis of the results of operations and financial condition of the Company for the nine months ended September 30, 2011 and 2010 should be read in conjunction with the Company’s unaudited consolidated financial statements and related footnotes thereto contained herein. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Cautionary Note Regarding Forward-Looking Statements.”

Overview

We were incorporated under the laws of the State of Nevada on December 31, 2009 as a blank check development stage company formed for the purpose of acquiring an operating business, through a merger, stock exchange, asset acquisition or similar business combination. On February 11, 2011, we completed the reverse acquisition of Shiny Gold through a share exchange transaction (the “Share Exchange”) whereby the Company acquired all of the issued and outstanding ordinary shares of Shiny Gold in exchange for 12,800,000 shares of our common stock, which shares constituted approximately 92.8% of our issued and outstanding shares, as of and immediately after the consummation of the Share Exchange. As a result of the Share Exchange, Shiny Gold became the Company’s wholly owned subsidiary and the former shareholders of Shiny Gold became the Company’s controlling stockholders. The Share Exchange with Shiny Gold was treated as a reverse acquisition, with Shiny Gold as the acquirer and the Company as the acquired party. Through its affiliated companies and subsidiaries, the Company is now a China-based agriculture company which engages in research and genetic development of corn seed, cultivation, production, purchasing, storage, and distribution of corn and other agriculture products. The Company sells high quality agricultural products as raw materials for commercial livestock feeding and other renewable energy uses.

Shiny Gold was formed under the laws of the British Virgin Islands on May 20, 2010. Shiny Gold owns all of the share capital of Heng Chang HK. Heng Chang HK owns all of the share capital of Hengchang Business Consultants, a wholly foreign owned enterprise located in the PRC. On February 10, 2011, Hengchang Business Consultants entered into a series of agreements (the “Contractual Arrangements”) with each of Hengchang Agriculture and Hengjiu and their respective shareholders. Hengchang Agriculture’s Chairman of the Board of Directors and 52% majority shareholder, Mr. Wei Yushan is also Hengjiu’s Chairman of the Board of Directors and principal shareholder. Almost all of Hengjiu’s assets are used in Hengchang’s business operations and controlled and managed by Mr. Wei. As a result of the Share Exchange, we control and receive the economic benefits of the Operating Companies’ business operations through the Contractual Arrangements, but we do not own any equity interests in the Operating Companies. In addition, as a result of the Contractual Arrangements, the Operating Companies are deemed to be our variable interest entities and, accordingly, we consolidate the Operating Companies’ results, assets and liabilities into our financial statements.

Critical Accounting Policies and Estimates

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements for the periods ended September 30, 2011 and 2010, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, and income taxes. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

Accounts Receivable

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable and other receivables to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

As a basis for accurately estimating the likelihood of collection, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories

Inventories, consisting of raw materials, work in process and finished goods related to our products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Additions and major replacements and improvements to plant and equipment accounts are recorded at cost. The cost of repairs and maintenance is expensed as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Included in property and equipment is construction-in-progress which consists of leasehold improvements and equipment pending installation and includes the costs of construction and installation and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use. Depreciation is computed using the straight-line method (after taking into account their respective estimated residual value) over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

	Useful Life
Building and building improvements	8 – 20 Years
Manufacturing equipment	5 – 10 Years
Office equipment and furniture	3 – 10 Years
Vehicles	4 – 10 Years

Land Use Rights

Revenue Recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. We derive our revenue primarily from the sale of corn crop, soybean crop and branded corn seeds.

The sales price of product sold is stated in the sales contract and is final and not subject to adjustment. The Company generally does not accept sales returns and does not provide customers with price protection. We assess a customer’s creditworthiness before accepting sales orders. Based on the above, we record revenue related to product sales upon delivery of the product to the customers.

Research and Development

Research and development costs are expensed as incurred. These costs primarily consist of fees paid to third parties and cost of material used and salaries paid for the development of our products.

Income Taxes

We are governed by the Income Tax Law of the People’s Republic of China. We account for income taxes using the liability method prescribed by ASC 740 “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence; it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

Variable Interest Entities

Foreign Currency Translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company is the local currency, the Chinese Renminbi (“RMB”). Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company’s revenue transactions are transacted in the functional currency. We do not enter any material transaction in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

Accumulated Other Comprehensive Income

Recent Accounting Pronouncements

The following table sets forth the results of our operations for the periods indicated as a percentage of net revenues (dollars in thousands):

	Three Months Ended											Nine Months Ended
	September 30,											September 30,
	2011		% of Revenue			2010			% of Revenue			2011		% of Revenue			2010		% of Revenue
Net revenues	$	27,789		100.0	%	$	3,855			100.0	%	$	46,804		100.00	%	$	44,219		100.0	%
Cost of revenues		25,980		93.5	%		3,779			98.0	%		42,431		90.7	%		39,432		89.2	%
Gross profit		1,810		6.5	%		76			2.0	%		4,373		9.3	%		4,787		10.8	%
Operating expenses		469		1.7	%		81			2.1	%		1,176		2.5	%		2,778		6.3	%
Income from operations		1,340		4.8	%		(5)			(0.1	)%		3,197		6.8	%		2,009		4.5	%
Other income (expenses), net		(249)		(0.9	)%		(34)			(0.9	)%		(674)		(1.4)	%		(97)		(0.2)	%
Income before provision for income taxes		1,091		3.9	%		(39)			(1.0	)%		2,523		5.4	%		1,912		4.3	%
Provision for income taxes		12		-	%		-			-	%		12		-	%		-		-	%
Net income		1,080		3.9	%		(39	)		(1.0	)%		2,512		5.4	%		1,912		4.3	%
Other comprehensive income: Foreign currency translation adjustments		405		1.5	%		397			10.3	%		1,184		2.5	%		445		1.0	%
Comprehensive income	$	1,484		5.3	%	$	358			9.3	%	$	3,696		7.9	%	$	2,358		5.3	%

Results of Operations for the three and nine months ended September 30, 2011 and 2010

Revenues. For the three months ended September 30, 2011, we had net revenues of $27,789,275, as compared to net revenues of $3,854,803 for the three months ended September 30, 2010, an increase of $23,934,472 or 620.9%. For the nine months ended September 30, 2011, we had net revenues of $46,804,017, as compared to net revenues of $44,218,895 for the nine months ended September 30, 2010, an increase of $2,585,122 or 5.8%. For the three months and nine months ended September 30, 2011 and 2010, the Company generated 100% of its revenue from its corn product line.

For the three months ended September 30, 2011, we sold approximately 89,514 metric tons of corn compared to 16,060 metric tons in the three months ended September 30, 2010, an increase of approximately 73,454 metric tons or 457.4%. For the nine months ended September 30, 2011, we sold approximately 150,365 metric tons of corn compared to 178,489 metric tons for the nine months ended September 30, 2010, a decrease of approximately 28,124 metric tons or 15.8%. For the three months and nine months ended September 30, 2011, the average sales price of corn was approximately $310.4 and $311.3 per metric ton, respectively, as compared to the average sale price of approximately $240.0 and $247.7 per metric ton for the three months and nine months ended September 30, 2010, respectively.

The increase in revenue for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010 was attributable to the increase in sales volume and sales price. In fiscal 2011, a greater proportion of our customers required us to deliver products in the third quarter of 2011 as compared to the same period in prior year. In 2010, the majority of product deliveries to a major customer were made in the second quarter of 2010.

The increase in revenue for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 was attributable to the 25.6% increase in the sales price and partially offset by the 15.8% decrease in sales volume. Our major sales contracts were signed later in 2011 as compared to 2010; the corn delivery dates for those contracts in 2011 are more concentrated in the third and fourth quarter of 2011 and, as a result, our sales to the customers in 2011 are spread out more evenly over the third and fourth quarter in 2011. As such, there was a decrease in sales volume for the nine months ended September 30, 2011 as compared to the same period in the prior year.

For the three and nine months periods ended September 30, 2011, our sales were concentrated on three customers, Guangxi National Granary Reserves/Grain Storage Center, Liuzhou Grain Storage Center and Huanglong Food Industry Co., Ltd. For the three and nine months periods ended September 30, 2010, we primarily sold to Guangxi National Granary Reserves and Naning Grain Storage Center, Liuzhou Grain Storage Center. Due to inflation in China, general agriculture products prices such as corn prices have continued rising in 2011 and we expect the trend will continue. Likewise, since corn is the major animal feed in China, we expect the demand for our corn product will continue to rise as meat consumption in China continues to increase.

In 2009, in accordance with a Seed Purchase Agreement between us and Jilin Defeng Seed Co, Ltd. (“Defeng”) dated on April 5, 2009, we were entrusted by Defeng to plant main crop parental seeds. Under such arrangement, Defeng sells parental seeds to us at an agreed price; we arrange the planting of these seeds in accordance with plans formulated by Defeng and we sell all seeds produced to Defeng at an agreed price. Under PRC law, production of main crop parental seeds requires the Seed Production License, which may be obtained by the entity that entrusts the seeds production or the entity that is entrusted to conduct the production. Defeng has one Seed Production License. We enter into crop seed production contracts with contractors that in turn contract farmers and utilize farmers’ leased land. According to these contracts, the contractors will manage farmers using the leased land to plant seeds and they provide all seeds planted and cultivated to us. We provide the local farmers with the parental seeds. For the three and nine months period ended September 30, 2011 and 2010, we did not generate any revenue from the corn seed business line.

Cost of sales. Cost of sales increased by $22,200,745, or 587.5%, from $3,779,021 for the three months ended September 30, 2010 to $25,979,766 for the three months ended September 30, 2011. Cost of sales increased by $2,999,429 or 7.6%, from $39,431,508 for the nine months ended September 30, 2010 to $42,430,937 for the nine months ended September 30, 2011. For the three months ended September 30, 2011 as compared to the same period in the prior year, the increase was attributable to the increase in our sales volume and the corn unit purchase price. For the nine months ended September 30, 2011 as compared to the same period in the prior year, the increase was attributable to the increase in the corn unit purchase price. Due to inflation and increasing demand in animal feed in China, we expect the cost of corn price will continue to increase. Likewise, since corn is the major animal feed in China, we expect the demand for our corn product will continue to rise as meat consumption in China continues to increase.

Gross profit and gross margin. Our gross profit was $1,809,509 for the three months ended September 30, 2011 as compared to $75,782 for the three months ended September 30, 2010, representing gross margins of 6.5% and 2.0%, respectively. Our gross profit was $4,373,080 for the nine months ended September 30, 2011 as compared to $4,787,387 for the nine months ended September 30, 2010, representing gross margins of 9.3% and 10.8%, respectively. The increase in our gross margin percentage for the three months ended September 30, 2011 was mainly attributable a higher gross margin recognized from the sale of corn in 2011 as a result of the increase in the corn unit selling price in 2011. Gross margin percentage was higher for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2011 because in 2010 we increased our selling price to cover shipping and freight expenses we paid on behalf of our customers. In 2011, our customers paid such expenses directly to the shipper and we lowered our selling price accordingly. In the future, responsibility for shipping and freight fees will depend upon the contract terms negotiated with our customers.

Selling expenses. Selling expenses were $174,849 for the three months ended September 30, 2011 and $18,379 for the comparable period in 2010, an increase of $156,470 or 851.4%. Selling expenses were $342,652 for the nine months ended September 30, 2011 and $2,458,258 for the comparable period in 2010, a decrease of $2,115,606 or 86.1%. Selling expenses consisted of the following (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Shipping and handling	$	96	$	6	$	206	$	2,293
Diesel, travel and transportation		59		9		102		54
Other		20		3		35		111
	$	175	$	18	$	343	$	2,458

For the three months ended September 30, 2011, shipping and handling increased by $90,000 or 1500.0% as compared to the same period in 2010. The increase in shipping and handling expenses was attributable to the increase in sales volume during the three months ended September 30, 2011 as compared to the same period in the prior year. For the nine months ended September 30, 2011, shipping and freight decreased by $2,087,000 or 91.0% as compared to the same period in 2010. In 2011, majority of our customers paid the shipping and freight charges directly to the shipper. During the first six months of 2010, we incurred these shipping and freight expenses and increased out selling price to cover these costs for our largest customer. Whether the shipping and freight fees will be paid by us might vary depends on the contract terms we have with our customers in the future.

For the three months ended September 30, 2011, diesel fuel, travel and transportation expenses increased by $50,000 or 555.6% as compared to the same period in 2010. The Company had more fuel, travel, and transportation expenses in the third quarter of 2011 as more sales activities incurred as compared to the third quarter of 2010. For the nine months ended September 30, 2011, diesel, travel and transportation expenses increased by $48,000 or 88.9% as compared to the same period in 2010. The increase in 2011 was primarily due to more diesel fuel, travel, transportation incurred in the third quarter of 2011.

For the three months ended September 30, 2011, other expenses increased by $17,000 or 566.7% as compared to the same period in prior year. The increase was primarily due to an increase in insurance expenses as the Company elected to increase its insurance coverage on its storage facility in 2011 . For the nine months ended September 30, 2011, other selling expenses were decreased by $76,000 or 68.5%. The decrease was primarily attributable to the decrease in storage expenses in 2011 as the Company utilized its own storage facility more and reduced the storage rental needs in 2011. Other selling expenses include insurance expense, maintenance fee and other miscellaneous expenses and may vary year by year depending on specific situations.

General and administrative expenses. General and administrative expenses amounted to $294,618 for the three months ended September 30, 2011, as compared to $62,399 for the comparable 2010 period, an increase of $232,219 or 372.2%. General and administrative expenses amounted to $833,674 for the nine months ended September 30, 2011, as compared to $319,913 for the comparable 2010 period, an increase of $513,761 or 160.6%. General and administrative expenses consisted of the following (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Compensation and related benefits	$	106	$	3	$	288	$	115
Professional fees		120		-		287		2
Depreciation and amortization		44		23		85		74
Travel and entertainment		8		5		24		23
Other		17		31		150		106
	$	295	$	62	$	834	$	320

For the three months ended September 30, 2011, compensation and related benefits increased by $103,000 or 3433.3% as compared to the comparable 2010 period. For the nine months ended September 30, 2011, compensation and related benefits increased by $173,000 or 150.4% as compared to the comparable 2010 period. The increase was primarily because we signed employment contracts with our Chief Executive Officer and Chief Operating Officer and started accounting fixed salaries for to our executive management in 2011. We also engage four Directors of the Board in the third quarter of 2011 and, accordingly, we incurred directors fees in the third quarter of 2011.

For the three months ended September 30, 2011, professional fees increased by $120,000 or 100% as compared to the comparable 2010 period. For the nine months ended September 30, 2011, professional fees increased by $285,000 or 14250% as compared to the comparable 2010 period. In February 2011, we acquired Shiny Gold through the Share Exchange and incurred additional audit and legal fees for the transaction. As a public reporting company, we will incur audit, legal and other consulting fees on a regular basis.

For the three months ended September 30, 2011, depreciation and amortization expenses increased by $21,000 or 91.3% as compared to the comparable 2010 period. For the nine months ended September 30, 2011, depreciation and amortization expenses increased by $11,000 or 14.9% as compared to the comparable 2010 period. The increase was primarily attributable to more property and equipments be depreciated and land used right being amortized in 2011.

Travel and entertainment expenses were materially consistent for the three and nine months periods ended September 30, 2011 and 2010.

For the three months ended September 30, 2011, other general and administrative expenses decreased by $14,000 or 45.2% as compared to the comparable 2010 period. The decrease in the third quarter of 2011 as compared to the third quarter of 2010 was primarily due to decrease in miscellaneous expenses in 2011. For the nine months ended September 30, 2011, other expenses increased by $44,000 or 41.5% as compared to the comparable 2010 period. The increase was primarily due to increase in repair fees and other office expenses paid in 2011.

Income (loss) from operations. For the three months ended September 30, 2011, income from operations was $1,340,042 as compared to loss from operations of $4,996 for the comparable period in 2010, an increase of $1,345,038. For the nine months ended September 30, 2011, income from operations was $3,196,755 as compared to $2,009,216 for comparable period in 2010, an increase of $1,187,539 or 59.1%. The increase was attributable to increase in revenue.

Other expenses. For the three months ended September 30, 2011, other expenses amounted to $249,225 as compared to other expenses of $34,331 for the three months ended September 30, 2010, an increase of $214,894 or 625.9%. For the nine months ended September 30, 2011, other expenses amounted to $673,666 as compared to other expenses of $97,110 for the nine months ended September 30, 2010, an increase of $576,556 or 593.7%. The increase in other expenses was primarily related to an increase in loan interest expense of $202,773 or 554.6% and $581,024 or 574.7% for the three and nine months ended September 30, 2011, respectively, as compared to the same period in 2010. In 2011 and 2010, pursuant to loan agreements, the Company borrowed approximately $15,620,000 and $1,512,000, respectively, for the purchase of corn inventory from local growers.

Income tax expense. The PRC local government has provided various incentives to companies in order to encourage economic development. Such incentives include reduced tax rates and other measures. Hengchang is qualified as an agricultural preliminary processor pursuant to the PRC tax code and exempt from the income tax. The estimated tax savings due to the tax exemption for the three months periods ended September 30, 2011 and 2010 amounted to $293,763 and $0, respectively. The estimated tax savings due to the tax exemption for the nine months periods ended September 30, 2011 and 2010 amounted to $702,200 and $478,027, respectively.

Net income (expense). As a result of the factors described above, our net income for the three months periods ended September 30, 2011 and 2010 was $1,079,597 and $(39,327), respectively, an increase of $1,118,924. Our net income for the nine months periods ended September 30, 2011 and 2010 was $2,511,868 and $1,912,106, respectively, an increase of $599,762 or 31.4%.

Foreign currency translation gain. Our functional currency is the Chinese Yuan or Renminbi (“RMB”). Our financial statements are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $404,437 and $397,430 for the three months ended September 30, 2011 and 2010, respectively. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $1,184,012 and $445,486 for the nine months ended September 30, 2011 and 2010, respectively. This non-cash gain had the effect of increasing our reported comprehensive income.

Comprehensive income. For the three months ended September 30, 2011 and 2010, comprehensive income amounted to $1,484,034 and $358,103, respectively were derived from the sum of our net income of $1,079,597 plus foreign currency translation gains of $404,437 in 2011 and net loss of $39,327 plus foreign currency translation gains of $397,430 in 2010, respectively. For the nine months ended September 30, 2011 and 2010, comprehensive income amounted to $3,695,880 and $2,357,592, respectively were derived from the sum of our net income of $2,511,868 plus foreign currency translation gains of $1,184,012 in 2011 and net income of $1,912,106 plus foreign currency translation gains of $445,486 in 2010, respectively.

Liquidity and Capital Resources

At September 30, 2011, our balance of cash was $14,624,060 comparing to $12,867,137 as of December 31, 2010. These funds were located in financial institutions located in China.

Our primary uses of cash have been for the purchase of corn from local farmers, purchases of property and equipments, construction of our corn storage facility and the acquisition of the related land use rights. Additionally, we use cash for employee compensation, and for working capital. Substantially all funds received have been expended in the furtherance of growing the business. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:

●	An increase in working capital requirements to finance higher level of inventories,

●	Addition of management, administrative and sales personnel as the business grows,

●	Increases in advertising, public relations and sales promotions for existing and new brands as the company expands within existing markets or enters new markets,

●	Development of new products in the seed industry to complement our current products,

●	The cost of being a public company and the continued increase in costs due to governmental compliance activities, and

●	Capital expenditures for additional farming machine and equipment purchases and land use right acquisition.

Changes in our working capital position are summarized as follows (dollars in thousands):

	September 30,			December 31,			Increased (Decrease)
	2011			2010			Working Capital
		(Unaudited)
Current assets		$	64,309		$	35,459	$	28,850
Current liability			50,297			18,304		31,993
Working Capital		$	14,012		$	17,155	$	(3,143	)

Our working capital decreased approximately $3,143, 000 primarily attributable to:

●	An increase in facility and land use right payable of approximately $16,034,000 for the purposes of acquiring facility and land use right.
●	An increase in loans payable- current portion of approximately $15,621,000 for the purposes of purchasing corn inventory from local growers.

●	An increase in taxes payable of approximately $676,000.

●	An increase in advances from customers of approximately $4,301,000. Advances from customers consist of prepayments from customers for merchandise that had not yet been shipped. We recognize the advances as revenue as customers take delivery of the goods, in accordance with our revenue recognition policy. related to the sale of our products,

Offset by:

●	a net increase in cash and restricted cash of approximately $1,757,000

●	a net increase in advance payments to suppliers of approximately $13,668,000

●	a net increase in inventories of approximately $8,432,000

●	a net increase in accounts receivable of approximately $4,489,000

●	a net increase in prepaid expenses and other assets of approximately $622,000
●	A decrease in accounts payable of $4,679, 000.

We require capital to purchase corn inventory and fund our working capital needs. For the nine months ended September 30, 2011 and 2010, pursuant to loan agreements, we borrowed approximately $15,621,000 and $1,512,000, respectively, for the purchase of corn inventory from local growers. Amounts borrowed under these short-term loan agreements accrued interest at rates ranged from 8.20% to 9.8% per annum in 2011 and 7.3% to 10.5% in 2010, respectively, and were repaid during the respective fiscal years.

We signed an asset transfer agreement to purchase Jiling National Agriculture Technology Demonstration Park (“Demonstration Park”) for RMB 87 million (approximately $13.6 million) in March 2011 and the assets were fully transferred in August 2011. Included in the purchase price, approximately 22.2 million RMB (approximately $3.5 million) was related to the property and equipment and RMB 64.8 million was related to the land use rights (approximately $10.1 million). We were obligated to pay the purchase price in October 2011. However, we have obtained a verbal agreement with the seller to extend the payment date to December 2011.

At September 30, 2011 and December 31, 2010, loans payable consisted of the followings (dollars in thousands):

	September 30, 2011 (Unaudited)		December 31, 2010
Loan payable to Jilin Gongzhuling Rural Cooperative Bank, due on October 27, 2012 with annual interest at the banks base interest rate plus 80% (10.53 % at December 31, 2010 ) secured by assets of the Company.	$	-	$	1,512,447

Loan payable to Jilin Gongzhuling Rural Cooperative Bank Nanweizi Branch, due on July, 2012 with annual interest at the banks base interest rate plus 50% (9.84% at September 30, 2011) secured by assets of the Company.		3,124,122		-

Loan payable to China Construction Bank, due in April 2012 with annual interest at the banks base interest rate plus 30% (8.53% at September 30, 2011 ) secured by assets of the Company.		12,496,485		-

	$	15,620,607	$	1,512,447

On January 31, 2011, we entered into an agreement with the shareholders of Jilin Defeng Seed Co, Ltd. (“Defeng”) , a Chinese limited liability company formed under laws of the PRC on September 29, 2003. Pursuant to the Agreement, within 12 months after the execution of this Agreement, we shall have the option to purchase a 70% equity interest in Defeng through the issuance of additional shares of stock of Defeng, and the shareholders of Defeng will retain a 30% equity interest in Defeng. Within 12 months after the execution of this Agreement, if we exercise our option to purchase the 70% equity interest in Defeng, we shall contribute certain land use right and real property rights related to the land locating at the east of 7 th Road of the Linxi Development Zone, the total value of which are approximately RMB 40,000,000 (approximately $5,900,000), and RMB 30,000,000 (approximately $4,400,000) in cash as our investment into Defeng. The shareholders of Defeng shall use Defeng’s existing fixed assets and intangible assets (including but not limited to Seed Property Rights, Operating Rights and Sales Network), the total value of which are approximately RMB30,000,000 (approximately $4,400,000) as its investment into Defeng. The registered capital of Defeng is currently RMB 30,000,000 and the shareholders of Defeng hold 100% equity interest in Defeng. After the Company’s investment into Defeng, the total registered capital of Defeng will be increased up to RMB 100,000,000, (approximately $14,700,000) of which we and the shareholders of Defeng shall maintain 70% and 30% respectively. Defeng is engaged in the production of crossbred corn and the wholesale and sale of crop seeds.

We believe that our current levels of cash, cash flows from operations, and bank/related party borrowings, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need additional cash resources in the future if we experience changed business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, the acquisition of Defeng and other acquisitions, strategic cooperation or other similar actions. If we ever determine that our cash requirements exceed our amounts of cash and cash equivalents on hand, we may seek to issue debt or equity securities or obtain a credit facility. Any future issuance of equity securities could cause dilution for our shareholders. Any incurrence of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating and financial covenants. It is possible that, when we need additional cash resources, financing will only be available to us in amounts or on terms that would not be acceptable to us, if at all.

Cash flows from the Company's operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

The following summarizes the key components of the Company’s cash flows for the nine months ended September 30, 2011 and 2010 ( dollars in thousands):

	September 30,			September 30,
	2011			2010
		(Unaudited)
Net cash used in operating activities	$	(17,919	)	$	(6,938	)
Cash flows provided by investing activities	$	2,451		$	11,384
Cash flows provided by financing activities	$	16,781		$	2,537
Effect of exchange rate on cash	$	444		$	223
Net increase in cash and cash equivalents	$	1,757		$	7,206

Net cash flow used in operating activities was $17,919,208 for the nine months ended September 30, 2011 as compared to net cash flow used by operating activities of $6,938,044 for the nine months ended September 30, 2010.

Net cash flow used by operating activities for the nine months ended September 30, 2011 was mainly due to

●	Changes in operating assets and liabilities consisting primarily of an increase in accounts receivable of $4,230,796, an increase in inventories of $5,012,278, and increase in prepaid and other current assets of $611,065, an increase in advance payments to suppliers of $13,449,200, and a decrease in accounts payable of $2,696,667
●	Offset by net income of $2,511,868, adjusted for the add back of non-cash items such as $390,478 of depreciation and the amortization of land use rights of $61,181, an decrease in prepaid taxes of $447,639, an increase in VAT and service taxes payable of $665,085, and a decrease in advances from customers of $3,975,068

Net cash flow used in operating activities for the nine months ended September 30, 2010 was primarily attributable to

●

Changes in operating assets and liabilities consisting primarily of a decrease in advances from customers of $25,990,252 and an increase in prepaid and other current assets of $418,427 offset by a decrease in accounts receivable of $7,497,100, a decrease in prepaid taxes of $815,220, a decrease in inventories of $8,061,248, an increase in accounts payable of $316,972, and an increase in VAT and service taxes payable of $503,640.

●	Offset by net income of $1,912,106, adjusted for the add back of non-cash items such as $320,976 of depreciation and the amortization of land use rights of $52,331.

Net cash flow provided by investing activities was $2,451,061 for the nine months ended September 30, 2011 as compared to $11,383,696 for the comparable 2010 period. During the nine months ended September 30, 2011, we collected loans receivable of $3,074,080 and make payments for the purchase of property and equipment and land use rights of $469,315. Additionally, we also invested in a related party company for $153,704. During the nine months ended September 30, 2010, we collected loans receivable of $17,604,600, and make payments for loan receivable of $5,868,200 and for the purchase of property and equipment and land use rights of $352,704.

Net cash flow provided by financing activities was $16,781,489 for the nine months ended September 30, 2011; we received proceeds from bank loan of $40,270,458, and offset by the payment of loans of $26,437,094. We also received capital contributions of $3,074,081 from our CEO and COO. Additionally, we also made payments for related party advances of $125,955. Net cash flow provided by financing activities was $2,537,334 for the nine months ended September 30, 2010. During the nine months ended September 30, 2010, we received proceeds from loans of $1,467,050 and received proceeds from related party advances of $1,070,284.

Contractual Obligations

The following tables summarize our contractual obligations as of September 30, 2011, and the effects of these obligations are expected to have on our liquidity and cash flows in future periods (dollars in thousands).

			Payment Due by period
	Total		Less than 1 year		1-3 Years		3-5 Years		5 Years +
Contractual obligations:
Loan payable current portion (1)	$	15,621		15,621		-		-		-

Facility and land use right	$	13,590		13,590
Construction and equipment (2)	$	2,443		2,443		-		-		-
Total Contractual Obligations:	$	31,654	$	31,654	$	-	$	-	$	-

(1)	We have two credit line facilities with various terms through April 2012 to February 2014. We expect to refinance these credit line facilities upon expiration.
(2)	Represents estimates remaining construction costs to build a grain storage facility.

Pursuant to PRC regulations, our PRC subsidiaries and VIEs require government approval in order to transfer assets, including cash, outside of the PRC, and certain transfers may be subject to a 10% tax. As a result, the net assets of our PRC subsidiaries and VIEs are treated as restricted assets. As of September 30, 2011 and December 31, 2010, the Company’s restricted net assets were approximately $39,923,000 and $33,153,000, respectively.

Off-balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Foreign Currency Exchange Rate Risk

We produce and sell almost all of our products in China. Thus, most of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the three months ended September 30, 2011 and 2010, we had unrealized foreign currency translation gain of $404,437 and $397,430, because of the change in the exchange rate. For the nine months ended September 30, 2011 and 2010, we had unrealized foreign currency translation gain of $1,184,012 and $445,486, because of the change in the exchange rate.

Related Party Transactions

From time to time, the Company’s chief executive officer advanced funds to the Company for working capital purposes. These advances are non-interest bearing, unsecured and payable on demand. At September 30, 2011 and December 31, 2010, due to related parties consisted of the following (dollars in thousands):

Due to related party

From time to time, the Company’s chief executive officer advanced funds to the Company for working capital purposes. These advances are non-interest bearing, unsecured and payable on demand. At September 30, 2011 and December 31, 2010, due to related parties consisted of the following:

	September 30, 2011 (Unaudited)		December 31, 2010
Hengchang Fertilizer	$	781,030	$	-

Wei Yushan (majority shareholder and chief executive officer)		3,307,234		4,222,574

Total	$	4,088,264	$	4,222,574

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Not required for smaller reporting companies.

Item 4.

Controls and Procedures.

Our chief executive officer and chief financial officer, Yushan Wei evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2011.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and chief financial officer. Based on that evaluation, our chief executive officer and chief financial officer Mr. Wei concluded that because of the significant deficiencies in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of June 30, 2011.

As of September 30, 2011, management identified significant deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) a lack of segregation of duties within accounting functions.

In order to correct the foregoing deficiencies, we have taken the following remediation measures:

●	We have engaged an outside consulting firm to help us on U.S. GAAP reporting compliance. We are also actively seeking qualified accountant with U.S. GAAP experience to oversee and manage our financial reporting process and the required training of our accounting staff.

●	We are currently evaluating the need for the establishment of effective internal audit functions, however, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we might decide to outsource the function to an outside party.

●

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible and we have not been able to take steps to improve our internal controls over financial reporting. We, however, expect to take steps to implement this plan during the next 12 months.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 5.	Other Information
As discussed elsewhere in this Report, we signed an asset transfer agreement to purchase Demonstration Park for RMB 87 million (approximately $13.6 million) in March 2011 and the assets were fully transferred in August 2011. Included in the purchase price, approximately 22.2 million RMB (approximately $3.5 million) was related to the property and equipment and RMB 64.8 million was related to the land use rights (approximately $10.1 million). We were obligated to pay the purchase price in October 2011. However, we have obtained a verbal agreement with the seller to extend the payment date to December 2011.

Item 6.	Exhibits.

Exhibit Number		Description
10.1		English Translation of the Transfer Agreement dated as of March 1, 2011 between Hengchang Agriculture and Jiling Nongke High-tech Industry Developemnt Co., Ltd.
10.2		English Translation of the Line of Credit Contract dated February 28, 2011 between Hengchang Agriculture and Jilin Gongzhuling Rural Cooperative Bank Nanweizi Branch
10.3		English Translation of the Line of Credit Contract dated March 28, 2011 between Hengchang Agriculture and China Construction Bank
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	+	XBRL Instance Document
101.SCH	+	XBRL Taxonomy Schema
101.CAL	+	XBRL Taxonomy Calculation Linkbase
101.DEF	+	XBRL Taxonomy Definition Linkbase
101.LAB	+	XBRL Taxonomy Label Linkbase
101.PRE	+	XBRL Taxonomy Presentation Linkbase

* Furnished herewith.

+ XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GSP-2, INC.

Date: November 21, 2011	By:	/s/ Yushan Wei
		Yushan Wei Chief Executive Officer, Chief Financial Officer
		and Principal Accounting Officer

	GSP-2, INC.

Date:November 21, 2011	By:	/s/ Yuejun Li
		Yuejun Li Chief Financial Officer and Principal Accounting Officer

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