0001144204-11-045064.txt : 20110809 0001144204-11-045064.hdr.sgml : 20110809 20110809172802 ACCESSION NUMBER: 0001144204-11-045064 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20110630 FILED AS OF DATE: 20110809 DATE AS OF CHANGE: 20110809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AgFeed Industries, Inc. CENTRAL INDEX KEY: 0001331427 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - LIVESTOCK & ANIMAL SPECIALTIES [0200] IRS NUMBER: 202597168 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33674 FILM NUMBER: 111022018 BUSINESS ADDRESS: STREET 1: 100 BLUEGRASS COMMONS BLVD. STREET 2: SUITE 310 CITY: HENDERSONVILLE STATE: TN ZIP: 37075 BUSINESS PHONE: 86-791-6669093 MAIL ADDRESS: STREET 1: 100 BLUEGRASS COMMONS BLVD. STREET 2: SUITE 310 CITY: HENDERSONVILLE STATE: TN ZIP: 37075 FORMER COMPANY: FORMER CONFORMED NAME: Agfeed Industries, Inc DATE OF NAME CHANGE: 20061122 FORMER COMPANY: FORMER CONFORMED NAME: Wallace Mountain Resources Corp. DATE OF NAME CHANGE: 20050627 10-Q 1 v229416_10q.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 
x
Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011

¨
Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______

001-33674
(Commission file number)

AGFEED INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Nevada
  
20-2597168
(State or other jurisdiction of incorporation
or organization)
  
(I.R.S. Employer Identification No.)
     
100 Bluegrass Commons Blvd.
Suite 310
Hendersonville, Tennessee
  
37075
(Address of principal executive offices)
  
(Zip Code)

(917) 804-3584
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 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 ¨  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 x
Non-accelerated filer ¨
Smaller reporting company¨
(Do not check if a smaller reporting company)

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

On August 9, 2011, 63,941,163 shares of the registrant's common stock were outstanding.

 
 
 

TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION
3
Item 1.
Financial Statements
3
Reclassifications
13
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
43
Item 4.
Controls and Procedures
44
Part II.
OTHER INFORMATION
44
Item 1.
Legal Proceedings
44
Item 1A.
Risk Factors
44
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
45
Item 3.
Defaults Upon Senior Securities
45
Item 4.
(Removed and Reserved)
45
Item 5.
Other Information
45
Item 6.
Exhibits
45
SIGNATURES
46

 
2
 

PART I – FINANCIAL INFORMATION

Item 1. 
Financial Statements

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2011 AND DECEMBER 31, 2010

   
2011
    
2010
  
   
(unaudited)
        
ASSETS
  
             
CURRENT ASSETS:
            
Cash and cash equivalents
   $ 10,758,836     $ 12,399,916  
Accounts receivable, net of allowance for doubtful accounts
    of $7,044,767 and $707,968
     13,230,158       21,841,442  
Advances to suppliers
     37,969       1,676,593  
Inventory
     87,942,225       81,379,649  
Prepaid expenses and other current assets
     3,275,227       2,242,807  
Deferred tax asset
     83,685       83,685  
Assets of discontinued operations
     -       6,293,524  
                 
 Total current assets
     115,328,100       125,917,616  
                 
 PROPERTY AND EQUIPMENT, net
     76,748,174       63,631,224  
 INTANGIBLE ASSETS, net
     5,439,708       5,783,102  
 GOODWILL
     22,801,262       22,365,414  
 DEFERRED TAX ASSET
     2,502,836       2,329,548  
 OTHER ASSETS
     2,114,750       3,467,758  
                 
 TOTAL ASSETS
   $ 224,934,830     $ 223,494,662  
                 
LIABILITIES AND EQUITY
  
                 
 CURRENT LIABILITIES:
                
 Short-term loan
   $ -     $ 4,551,000  
 Line of credit
     48,535,609       -  
 Accounts payable
     7,429,565       8,783,569  
 Other payables
     3,146,624       3,736,931  
 Unearned revenue
     15,602       489,241  
 Accrued expenses
     11,311,639       6,142,747  
 Accrued payroll
     1,154,654       1,163,504  
 Tax and welfare payable
     1,078,320       1,893,727  
 Interest payable
     18,408       121,392  
 Current portion of long-term debt
     1,718,108       1,703,658  
 Convertible notes, net of discount of $10,864
     -       989,136  
 Liabilities of discontinued operations
     97,446       1,595,805  
                 
 Total current liabilities
     74,505,975       31,170,710  
                 
 ACQUISITION NOTE PAYABLE
     9,621,434       9,621,434  
 LINE OF CREDIT
     -       42,231,176  
 LONG-TERM DEBT
     13,852,537       15,024,666  
                 
 TOTAL LIABILITIES
     97,979,946       98,047,986  
                 
 COMMITMENTS AND CONTINGENCIES (Note 11)
     -       -  
                 
 EQUITY:
                
    AgFeed stockholders' equity:
                
Common stock, $0.001 per share; 75,000,000 shares authorized;
    63,818,757 issued and 63,432,062 outstanding at June 30, 2011
    51,756,907 issued and 51,370,212 outstanding at December 31, 2010
     63,819       51,758  
 Additional paid-in capital
     142,581,263       125,788,151  
 Accumulated other comprehensive income
     10,356,717       8,120,628  
 Statutory reserve
     5,644,967       5,621,937  
 Treasury stock (386,695 shares)
     (1,858,942 )     (1,858,942 )
 Accumulated deficit
     (29,879,113 )     (12,430,229 )
 Total AgFeed stockholders' equity
     126,908,711       125,293,303  
    Noncontrolling interest
     46,173       153,373  
 Total equity
     126,954,884       125,446,676  
                 
 TOTAL LIABILITIES AND EQUITY
   $ 224,934,830     $ 223,494,662  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
3
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
 
   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
   
(unaudited)
    
(unaudited)
    
(unaudited)
    
(unaudited)
  
                         
Revenues
  
$
85,397,972
    
$
33,760,376
    
$
178,385,171
    
$
80,250,232
  
                                 
Cost of goods sold
    
77,311,556
      
30,223,994
      
162,418,653
      
70,841,813
  
                                 
Gross profit
    
8,086,416
      
3,536,382
      
15,966,518
      
9,408,419
  
                                 
Operating expenses
                                
Selling expenses
    
1,086,305
      
975,823
      
2,072,968
      
1,993,987
  
General and administrative expenses
    
6,187,232
      
3,642,078
      
11,343,437
      
7,085,249
  
Receivable credit and collection losses
    
14,265,222
      
-
      
15,484,448
      
-
  
Total operating expenses
    
21,538,759
      
4,617,901
      
28,900,853
      
9,079,236
  
                                 
Income (loss) from operations
    
(13,452,343
)
    
(1,081,519
)
    
(12,934,335
)
    
329,183
  
                                 
Non-operating income (expense):
                                
Other income (expense)
    
(38,522
)
    
177,453
      
(41,238
)
    
252,611
  
Interest income
    
7,671
      
36,951 
      
22,393
      
84,284
  
Interest and financing costs
    
(995,837
)
    
(139,930
)
    
(1,910,796
)
    
(264,841
)
Foreign currency transaction loss
    
(4,467
)
    
(34,364
)
    
(14,595
)
    
(20,561
)
                                 
Total non-operating income (expense)
    
(1,031,155
)
    
40,110
      
(1,944,236
)
    
51,493
  
                                 
Loss from operations before income taxes
    
(14,483,498
)
    
(1,041,409
)
    
(14,878,571
)
    
380,676
  
                                 
Income tax expense (benefit)
    
(304,244
)
    
641,139
      
234,495
      
1,094,719
  
                                 
Loss from continuing operations
    
(14,179,254
)
    
(1,682,548
)
    
(15,113,066
)
    
(714,043
)
                                 
Discontinued operations:
                                
Income (loss) from discontinued operations (including loss
                                
  on disposal of $830,200 in 2011)
    
(1,744,242
)
    
(1,382,165
)
    
(2,425,287
)
    
(1,339,446
)
                                 
Net loss
    
(15,923,496
)
    
(3,064,713
)
    
(17,538,353
)
    
(2,053,489
)
                                 
Less: Net loss attributed to noncontrolling interest
    
(48,466
)
    
(109,961
)
    
(112,499
)
    
(166,155
)
                                 
Net loss attributed to AgFeed
  
$
(15,875,030
)
  
$
(2,954,752
)
  
$
(17,425,854
)
  
$
(1,887,334
)
                                 
                                 
                                 
Comprehensive loss
                                
     Net loss
  
$
(15,923,496
)
  
$
(3,064,713
)
  
$
(17,538,353
)
  
$
(2,053,489
)
     Foreign currency translation gain
    
1,462,945
      
298,682
      
2,241,388
      
299,446
  
                                 
Comprehensive loss
  
$
(14,460,551
)
  
$
(2,766,031
)
  
$
(15,296,965
)
  
$
(1,754,043
)
                                 
Weighted average shares outstanding :
                                
Basic
    
60,500,355
      
45,015,351
      
56,964,030
      
44,942,821
  
Diluted
    
60,500,355
      
45,015,351
      
56,964,030
      
44,942,821
  
                                 
Basic loss per share attributed to AgFeed common stockholders:
                                
Continuing operations
  
$
(0.23
)
  
$
(0.03
)
  
$
(0.27
)
  
$
(0.01
)
Discontinued operations
    
(0.03
)
  
$
(0.03
)
    
(0.04
)
  
$
(0.03
)
   
$
(0.26
)
  
$
(0.07
)
  
$
(0.31
)
  
$
(0.04
)
                                 
Diluted loss per share attributed to AgFeed common stockholders:
                                
Continuing operations
  
$
(0.23
)
  
$
(0.03
)
  
$
(0.27
)
  
$
(0.01
)
Discontinued operations
    
(0.03
)
  
$
(0.03
)
    
(0.04
)
  
$
(0.03
)
   
$
(0.26
)
  
$
(0.07
)
  
$
(0.31
)
  
$
(0.04
)
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
 
   
2011
    
2010
  
   
(unaudited)
    
(unaudited)
  
             
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net loss
  
$
(17,538,353
)
  
$
(2,053,489
)
Adjustments to reconcile net loss
                
to net cash used in operating activities:
                
Depreciation
    
2,743,997
      
1,575,933
  
Amortization of intangible assets
    
365,906
      
43,410
  
Loss on sale/disposal of assets
    
1,460,937
      
1,321,838
  
Receivable credit and collection losses
    
15,484,448
      
-
  
Stock based compensation
    
14,470
      
150,562
  
Issuance of common stock for services
    
770,986
      
751,440
  
Amortization of debt issuance costs
    
4,617
      
14,921
  
Amortization of discount on convertible debt
    
10,864
      
35,114
  
Change in working capital components
                
Accounts receivable
    
(5,849,266
)
    
(2,945,382
)
Other receivables
    
-
      
618,255
  
Inventory
    
(2,972,764
)
    
(3,340,955
)
Advances to suppliers
    
1,713,581
      
885,238
  
Prepaid expenses
    
(246,045
)
    
(59,691
)
Deferred taxes
    
(173,288
)
    
-
  
Other assets
    
1,821,147
      
-
  
Accounts payable
    
(2,281,079
)
    
610,581
  
Other payables
    
(1,318,111
)
    
(137,439
)
Unearned revenue
    
(560,326
)
    
(254,731
)
Accrued expenses
    
3,997,211
      
58,106
  
Accrued payroll
    
(77,073
)
    
(243,862
)
Tax and welfare payable
    
(841,248
)
    
74,277
  
Interest payable
    
(103,198
)
    
35,195
  
                 
Net cash used in operating activities
    
(3,572,587
)
    
(2,860,679
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Purchase of property and equipment
    
(14,729,771
)
    
(10,759,297
)
Proceeds from the sale of assets
    
315,114
      
-
  
                 
Net cash used in investing activities
    
(14,414,657
)
    
(10,759,297
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from the sale of common stock
    
16,592,625
      
-
  
Borrowings under line of credit facility, net
    
6,304,433
      
-
  
Payment on convertible notes
    
(1,000,000
)
    
-
  
Payment on note payable
    
(1,157,679
)
    
-
  
Payment on short-term loan
    
(4,587,000
)
    
-
  
Capital contributed by noncontrolling interest
    
-
      
401,282
  
Purchase of noncontrolling interest in majority owed hog farms
    
-
      
(406,103
)
                 
Net cash provided by (used in) financing activities
    
16,152,379
      
(4,821
)
                 
Effect of exchange rate changes on cash and cash equivalents
    
193,785
      
72,133
  
                 
NET DECREASE IN CASH & CASH EQUIVALENTS
    
(1,641,080
)
    
(13,552,664
)
                 
CASH & CASH EQUIVALENTS, BEGINNING BALANCE
    
12,399,916
      
37,580,154
  
                 
CASH & CASH EQUIVALENTS, ENDING BALANCE
  
$
10,758,836
    
$
24,027,490
  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Interest paid, net of amounts capitalized
  
$
 1,998,299    
$
204,969
  
Income taxes paid
  
$
 1,136,283    
$
492,843
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Note 1 - Organization and Basis of Presentation

The unaudited consolidated financial statements were prepared by AgFeed Industries, Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  The results for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Organization and Lines of Business

AgFeed Industries, Inc. (the “Company” or “AgFeed”) was incorporated in the State of Nevada on March 30, 2005. The Company is engaged in the animal nutrition business and commercial hog production business in the United States and China through its operating subsidiaries.
 
The Company’s animal nutrition business consists of the manufacture, marketing and sale of premix, concentrate and complete feed for use in the Chinese animal husbandry markets almost exclusively for hog production. Premix is an animal feed additive that is used in commercial animal production worldwide. The Company has been almost exclusively in the premix feed business since 1995 and now operates five premix, concentrate and complete feed manufacturing facilities located in the cities of Nanchang, Shandong, Shanghai, Nanning, and Hainan. The Company is expanding its concentrate and complete feed lines to meet the growing demand of commercial producers as they modernize their production technology and focus on the requirements of the food safety laws.
 
The Company entered the hog breeding and production business in China in November 2007. In this business, the Company mainly produces hogs for processing and sell breeding stock. The Company currently has two breeder farms and 21 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces.  The Company has almost finished construction of its western style hog farm in the Guangxi province and has just begun construction of another western style hog farm in the Jiangxi province.
 
The Company entered the hog breeding and production business in the United States in September 2010 with the acquisition of M2 P2, LLC (“M2P2”).  M2P2 operates hog farms and facilities in Colorado, Oklahoma, North Carolina and Iowa.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of AgFeed Industries, Inc. and its wholly-owned and majority-owned subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“US GAAP”). The Company’s Chinese subsidiaries’ functional currency is the Chinese Yuan Renminbi (“RMB”) and the Company’s United States subsidiaries’ functional currency is the Unites States Dollar (“USD”).  The accompanying consolidated financial statements have been translated and presented in USD.

 
6
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Note 2 – Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Accounts Receivable

Accounts receivable are carried at original invoice less an estimate for doubtful accounts.   Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Accounts receivable are written off when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when received.

The Company’s accounts receivable and reserves for doubtful accounts are substantially representative of its credit dealings with animal nutrition customers. The Company ages its receivables into traditional 30-day buckets and monitors the customers and balances on a regular basis. Generally the Company  uses a formula-based analysis to more broadly assign collection risk to its aging groups primarily over 90 days past due, subject to specific customer review. This formula-based approach applies a declining percentage of collectability to each bucket-aging category at least 90 days past due as the past due days increase.  For the current quarter, however, the Company placed greater reliance on individual customer assessment and then applied an overall factor of collection as its believes the Company is experiencing a new set of market dynamics exacerbated by the reorganization of its animal feed nutrition segment, cash constraints of its long-standing customers related to increasing feed raw material costs and herd expansion initiatives.  The below table analyzes the change in the Company’s accounts receivable reserve from December 31, 2011 to June 30, 2011:

Balance, December 31, 2010
   $ 707,968  
         
Additions
     15,484,448  
         
Write-offs of uncollectible accounts
     (9,147,649 )
Balance, June 30, 2011    $ 7,044,767  

The increase in the accounts receivable reserve includes approximately of $9.2 million related to the collection of outstanding accounts receivable in the Company's Chinese animal nutrition business and an additional $6.3 million of bad debt allowance.   The operating pressures facing the Company's customers has led management increase accounts receivable  reserves due to concerns regarding credit quality.

Advances to Suppliers

The Company makes advances to certain vendors for purchases of material. The advances are interest free and unsecured.

 
7
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Inventory

Inventory is stated at the lower of cost, as determined primarily by the average cost method, or market. Management compares the cost of inventories with their market value, and an allowance is made for writing down the inventories to their market value, if lower. Costs of raised animals include proportionate costs of breeding, including depreciation of the breeding herd, plus the costs of maintenance through the balance sheet date. Purchased pigs are carried at purchase cost plus costs of maintenance through the balance sheet date.

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

   
June 30,
2011
    
December 31,
2010
  
             
Raw material
   $ 11,125,948     $ 11,691,635  
Work in process
     149,341       160,007  
Finished goods – feed
     53,048       810,786  
Hogs
     76,613,888       68,717,221  
Total
   $ 87,942,225     $ 81,379,649  
 
Property & Equipment

Property and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

Office equipment
1 to 5 years
Operating equipment
 1 to10 years
Vehicles
5 years
Swine for reproduction
2 to 3.5 years
Buildings
20 to 40 years

The following are the details of property and equipment at June 30, 2011 and December 31, 2010:

   
June 30,
    
December 31,
  
   
2011
    
2010
  
             
Office equipment
   $ 1,020,845     $ 983,992  
Operating equipment
     17,300,906       13,945,244  
Vehicles
     1,279,784       994,686  
Swine for reproduction
     19,857,311       10,830,812  
Land
     915,956       752,500  
Buildings
     40,497,522       29,165,246  
Construction-in-process
     4,373,390       11,888,319  
Total
     85,245,714       68,560,799  
                 
Less accumulated depreciation
     (8,497,540 )     (4,929,575 )
                 
    $ 76,748,174     $ 63,631,224  
 
Construction-in-process consists of amounts expended for construction. Once construction is completed, the cost accumulated in construction-in-process is transferred to property and equipment.

 
8
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Long-Lived Assets

The Company applies the provisions of ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets, including intangible assets. ASC Topic 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal.  The Company determined that based on the criteria above, an impairment of certain assets was necessary and accordingly recorded an impairment of approximately $9.0 million for the year ended December 31, 2010 and approximately $0.9 million for the six months ended June 30, 2011.

Intangible Assets

The following are the details of intangible assets at June 30, 2011 and December 31, 2010:

   
June 30,
    
December 31,
  
   
2011
    
2010
  
             
Right to use land
   $ 796,729     $ 781,278  
Customer relationships
     4,679,158       4,835,195  
Computer software
     509,772       478,988  
Total
     5,985,659       6,095,461  
                 
Less Accumulated amortization
     (545,951 )     (312,359 )
                 
Intangibles, net
   $ 5,439,708     $ 5,783,102  

Per the People's Republic of China's (“PRC”) governmental regulations, the PRC Government owns all Chinese land. Generally, the Company leases, through its PRC subsidiaries, land pursuant to land use contracts with the PRC government for periods of 30 to 50 years. Accordingly, the right to use land for these companies is amortized over 50 years or the lease term, if shorter.  Customer relationships is amortized over five to twelve years and the computer software is amortized over three to nine years. For hog farms, the Company generally signed land leases with original owners of the farms.

The Company follows ASC Topic 350 in accounting for intangible assets, which requires impairment losses to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the assets are less than the assets’ carrying amounts. There were no impairment losses recorded on intangible assets for the six months ended June 30, 2011 and 2010.

Goodwill

Goodwill represents the excess of purchase price over the underlying net assets of businesses acquired. Under accounting requirements, goodwill is not amortized but is subject to annual impairment tests.

The extreme operating conditions that the Company experienced during 2010 lead to a full review of its established Chinese production system (the farms acquired during 2007 and 2008).  This review has resulted in a change in the management of this farm system and an assessment that while the system can be operated profitably it cannot sustain a high enough level of profitability to support the original acquisition values and resulting goodwill.  In connection with the Company’s annual review for the year ended December 31, 2010, management determined that a write down of goodwill of $21,612,398 was necessary. The impairment was determined based on the fair value of the reporting units, which was estimated based on a discounted cash flow valuation model and the projected future cash flows of the underlying businesses.  Management determined that there were no triggering events at June 30, 2011 and deemed no additional impairment was necessary.

 
9
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Summary of changes in goodwill by reporting segments is as follows:

   
Animal
    
Hog Production
        
   
Nutrition
    
China
    
U.S. (M2P2)
    
Total
  
                         
Balance, December 31, 2010
   $ 2,437,135     $ 19,602,279     $ 326,000     $ 22,365,414  
Foreign currency adjustment
     48,197       387,651       -       435,848  
Balance, June 30, 2011
   $ 2,485,332     $ 19,989,930     $ 326,000     $ 22,801,262  

Revenue Recognition

Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. The Company is not subject to VAT withholdings. The Company gives volume rebates to certain customers based on volume achieved. The Company accrues sales rebates based on actual sales volume.

Major Customer

The Company has one major customer that during the six months ended June 30, 2011 accounted for approximately $104.7 million in revenues or 57.8% of total Company revenues.  This customer also accounted for approximately 32% of the Company’s accounts receivable at June 30, 2011.  No one customer accounted for more than 10% of the Company’s revenue for the six months ended June 30, 2010.

Advertising Costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place.  Advertising costs for the six months ended June 30, 2011 and 2010 were not significant.

Research and Development

The Company expenses its research and development costs as incurred.  Research and development costs for the three and six months ended June 30, 2011 and 2010 were not significant.

Derivative Instruments

Under accounting requirements, all derivative instruments are recognized on the balance sheet at fair value.  The accounting for changes in the fair value (gains or losses) depends on the nature of the derivative and hedging relationship.

M2P2 periodically utilizes derivative instruments in its risk management and commodity hedging activities.  Derivative instruments primarily include futures and forward contracts which may be utilized to hedge price risk related to a portion of the Company’s grain purchases.  Although the derivatives are considered an economic hedge, they do not qualify for the defined hedge accounting and, accordingly, changes in fair value of the derivatives are recognized in net income. Gains or losses related to grain derivatives are classified in cost of goods sold on the consolidated statement of operations.

 
10
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

The Company’s open derivative positions have been recorded at fair value (marked to market), resulting in a derivative asset and liability of approximately $896,000 and $0, and $1,094,000 and $980,000 at June 30, 2011 and December 31, 2010, respectively. Derivative assets are included in other current assets and derivative liabilities are included in accrued expenses on the consolidated balance sheet. Realized and unrealized derivative losses included in net loss during the six months ended June 30, 2011 totaled approximately $1,467,000 and $(195,000), respectively.

Stock-Based Compensation
 
The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC Topic 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. As of June 30, 2011 the Company had China deferred tax assets of approximately $2.7 million which were fully offset by a related valuation allowance.
 
Foreign Currency Translation
 
The accounts of the Company’s Chinese subsidiaries are maintained in RMB and the accounts of the U.S. parent company and U.S. subsidiaries are maintained in USD. The accounts of the Chinese subsidiaries were translated into USD in accordance with Accounting Standards Codification (“ASC”) Topic 830 “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiaries. According to ASC Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet dates, stockholders’ equity is translated at historical rates and statement of income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income.

Foreign Currency Transactions and Comprehensive Income
 
US GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company’s Chinese subsidiaries is the RMB. The unit of Renminbi is in Yuan. Translation gains are classified as an item of accumulated other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.
 
Basic and Diluted Earnings (Loss) Per Share
 
Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.” Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  At June 30, 2011, the Company had a total of 2,169,435 common stock equivalents outstanding, including options and warrants. All common stock equivalents for the six months ended June 30, 2011 are anti-dilutive due to the net loss incurred.

 
11
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations for the three and six months ended June 30, 2011 and 2010:

Three months ended June 30:
   
2011
    
2010
  
         
Per Share
          
Per Share
  
   
Shares
    
Amount
    
Shares
    
Amount
  
Basic  earnings per share
     60,500,355     $ (0.26 )     45,015,351     $ (0.07 )
Effect of dilutive stock options and warrants
     -       -       -       -  
                                 
Diluted earnings per share
     60,500,355     $ (0.26 )     45,015,351     $ (0.07 )

Six months ended June 30:

   
2011
    
2010
  
         
Per Share
          
Per Share
  
   
Shares
    
Amount
    
Shares
    
Amount
  
Basic  earnings per share
     56,964,030     $ (0.31 )     44,942,821     $ (0.04 )
Effect of dilutive stock options and warrants
     -       -       -       -  
                                 
Diluted earnings per share
     56,964,030     $ (0.31 )     44,942,821     $ (0.04 )

Statement of Cash Flows
 
In accordance ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Segment Reporting

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance.  The Company determined it has four reportable segments (See Note 10).  

Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. In addition, the Company has long-term debt with financial institutions. The carrying amounts of the line of credit and other long-term liabilities approximate their fair values based on current rates of interest for instruments with similar characteristics. Derivative financial instruments are recorded at fair value based on quoted market prices.

 
12
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The three levels of valuation hierarchy are defined as follows:

 
·
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 
·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
At June 30, 2011 and December 31, 2010, the Company’s derivative instruments were reported at fair value using Level 1 and Level 2 inputs, as follows:

 
·
derivative liability of $896,000 and $980,000 at June 30, 2011 and December 31, 2010, respectively, consisting of exchange traded commodity futures contracts valued using Level 1 inputs. The fair value measurements are determined by quoted market prices from the Chicago Board of Trade (CBOT).
 
·
derivative asset of $0 and $1,094,000 at June 30, 2011 and December 31, 2010, respectively, consisting of fixed price forward purchase contracts valued using Level 2 inputs. The fair value measurements are based on observable data for similar assets as well as quoted market prices from the CBOT.

At December 31, 2010, the Company had approximately $19.6 million of goodwill which was measured at fair value on a non-recurring basis, and was valued using Level 3 inputs.

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on the previously reported net income or stockholders’ equity.

Note 3 – Short-Term Loan

Short term loan at June 30, 2011 and December 31, 2010 is as follows:

   
June 30,
    
December 31,
  
   
2011
    
2010
  
             
Short-term bank loan payable to Shanghai Pudong Development Bank.  The loan accrues interest at 5.84%.  The note was renewed in May 2010 and is due May 4, 2011 (The loan was paid off in full in May 2011).  The loan is collateralized by buildings and land use rights.
   $ -     $ 4,551,000  
 
 
13
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Note 4 – Acquisition Note Payable

In connection with the acquisition of M2P2, the Company issued a promissory note payable in the amount of $9,621,434.  The note bears interest at a rate of 8.0% per year, with interest payable quarterly in cash on March 31, June 30, September 30 and December 31 of each year, beginning on December 31, 2010.  The Company will make interest only payments until June 30, 2012 and thereafter it will make amortizing principal and interest payments with the last payment due on September 30, 2020. The Company granted AF Sellco, LLC a perfected first-priority lien on, and security interest in, all of the outstanding equity interests of M2P2 as collateral security for the Company’s obligations on the promissory notes.

Note 5 – Line of Credit

The Company’s wholly-owned subsidiary, M2P2 has a $65 million senior revolving loan facility that expires on June 1, 2012. The first $25 million borrowed under the facility bears interest at 3.95%; and the remaining amount borrowed under the facility bears interest at the 1-month LIBOR plus 3.00% (3.25% at June 30, 2011).  This facility is collateralized by substantially all of the assets of M2P2 and has various restrictive covenants, including, but not limited to, certain restrictions on distributions, maintenance of a minimum net worth and other financial covenant requirements.

Note 6 – Long-Term Debt

Long- term loans at June 30, 2011 and December 31, 2010 are as follows:

   
2011
    
2010
  
                 
Note payable, bearing interest at the prime rate plus 2% (5.25% at June 30, 2011) and payable on November 25, 2018. The note is secured by the M2P2’s 100% interest in Heritage Farms LLC and is subordinated to certain senior debt.
   $ 3,500,000     $ 3,500,000  
                 
Senior term loan - $6 million; bears interest at 5.0%; quarterly installments of $250,000 plus interest with remaining balance is due April 1, 2013. (A)
     5,000,000       5,750,000  
                 
Senior term loan - $7.6 million; $5.8 million of the loan bears interest at 5.0% and the $1.4 million remaining balance bears interest at the 3-month LIBOR plus 1.75% (2.05% at June 30, 2011); payments are due in monthly installments of approximately $85,000. The remaining balance is due March 1, 2020. (A)
     7,070,645       7,478,324  
      15,570,645       16,728,324  
                 
Less current portion
     (1,718,108 )     (1,703,658 )
                 
    $ 13,852,537     $ 15,024,666  
 
 
14
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

 
(A)
These borrowings are collateralized by substantially all of the assets of M2P2 and have various restrictive covenants, including, but not limited to, certain restrictions on distributions, maintenance of a minimum net worth and other financial covenant requirements.

Note 7 – Stockholders’ Equity

Common Stock

The Company has granted a total of 2,025,000 shares of restricted stock to certain officers, directors and key employees.  The restricted stock awards have vesting schedules ranging from 1 to 3 years.  The value of the awards granted was calculated using the fair market value of the Company’s stock price at the date of grant.  This amount is being expensed over the vesting period as the restrictions lapse.  The expense recognized during the three and six months ended June 30, 2011 and 2010 was $433,795 and $770,986, and $375,720 and $751,440, respectively.  At June 30, 2011 there is $3,575,745 of compensation expense that will be amortized over the remaining vesting periods.

Equity Credit Agreement

On September 9, 2009, the Company entered into an Equity Credit Agreement with Southridge Partners II, LP (“Southridge”), amended and restated as of November 9, 2009, providing for, among other things, the issuance of shares of its common stock at any time and from time to time during the next two years for gross proceeds of up to $50,000,000. In connection with the closing of the transaction, the Company also issued Southridge a warrant to purchase an additional 400,000 shares of its common stock during a five-year period at an exercise price of $5.75 per share.  The fair value of the warrant was charged to additional paid in capital as it was issued in connection with an equity instrument.  During the year ended December 31, 2010, the Company issued 150,000 shares of its common stock to Southridge for the surrender of the existing warrant to purchase 400,000 shares of the Company’s common stock.  The warrant was subsequently canceled by the Company.  During the six months ended June 30, 2011, the Company issued 10,846,850 shares of its common stock for $16,592,625 in connection with this Equity Credit Agreement. 

Note 8 – Statutory Common Welfare Fund

As stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:

 
i.
Making up cumulative prior years’ losses, if any;

 
ii.
Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;

 
iii.
Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory common welfare fund”, which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and

 
iv.
Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

Pursuant to the new Corporate Law effective on January 1, 2006, there is now only one "Statutory surplus reserve" requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.

The Company appropriated $936,822, $1,449,061 and $2,483,829 as reserve for the statutory surplus reserve and welfare fund for the years ended December 31, 2010, 2009 and 2008, respectively.

 
15
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Note 9 – Stock Options and Warrants

Stock Options

Following is a summary of stock option activity:

   
Options
outstanding
    
Weighted
Average
Exercise
Price
    
Weighted
average
remaining
contractual life
    
Aggregate
Intrinsic Value
  
                         
Outstanding, December 31, 2010
     185,000     $ 8.96       2.71     $ -  
Granted
     -       -                  
Forfeited
     -       -                  
Exercised
     -       -                  
Outstanding, June 30, 2011
     185,000     $ 8.96       2.20     $ -  
                                 
Exercisable, June 30, 2011
     175,000     $ 8.94       2.20     $ -  

The exercise price for options outstanding at June 30, 2011 is as follows:

Number of
Options
    
Exercise
Price
  
10,000
     $ 3.30  
  15,000
     $ 8.85  
160,000
     $ 9.32  
185,000
          
Warrants

Following is a summary of the warrant activity:

   
Warrants
outstanding
    
Weighted
Average
Exercise
Price
    
Weighted
average
remaining
contractual life
    
Aggregate
Intrinsic Value
  
                         
Outstanding, December 31, 2010
     2,204,435     $ 4.03       2.42     $ 253,000  
Granted
     -       -                  
Forfeited/canceled
     (220,000 )   $ 5.00                  
Exercised
     -       -                  
Outstanding, June 30, 2011
     1,984,435     $ 3.92       2.18     $ -  
                                 
Exercisable, June 30, 2011
     1,984,435     $ 3.92       2.18     $ -  


 
16
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

The exercise price for warrants outstanding at June 30, 2011 is as follows:

Number of
Warrants
    
Exercise
 Price
  
575,000
     $ 2.50  
1,409,435
     $ 4.50  
1,984,435
          

Note 10 – Segment Information

The Company’s predominant businesses are the research and development, manufacture, marketing, distribution, and sale of pre-mix, concentrates and complete feeds and feed additives primarily for use in China’s domestic pork husbandry market and the raising, breeding, and selling of pigs.  The Company operates in four segments:  (1) animal feed nutrition, (2) hog production – United States, (3) hog production – China and (4) western style hog farms in China.  Certain of the reportable segments include geographic units which are aggregated due to having substantially similar products, production processes, distribution systems, and economic characteristics. The Company does not allocate the holding company income and expenses to the other four segments, but rather presents them as part of the segment disclosures so that all the captions reconcile to the financial statements.  The Company added the US hog production (as a result of the acquisition of M2P2) and western style hog farms segments in 2010.
 
The following tables summarize segment information (continuing operations) for the three and six months ended June 30, 2011 and 2010:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
                         
Revenues from unrelated entities
                        
Animal feed nutrition
   $ 16,741,242     $ 26,369,201     $ 40,949,913     $ 50,658,950  
Hog production - United States
     54,842,557       -       112,726,981       -  
Hog production - China
     13,814,173       7,391,175       24,708,277       29,591,282  
Western style hog farms
     -       -       -       -  
Holding Company
     -       -       -       -  
    $ 85,397,972     $ 33,760,376     $ 178,385,171     $ 80,250,232  
                                 
Intersegment revenues
                                
Animal feed nutrition
   $ 3,527,492     $ 1,721,014     $ 7,550,791     $ 5,490,936  
Hog production - United States
     -       -       -       -  
Hog production - China
     665,116       1,267,008       1,222,267       1,784,139  
Western style hog farms
     -       -       -       -  
Holding Company
     -       -       -       -  
    $ 4,192,608     $ 2,988,022     $ 8,773,058     $ 7,275,075  
 
 
17
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)
 
Total revenues
                                
Animal feed nutrition
   $ 20,268,734     $ 28,090,215     $ 48,500,704     $ 56,149,886  
Hog production - United States
     54,842,557       -       112,726,981       -  
Hog production - China
     14,479,289       8,658,183       25,930,544       31,375,421  
Western style hog farms
     -       -       -       -  
Holding Company
     -       -       -       -  
Less Intersegment revenues
     (4,192,608 )     (2,988,022 )     (8,773,058 )     (7,275,075 )
    $ 85,397,972     $ 33,760,376     $ 178,385,171     $ 80,250,232  
                                 
Gross profit
                                
Animal feed nutrition
   $ 2,126,593     $ 4,768,663     $ 4,552,636     $ 9,232,737  
Hog production - United States
     3,417,038       -       7,801,606       -  
Hog production - China
     2,542,785       (1,232,281 )     3,612,276       175,682  
Western style hog farms
     -       -       -       -  
Holding Company
     -       -       -       -  
    $ 8,086,416     $ 3,536,382     $ 15,966,518     $ 9,408,419  
                                 
Income (loss) from operations
                                
Animal feed nutrition
   $ (14,227,226 )   $ 2,962,810     $ (15,062,722 )   $ 5,630,163  
Hog production - United States
     2,530,419       -       6,175,862       -  
Hog production - China
     1,309,764       (2,755,218 )     1,170,518       (2,525,857 )
Western style hog farms
     (770,045 )     (314,699 )     (1,068,439 )     (531,822 )
Holding Company
     (2,295,255 )     (974,412 )     (4,149,554 )     (2,243,301 )
    $ (13,452,343 )   $ (1,081,519 )   $ (12,934,335 )   $ 329,183  
                                 
Interest income
                                
Animal feed nutrition
   $ 1,602     $ 22,738     $ 4,601     $ 56,181  
Hog production - United States
     -       -       -       -  
Hog production - China
     5,439       8,187       16,442       14,099  
Western style hog farms
     -       1,382       -       1,382  
Holding Company
     630       4,644       1,350       12,622  
    $ 7,671     $ 36,951     $ 22,393     $ 84,284  
                                 
Interest and financing costs
                                
Animal feed nutrition
   $ 25,536     $ 97,079     $ 96,240     $ 179,611  
Hog production - United States
     760,292       -       1,384,970       -  
Hog production - China
     17,580       -       17,580       -  
Western style hog farms
     -       -       -       -  
Holding Company
     192,429       42,851       412,006       85,230  
    $ 995,837     $ 139,930     $ 1,910,796     $ 264,841  
 
 
18
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)
 
Income tax expense (benefit)
                                
Animal feed nutrition
   $ 82,523     $ 641,139     $ 217,377     $ 1,094,719  
Hog production - United States
     -       -       -       -  
Hog production - China
     -       -       -       -  
Western style hog farms
     -       -       -       -  
Holding Company
     (386,767 )     -       17,118       -  
    $ (304,244 )   $ 641,139     $ 234,495     $ 1,094,719  
                                 
Net income (loss)
                                
Animal feed nutrition
   $ (14,375,746 )   $ 2,264,097     $ (15,404,509 )   $ 4,437,740  
Hog production - United States
     1,770,127       -       4,790,892       -  
Hog production - China
     1,350,080       (2,592,928 )     1,261,605       (2,275,618 )
Western style hog farms
     (770,045 )     (231,137 )     (1,061,239 )     (394,101 )
Holding Company
     (2,105,204 )     (1,012,619 )     (4,587,316 )     (2,315,909 )
Discontinued operations
     (1,744,242 )     (1,382,165 )     (2,425,287 )     (1,339,446 )
    $ (15,875,030 )   $ (2,954,752 )   $ (17,425,854 )   $ (1,887,334 )
                                 
Provision for depreciation
                                
Animal feed nutrition
   $ 215,394     $ 112,394     $ 457,125     $ 219,436  
Hog production - United States
     435,968       -       927,317       -  
Hog production - China
     594,073       651,640       1,359,555       1,356,497  
    $ 1,245,435     $ 764,034     $ 2,743,997     $ 1,575,933  
                                 
   
As of
    
As of
                  
   
June 30,
    
December 31,
                  
    2011     2010                  
Total assets
                                
Animal feed nutrition
   $ 26,315,368     $ 42,783,939                  
Hog production - United States
     108,565,414       94,369,142                  
Hog production - China
     63,295,409       58,918,591                  
Western style hog farms
     22,676,520       15,162,473                  
Holding Company
     4,082,119       5,966,993                  
Discontinued operations
     -       6,293,524                  
    $ 224,934,830     $ 223,494,662                  
                                 
Goodwill
                                
Animal feed nutrition
   $ 2,485,332     $ 2,437,135                  
Hog production - United States
     326,000       326,000                  
Hog production - China
     19,989,930       19,602,279                  
Western style hog farms
     -       -                  
Holding Company
     -       -                  
    $ 22,801,262     $ 22,365,414                  
                                 
Long-term asset by geographic region
                                
United States
   $ 33,163,638     $ 29,581,577                  
China
     76,443,092       67,995,469                  
    $ 109,606,730     $ 97,577,046                  

Note 11 – Commitments

At June 30, 2011, the Company had commitments to expend approximately $2,129,000 for construction in process and growing breeder hogs.

 
19
 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)

Note 12 – Discontinued Operations

During the six months ended June 30, 2011, the Company made the decision to dispose of all eight of our commercial hog farms in Jiangxi Province. All eight farms were included in our hog production – China segment.  The closure of these farms is being accounted for as a discontinued operation.  Operating results for hog farms in the Jiangxi Province have been presented in the accompanying consolidated statements of operations as discontinued operations for the six months ended June 30, 2011 and 2010.  In addition, the assets and liabilities related to hog farms have been presented in the accompanying consolidated balance sheets as “Assets of discontinued operations” and “Liabilities of discontinued operations” at June 30, 2011 and December 31, 2010.  Currently, the Company has executed settlement agreements for seven of the eight hog farms.

The operating results for the eight hog farms have been presented in the accompanying consolidated statement of operations for the three and six months ended June 30, 2011 and 2010 as discontinued operations and are summarized below:
 
   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
                         
Revenues
   $ 660,619     $ 3,901,579     $ 2,791,028     $ 10,270,790  
Cost of goods sold
     2,621,784       4,878,683       4,576,498       10,800,649  
Gross profit
     (1,961,165 )     (977,104 )     (1,785,470 )     (529,859 )
Operating expenses
     257,884       307,966       887,003       640,756  
Loss from operations
     (2,219,049 )     (1,285,070 )     (2,672,473 )     (1,170,615 )
Non-operating income (expense)
     474,807       (97,095 )     247,186       (168,831 )
Loss before taxes
     (1,744,242 )     (1,382,165 )     (2,425,287 )     (1,339,446 )
Income tax expense
     -       -       -       -  
Net loss
   $ (1,744,242 )   $ (1,382,165 )   $ (2,425,287 )   $ (1,339,446 )

The assets and liabilities of the discontinued operations at June 30, 2011 and December 31, 2010 are summarized below:

   
June 30,
    
December 31,
  
   
2011
    
2010
  
             
Current assets
   $ -     $ 3,271,226  
Long-term assets
     -       3,022,298