UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

or

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  x Smaller Reporting Company  o

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

There were 14,233,880 shares of the Registrant’s Common Stock outstanding at May 20, 2013.

GSP-2, INC. AND SUBSIDIARIES

FORM 10-Q

March 31, 2013

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements.	3
	Condensed Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012	3
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	5
	Notes to Unaudited Condensed Consolidated Financial Statements.	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	24
Item 3	Quantitative and Qualitative Disclosures About Market Risk.	37
Item 4	Controls and Procedures.	38
PART II - OTHER INFORMATION
Item1.	Legal Proceedings.	39
Item 1A.	Risk Factors.	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	48
Item 3.	Defaults Upon Senior Securities.	48
Item 4.	Mine Safety Disclosures.	48
Item 5.	Other Information.	48
Item 6.	Exhibits.	48

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 annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2013, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file 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.

2

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements.

GSP-2 INC. AND SUBSIDARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2013		December 31, 2012
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	21,153,305	$	11,371,975
Accounts receivable		24,655,764		26,960,258
Advance payments to suppliers		4,794,440		4,756,653
Prepaid VAT taxes		2,951,542		2,950,275
Inventories		24,788,308		25,066,211
Deferred inventory costs		32,460		-
Prepaid expenses and other assets		36,037		84,287
Deposit on loan guarantee agreement		318,390		316,651
Total Current Assets		78,730,246		71,506,310
PROPERTY AND EQUIPMENT - net		19,072,108		19,238,776
OTHER ASSETS:
Investment in related party company		159,195		158,326
Land use rights, net		13,974,469		13,995,178
Total Other Assets		14,133,664		14,153,504
Total Assets	$	111,936,018	$	104,898,590
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable- current portion	$	19,660,596	$	13,220,183
Accounts payable		265,535		183,437
Advances from customers		734,653		732,521
Other payable		668,585		379,947
Due to related parties		4,994,507		4,808,359
Tax payable		701,580		700,123
Dividend payable		192,584		154,974
Total Current Liabilities		27,218,040		20,179,544
Total Liabilities		27,218,040		20,179,544
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock ($0.001 par value; 100,000,000 shares authorized,
752,200 issued and outstanding at March 31, 2013 and December 31, 2012)		752		752
Common Stock ($0.001 par value, 100,000,000 shares authorized,
14,233,880 shares issued and outstanding at March 31, 2013 and
December 31, 2012)		14,234		14,234
Additional paid-in capital		17,342,820		17,342,820
Retained earnings		60,951,828		61,419,489
Statutory reserves		2,580,884		2,580,884
Accumulated other comprehensive income - foreign currency translation adjustment		3,827,460		3,360,867
Total Shareholders' Equity		84,717,978		84,719,046
Total Liabilities and Shareholders' Equity	$	111,936,018	$	104,898,590

See notes to unaudited condensed consolidated financial statements

3

GSP-2 INC. AND SUBSIDARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
	For the Three Months Ended
	March 31,
	2013			2012
REVENUES	$	1,241,306		$	9,929,627
COST OF REVENUES		660,897			8,131,329
GROSS PROFIT		580,409			1,798,298
OPERATING EXPENSES:
Research and development		101,325			-
Selling		23,134			62,537
General and administrative		596,398			556,791
Total Operating Expenses		720,857			619,328
(LOSS) INCOME FROM OPERATIONS		(140,448	)		1,178,970
OTHER INCOME (EXPENSES):
Interest income		14,520			3,057
Interest expense		(304,018	)		(489,569	)
Other income (expense)		(105	)		-
Total Other (Expenses)		(289,603	)		(486,512	)
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES		(430,051	)		692,458
PROVISION FOR INCOME TAXES		-			16,413
NET (LOSS) INCOME		(430,051	)		676,045
PREFERRED STOCK DIVIDEND		37,610			37,610
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	(467,661	)	$	638,435
COMPREHENSIVE (LOSS)INCOME:
NET (LOSS) INCOME	$	(430,051	)	$	676,045
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain		442,218			345,071
COMPREHENSIVE INCOME	$	12,167		$	1,021,116
EARNINGS PER COMMON SHARE:
Basic	$	(0.03	)	$	0.05
Diluted	$	(0.03	)	$	0.05
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic		14,233,880			14,097,140
Diluted		14,233,880			14,849,340

See notes to unaudited condensed consolidated financial statements

4

GSP-2 INC. AND SUBSIDARIES

UNAUDITED CONDENSED CONSOLIDATED  STATEMENTS OF CASH FLOWS

	For the Three Months Ended
	March 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	(430,051	)	$	676,045
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		318,368			178,656
Amortization of intangible assets		67,124			73,006
Common stock issued for services		-			24,375
Changes in assets and liabilities:
Accounts receivable		2,450,919			8,152,860
Prepaid VAT taxes		14,927			(810,830	)
Inventories		415,293			(4,756,826	)
Prepaid and other current assets		48,426			(96,845	)
Advances to suppliers		(11,655	)		3,241,759
Accounts payable		81,409			85,194
Other payable		286,357			85,049
Taxes payable		(2,386	)		(16,352	)
Advances from customers		(1,890	)		(8,665,816	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		3,236,841			(1,829,725	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(46,219	)		(356,310	)
Purchase of intangible asset		(2,052	)		-
NET CASH USED IN INVESTING ACTIVITIES		(48,271	)		(356,310	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable		6,363,529			18,037,632
Payments of loans payable		-			(12,657,988	)
Change in restricted cash		-			(5	)
Proceeds from related party advances		161,408			70,590
Capital contribution		-			4,746,745
NET CASH PROVIDED BY FINANCING ACTIVITIES		6,524,937			10,196,974
EFFECT OF EXCHANGE RATE CHANGE ON CASH		67,823			34,871
NET INCREASE IN CASH		9,781,330			8,045,810
CASH  - beginning of period		11,371,975			6,949,341
CASH - end of period	$	21,153,305		$	14,995,151
SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:
Cash paid for:
Interest	$	304,018		$	448,166
Income taxes	$	-		$	-
Non-cash operating, investing and financing activities:
Net transfer of seed right amortization costs to deferred inventory cost	$	32,438		$	-
Common stock issued to offset accounts payable and related party payable	$	-		$	293,386
Acquisition of property, land use right and construction in progress for facility and land use right payable and tax payable	$	-		$	80,819
Desposit on loan gurantee agreement and deferred financing costs paid by related parties	$	-		$	569,609

See notes to unaudited condensed consolidated financial statements

5

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 Hengchang Business Consultants and the Operating Companies (the “Business Cooperation Agreement”), Hengchang Business Consultants has the exclusive right to provide to the Operating Companies general business operation services, including advice and strategic planning, as well as consulting services related to technology, research and development, human resources, marketing and other services deemed necessary (collectively, the “Services”). Under the Business Cooperation Agreement, Hengchang Business Consultants has exclusive and proprietary rights and interests in all rights, ownership, interests and intellectual properties arising out of or created during the performance of the Business Cooperation Agreement, including but not limited to copyrights, patents, patent applications, software and trade secrets. The Operating Companies shall pay to Hengchang Business Consultants a monthly consulting service fee (the “Service Fee”) in Renminbi that is equal to 100% of the monthly net income to the Operating Companies. Upon the prior written consent by Hengchang Business Consultants, the rate of Service Fee may be adjusted pursuant to the operational needs of the Operating Companies.  Within ninety (90) days after the end of each fiscal year, the Operating Companies shall (a) deliver to Hengchang Business Consultants  financial statements of the Operating Companies for such fiscal year, which shall be audited and certified by an independent certified public accountant approved by Hengchang Business Consultants, and (b) pay an amount to Hengchang Business Consultants equal to the shortfall, if any, of the aggregate net income of the Operating Companies for such fiscal year, as shown in such audited financial statements, as compared to the aggregate amount of the Service Fee paid by the Operating Companies to Hengchang Business Consultants in such fiscal year. Unless earlier terminated in accordance with the provisions of the Business Cooperation Agreement or other agreements separately executed between Hengchang Business Consultants and the Operating Companies, the Business Cooperation Agreement expires on February 10, 2021; however, the term of the Business Cooperation Agreement may be extended if confirmed in writing by Hengchang Business Consultants prior to the expiration of the term thereof. The period of the extended term shall be determined exclusively by Hengchang Business Consultants and the Operating Companies shall accept such extended term unconditionally. Unless Hengchang Business Consultants commits gross negligence, or a fraudulent act, against the Operating Companies, the Operating Companies shall not terminate the Business Cooperation Agreement prior to the expiration of the term, including any extended term. Notwithstanding the foregoing, Hengchang Business Consultants shall have the right to terminate the Business Cooperation Agreement at any time upon giving 30 days' prior written notice to the Operating Companies.

6

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

Organization (continued)

● Shareholders’ Equity Interest Pledge Agreement.In order to guarantee the Operating Companies’ performance of its respective obligations under the Exclusive Business Cooperation Agreement, the Operating Companies’ Shareholders and Hengchang Business Consultants entered into an equity interest pledge agreement (the “Pledge Agreement”), pursuant to which the Operating Companies’ shareholders pledged all of their equity interest in the Operating Companies to Hengchang Business Consultants. If the Operating Companies or the Operating Companies’ shareholders breach their respective contractual obligations, Hengchang Business Consultants, as pledgee, will be entitled to exercise certain rights, including the right to sell the pledged equity interests. Upon the full payment of the Service Fee under the Business Cooperation Agreement and upon the termination of the Operating Companies’ obligations thereunder, the Pledge Agreement shall be terminated.

● Exclusive Option Agreement.Under the exclusive option agreement between the Operating Companies, the Operating Companies’ Shareholders and Hengchang Business Consultants (the “Option Agreement”), the Operating Companies’ Shareholders have irrevocably granted Hengchang Business Consultants or its designee the irrevocable and exclusive right to purchase, to the extent permitted under PRC law, all or any part of the equity interests in the Operating Companies (the "Equity Interest Purchase Option") for RMB 10. If an appraisal is required by PRC laws at the time when and if Hengchang Business Consultants exercises the Equity Interest Purchase Option, the parties shall negotiate in good faith and, based upon the appraisal, make a necessary adjustment to the purchase price so that it complies with any and all then applicable PRC laws.  Pursuant to the Exclusive Option Agreement, the Operating Companies and the Operating Companies’ shareholders agree that, without the prior consent of Hengchang Business Consultants, they shall not in any manner supplement, change or amend the articles of association and bylaws of the Operating Companies, increase or decrease its registered capital, or change the structure of its registered capital in any other manner, shall not engage in any transactions that could materially affect the Operating Companies’ assets, liabilities, rights or operations, including, without limitation, the incurrence or assumption of any indebtedness except incurred in the ordinary course of business, execute any major contract over RMB 100,000, shall not sell or purchase any assets or rights, incur of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. The term of the Exclusive Option Agreement is ten years commencing on February 10, 2021 and may be extended at the sole election of Hengchang Business Consultants.

● Power of Attorney.  Under the power of attorney between the Operating Companies’ shareholders and Hengchang Business Consultants (the “Power of Attorney”), Hengchang Business Consultants has been granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Operating Companies’ shareholders, to act on behalf of the Operating Companies’ shareholders as their exclusive agent and attorney with respect to all matters concerning the Operating Companies’ shareholders’ equity interests in the Operating Companies, including without limitation, the right to: 1) attend shareholders' meetings of the Operating Companies; 2) exercise all the Operating Companies’ shareholders’ rights, including voting rights under PRC laws and the Operating Companies’ Articles of Association, including but not limited to the sale or transfer or pledge or disposition of the Operating Companies’ shareholders’ equity interests in the Operating Companies in whole or in part; and 3) designate and appoint on behalf of the Operating Companies’ shareholders the legal representative, executive director, supervisor, manager and other senior management of the Operating Companies.

7

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

Organization (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, cultivating, purchasing and distribution of agricultural products including corn, soybean, and crop seeds. In January 2012, the registered capital of Hengchang Agriculture was increased from RMB 5.0 million (approximately $729,000) to RMB 35.0 million (approximately $5.5 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 15.6 million (approximately $2.4 million) and RMB 14.4 million (approximately $2.3 million), respectively. In June 2012, the registered capital of Hengchang Agriculture was increased from RMB 35.0 million (approximately $5.5 million) to RMB 50.0 million (approximately $7.9 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 7.8 million (approximately $1.2 million) and RMB 7.2 million (approximately $1.1 million), respectively. In July 2011, Hengchang Agriculture and seven PRC individuals formed Jilin Hengchang Planting Specialty Cooperative (“Hengchang Planting”) and Jilin Hengchang Mechanized Planting Specialty Cooperative (“Hengchang Mechanized Planting”) in Jilin 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). 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).    

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 10.0 million (approximately $1.5 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 unaudited condensed consolidated 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 unaudited condensed consolidated 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 unaudited condensed consolidated financial statements in accordance with U.S. GAAP.

8

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

Basis of presentation (continued)

The Company’s unaudited condensed consolidated financial statements include the accounts of its variable interest entity, Hengjiu, which is under common control with Hengchang Agriculture. All significant intercompany accounts and transactions have been eliminated in consolidation. These unaudited condensed 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 10K report for the year ended December 31, 2012.

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 unaudited condensed 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.

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. Significant estimates in the three months ended March 31, 2013 and 2012 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, and accruals for taxes due.

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 than 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.

9

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

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.

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 March 31, 2013 and December 31, 2012, 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 $4,794,440 and $4,756,653 at March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012.

Deferred inventory costs

Deferred inventory costs consist of costs for crop land lease. In accordance with Accounting Standards Codification (“ASC’’) 905 “Agriculture’’, costs of growing crops shall be accumulated until the time of harvest. Growing crops shall be reported at the lower of cost or market. The amount will be transferred to inventories at the time of harvests. As of March 31, 2013 and December 31, 2012, the deferred inventory costs were $32,460 and $0, respectively.

10

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

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:

	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 three months ended March 31, 2013 and 2012.

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.

11

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

Income taxes (continued)

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 March 31, 2013 and December 31, 2012, advances from customers amounted to $734,653 and $732,521 respectively.

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 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 $3,026 and $50,591 for the three months ended March 31, 2013 and 2012, respectively.

Variable Interest Entities

Pursuant to Accounting Standards Codification, we are required to include in our unaudited condensed 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.

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

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 March 31, 2013 and December 31, 2012 were translated at 6.2816 RMB to $1.00 and at 6.3161 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 three months ended March 31, 2013 and 2012 were 6.2858 RMB and 6.3201 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 three months ended March 31, 2013 and 2012, comprehensive income includes net income and unrealized gains from foreign currency translation adjustments.

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.

Income (loss) 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 (loss) per common share:

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

(Loss) income per share of common stock (continued)

	Three Months Ended March 31,
	2013			2012
Net (loss) income available to common shareholders for basic net income per common share	$	(467,661	)	$	638,435
Add: preferred stock dividend		-			37,610
Net (loss) income available to common shareholders for diluted net income per common share	$	(467,661)		$	676,045
Weighted average common share outstanding - basic		14,233,880			14,097,140
Effect of dilutive securities:
Warrants		**			*
Series A convertible preferred stock		**			752,200
Weighted average common shares outstanding - diluted		14,233,880			14,849,340
Net (loss) income per common share - basic	$	(0.03	)	$	0.05
Net (loss) income per common share - diluted	$	(0.03	)	$	0.05

*75,220 warrants were excluded from the calculation due to anti dilutive effect.

**75,220 warrants and 752,200 Series A convertible preferred stock were excluded from the calculation due to anti dilutive effect.

Reclassifications

Certain reclassifications, having no effect on the total revenues, operating income, net income, earnings per share or the balance sheet, have been made to the previously issued unaudited condensed consolidated financial statements to conform to the current period’s presentation of the Company’s unaudited condensed consolidated financial statements. The reclassifications were pertaining to reclassification adjustments for certain depreciation expenses from selling expenses to costs of goods sold.

Recent accounting pronouncements

In March 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-05 - Foreign Currency Matters (Topic 830) – “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. This amendment was issued to address diversity in practice related to the timing and amount of cumulative translation adjustment released into net income upon the occurrence of certain events. The amendment will be effective for the Company in its fiscal year commencing January 1, 2013. The Company has not yet determined what effect, if any, the adoption of this standard will have on its financial statements.

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.

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NOTE 2 – ACCOUNTS RECEIVABLE

At March 31, 2013 and December 31, 2012, accounts receivable consisted of the following:

	March 31, 2013		December 31, 2012
Defeng Seed Co., Ltd.	$	5,616,163	$	5,585,487
Nanning Granary Reserve		9,340,831		11,664,692
Jilin Dida Starch Biochemical Co., Ltd.		8,585,720		8,538,823
Liuzhou Granary Reserve		1,111,291		1,006,914
Others		1,759		164,342
Less: allowance for doubtful accounts		-		-
	$	24,655,764	$	26,960,258

At March 31, 2013 and December 31, 2012, the Company does not, based on a review of its outstanding balances, have any allowance for doubtful accounts.

NOTE 3 - INVENTORIES

At March 31, 2013 and December 31, 2012, inventories consisted of the following:

	March 31, 2013		December 31, 2012
Finished goods	$	24,788,308	$	25,039,329
Packaging and other materials		-		26,882
		24,788,308		25,066,211
Less: reserve for obsolete inventory		-		-
	$	24,788,308	$	25,066,211

NOTE 4 – 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 March 31, 2013 and December 31, 2012, advance payments to suppliers consisted of the following:

	March 31, 2013		December 31, 2012
Advance payments to corn and corn seed suppliers	$	4,536,615	$	4,657,155
Others		257,825		99,498
	$	4,794,440	$	4,756,653

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NOTE 5 - PROPERTY AND EQUIPMENT

At March 31, 2013 and December 31, 2012, property and equipment consisted of the following:

	Useful Life	March 31, 2013			December 31, 2012
Office equipment and furniture	4-10 Years	$	87,487		$	85,127
Manufacturing equipment	5-10 Years		1,022,217			1,016,633
Vehicles	4-10 Years		1,947,378			1,910,618
Buildings and building improvements	8-20 Years		18,598,878			18,479,295
			21,655,960			21,491,673
Less: accumulated depreciation			(2,583,852	)		(2,252,897	)
		$	19,072,108		$	19,238,776

For the three months ended March 31, 2013 and 2012, depreciation expense amounted to $318,368 and $178,656, respectively.

NOTE 6- INVESTMENT IN RELATED PARTY COMPANY

Mr. Yushan Wei, Mr. Yufeng Wei and Hengchang Agriculture formed a PRC limited company, Jilin 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.  Hengchang Agriculture owns 20% of Hengchang Fertilizer at March 31, 2013.  Hengchang Fertilizer started its operations in February 2012. 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 June 30, 2013.

NOTE 7 – INTANGIBLE ASSETS

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. 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.

The Company’s seed rights consist of purchased seed rights relating to produce two varieties of corn seed, Hengyu 218 and Hengyu 398 in Jilin province. The seed rights have a useful life of five years. The Company amortizes the seed rights on a straight-line basis over the useful life. At March 31, 2013 and December 31, 2012, intangible assets consisted of the following:

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NOTE 7 – INTANGIBLE ASSETS (continued)

	Useful Life	March 31, 2013			December 31, 2012
Land use rights	50 Years	$	14,034,044		$	13,960,514
Seed rights	5 Years		636,780			633,302
Software	3 Years		5,199			-
Less: accumulated amortization			(701,554	)		(598,638	)
		$	13,974,469		$	13,995,178

Amortization of intangible assets attributable to future periods is as follows:

Twelve-month periods ending March 31:
2014	$	399,198
2015		399,198
2016		397,976
2017		386,853
2018		291,336
Thereafter		12,099,908
	$	13,974,469

For the three months ended March 31, 2013 and 2012, amortization expense amounted to $67,124 and $73,006, respectively. At March, 31, 2013, $ 32,438 of the seed right amortization cost was transferred to deferred inventory cost and the amount will be transferred to inventories at the time of seed harvests.

NOTE 8 – ADVANCES FROM CUSTOMERS

At March 31, 2013 and December 31, 2012, advances from customers consisted of the following:

	March 31, 2013		December 31, 2012
Central Grain Reserve Gongzhuling Depot	$	156,012	$	155,159
Liuzhou Fengfu Feed Company		214,913		213,739
Yulin Liyuan Feed Co., Ltd		188,614		187,584
Others		175,114		176,039
Total	$	734,653	$	732,521

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NOTE 9 – RELATED PARTY TRANSACTIONS

Due to related party

At March 31, 2013 and December 31, 2012, due to related parties consisted of the following:

	March 31, 2013		December 31, 2012
Yushan Wei (controlling person of the Company’s majority shareholder and chief executive officer)	$	3,691,054	$	3,551,175
Yufeng Wei (Chief operating officer)		1,264,078		1,236,559
Dore Perler (Director)		11,875		5,625
Megan Penick (Director)		11,875		5,625
Li Changhua (Director)		15,625		9,375
Total	$	4,994,507	$	4,808,359

From time to time, the Company’s officers advanced funds to the Company for working capital purposes.  These advances are non-interest bearing, unsecured and payable on demand. The amounts due to each Director are due to timing differences in actual compensation payouts to the directors.

NOTE 10 – LOANS PAYABLE

At March 31, 2013 and December 31, 2012, loans payable consisted of the following:

	March 31, 2013		December 31, 2012
Loan payable under a group loan agreement to Jilin Gongzhuling Rural Cooperative Bank, due in September 2013 with annual interest at the banks base interest rate plus 50% (9.00% at March 31, 2013) secured by assets of the Company.	$	6,367,804	$	-
Loans payable to Gongzhuling Rural Cooperative Bank, due in November  2015 with annual interest at the banks base interest rate plus 50% (9.00% at March 31, 2013 and December 31, 2012) secured by assets of the Company.		7,004,585		6,966,324
Loan payable to China Construction Bank Siping Branch, due in August 2013 with annual interest at the banks base interest rate plus 20% (7.38% at March 31, 2013 and December 31, 2012) secured by assets of the Company.		6,288,207		6,253,859
	$	19,660,596	$	13,220,183

In February 2013, the Company obtained a loan agreement (the “February 2013 Loan”) for RMB 40 million (approximately $6.4 million) with an annual interest at the bank’s base interest rate plus 50% through September 2013 with Jilin Gongzhuling Rural Cooperative Bank. The Company is required to repaid the loan amount on September 30, 2013.

The Company has two loan agreements with the availability to borrow up to RMB 44 million (approximately $7.0 million) with an annual interest at the bank’s base interest rate plus 50% through November 2015 with Jilin Gongzhuling Rural Cooperative Bank (the “Rural Coop Loan”). Under the Rural Coop Loan, the Company is permitted to borrow in tranches and the borrowing amount in each tranche should be no less than RMB 5 million (approximately $796,000). The borrowing period for each tranche should be no less than 210 days and no longer than 12 months. At March 31, 2013, the Company has drawn the maximum RMB 44 million under the Rural Coop Loan.

18

NOTE 10 – LOANS PAYABLE (continued)

In February 2012, the Company obtained a credit line facility (the “2012 Construction Loan”) with the availability to borrow up to RMB 80 million (approximately $12.6 million) with annual interest at the bank base interest rate plus 20% through February 2013 with the Creditor for corn purchase purposes. The borrowing period for each borrowing tranche should be no less than 30 days and no longer than 12 months. If there are outstanding borrowed tranches at the end of the credit line facility period that have not reached the 12 months borrowed period, the outstanding period for the borrowed tranches are allowed to be extended for six months from the date the 2012 Construction Loan expires or the initial 12 months expiration date, whichever is sooner. Collections from selling the Company’s inventory acquired through the use of the 2012 Construction Loan are required to be deposited into the Company’s bank account at the Creditor’s branch. In connection with the 2012 Construction Loan, the Company also entered in an RMB credit line guarantee agreement (“2012 Guarantee Agreement”) with Jilin Province Credit Guarantee Investment Co., Ltd. Siping Heat Exchanger Industry Branch (the “Guarantor”) whereby the Guarantor provides the guarantee services for the 2012 Construction Loan to the Company and the Company agrees to RMB 1.6 million (approximately $253,000) to the Guarantor as the fee for Guarantor’s services. The Company also agrees to pay RMB 2 million (approximately $316,000) to the Guarantor as the guarantee risk deposit (“Risk Deposit”); shall the Company not fulfill its obligation to the Creditor, Guarantor will use the Risk Deposit to pay the Company’s obligation to the Creditor on the Company’s behalf. If the Company does not pay the principle and interests in accordance to the terms in the 2012 Construction Loan and therefore causes the Guarantor to pay the principle and interests on the Company’s behalf, the Guarantor has the right to demand the Company to repay the entire amount plus 15% of the principle and interests. The Risk Deposit will be returned to the Company when the 2012 Construction Loan is terminated. The Guarantor also entered into an RMB credit line guarantor agreement (“2012 Guarantor Agreement”) with the Creditor to guarantee for all debt included but not limited to the principal, interest, penalty and other expenses incurred by the Company under the 2012 Construction Loan with the highest guarantee amount of RMB 96.5 million (approximately $15.3 million). Under the 2012 Guarantee Agreement, the Company is required to provide various financial reports and project progress reports to the Guarantor. The Company is also required to inform the Guarantor and obtain Guarantor’s written approval in advance in the following events: 1. any investments above RMB 8 million (approximately $1.3 million) 2. any financing activities above RMB 8 million (approximately $1.3 million) 3. Any guarantee activities for other parties above RMB 8 million (approximately $1.3 million) 4. change in ownership above RMB 7 million ($1.1 million) 5. sale of assets above RMB 8 million (approximately $1.3 million) 6. any indemnification to third parties or accidental asset loss above RMB 8 million (approximately $1.3 million) 7. other material economical dispute that might possibly impact the Company’s ability to repay the 2012 Construction Loan.

NOTE 11 – 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 is considered an agricultural preliminary processor pursuant to the PRC tax code, allowing Hengchang Agriculture exempt from income tax.  

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:

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NOTE 11 – INCOME TAXES (continued)

	Three Months Ended March 31,
	2013		2012
Income tax provision at China statutory rate of 25%	$	-	$	244,244
Permanent difference - China tax exemption		-		(227,831	)
Total provision for income tax	$	-	$	16,413
Basic and diluted net income per share effect	$	-	$	(0.02	)

NOTE 12 – STOCKHOLDERS’ EQUITY

December 2011 Sale of Series A Preferred Stock

On December 20, 2011, the Company sold 752,200 shares of series A preferred stock to several investors for $1,504,400.  The effective price per share of common stock issuable upon conversion of the series A preferred stock was $2.00 per share, which was the deemed market price for the Company’s common stock on the date of the sale. Pursuant to the related purchase agreements, the Company’s controlling shareholder, Ally Joy Investments Limited (“Ally Joy”) agreed to deposit an aggregate amount of 200,000 shares of the Company’s common stock into an escrow account; Ally Joy is controlled by our Chief Executive Officer. The Company is required to meet $15.9 million after tax net income for the fiscal year ending December 31, 2011(“2011 Targeted Net Income”) and $18 million after tax net income for the fiscal year ending December 31, 2012 (“2012 Targeted Net Income) under U.S. GAAP. If the Company does not reach the 2011 Targeted Net Income or the 2012 Targeted Net Income, Ally Joy shall transfer to the holders of the Series A Preferred Stock an additional amount of shares of the Company’s common stock equal to the percentage of variation of the actual net income from the targeted net income times the number of purchased Series A Preferred Stock for each year not meeting the targeted net income. The Company met the 2011 and 2013 Targeted Net Income. The Company agreed to file a Form S-1 registration statement (the “Registration Statement”) within 30 calendar days following the date of the sale of the Series A preferred Stock (“Closing Date”).  The Company agreed to use its best efforts to cause the Registration Statement to be declared effective upon the earlier of (a) 180 calendar days after the Closing Date or (b) three business days after the Registration Statement is declared effective. The Company also agreed to obtain common stock quotation on the Over the Counter Bulletin Board (“OTCBB”) within 60 days of the effectiveness of the initial Registration Statement.  The Company shall use its best efforts to cause its common stock to become listed (the “Uplisting”) on a senior exchange board (“Senior Exchange Listing”) within 12 months of the OTCBB listing date (“the Uplisting Date”). If the Senior Exchange Listing has not occurred by the Uplisting Date, the Company shall pay cash liquidated damage to the holders of the Series A preferred stock in the amount equal to 0.5% of each holder’s aggregate purchase price and on each monthly anniversary of the said date until the Uplisting is completed. Until the closing of an offering of the Company’s common stock at a price per share not less than $4.00, the Company is restricted from incurring any indebtedness or making any payment on the existing indebtedness to the Company’s Chief Executive Officer.

In connection with the sale of the Series A preferred stock, the Company received gross proceeds of $1,504,400 before deducting offering expenses of $345,440. In addition, the placement agent and consultants received of 250,000 common stock and warrants to purchase 75,220 shares of common stock with an exercise price of $2.40 per share and five years exercise period.

The series A preferred stock has the following rights, preferences and limitations:

● There are 875,000 authorized shares of series A preferred stock.

● Holders will be entitled to receive dividends at the rate of 10% of the original issuance price ($2.00). Dividends shall be cumulative but not compounding. Dividend payments may, in sole discretion of the Company, be made in fully paid and non-assessable share of Series A preferred stock based up the original issuance prices and the issuance of such shares of shall constitute full payment of such dividend.

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NOTE 12 – STOCKHOLDERS’ EQUITY (continued)

● The holders of the series A preferred stock have no voting rights except as required by law. However, so long as any shares of series A preferred stock are outstanding, the Company shall not, without first obtaining the approval  of the holders of majority of the then outstanding shares of the Series A preferred stock (a) amend the rights, preferences or privileges of the series A preferred stock, (b) amend or waive any provision of its Articles of Incorporation in a manner that would alter the rights, preferences or privileges of the Series A Preferred Stock, (c) create any class of capital stock or series or of preferred stock, the terms of which expressly provide that such class or series or (d) enter into any agreement with respect to the foregoing.

● Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the series A preferred stock will be entitled to receive an amount per share equal to the sum of $2.00, subject to adjustments, plus any accrued but unpaid dividends out of the assets of the Company available for distribution to the shareholders of the Company before any payment or distribution is made to holders of other classes of stocks.

● Each share of series A preferred stock is convertible at any time into one share of common stock, subject to adjustment, at the option of the holder. Each outstanding share of Series A preferred stock shall automatically convert into one share of the Company’s common stock upon the effectiveness of a registration statement filed by the Company with the Securities and Exchange Commission.

Warrants

Warrant activity for the three months ended March 31, 2013 is summarized as follows:

	Three Months Ended March 31, 2013
	Number of Warrants		Weighted Average Exercise Price
Balance at December 31, 2012		75,220	$	2.4
Granted		-		-
Exercised		-		-
Forfeited		-		-
Balance at March 31, 2013		75,220	$	2.4
Warrants exercisable at March 31, 2013		75,220	$	2.4

The following table summarizes the shares of the Company's common stock issuable upon exercise of warrants outstanding at March 31, 2013:

Warrants Outstanding								Warrants Exercisable
Range of Exercise Price		Number Outstanding at March 31, 2013		Weighted Average Remaining Contractual Life (Years)		Weighted Average  Exercise Price		Number Exercisable at March 31, 2013		Weighted Average  Exercise Price
$	2.40		75,220		3.75	$	2.40		75,220	$	2.40
			75,220		3.75	$	2.40		75,220	$	2.40

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NOTE 13 – 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. 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. The balance of statutory reserve represents the accumulated balance of the restricted net assets maintained by the Company. The accumulated balance of the statutory reserve of the Company as of March 31, 2013 and December 31, 2012 was $2,580,884 and $2,580,884, respectively.

For the three months ended March 31, 2013, statutory reserve activity is as follows:

	Hengchang Agriculture		Hengjiu		Total
Balance – December 31, 2012	$	2,580,884	$	-	$	2,580,884
Addition to statutory reserves		-		-		-
Balance –March 31, 2013	$	2,580,884	$	-	$	2,580,884

NOTE 14 – CONCENTRATIONS

As of March 31, 2013 and December 31, 2012, the Company held cash in PRC banks of $21,139,748 and $11,357,179, 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

One customers account for approximately 17% of the Company’s revenue during the three months ended March 31, 2013. At March 31, 2013, the amount for accounts receivable from the customer accounted for approximately 4.5% of the Company’s total accounts receivable. Two customers accounted for approximately 78.9% and 8.0% of the Company’s revenue during the three months ended March 31, 2012, respectively. At March 31, 2012, the two customers did not have any outstanding accounts receivable.

Suppliers

One supplier accounted for 100% of the Company’s purchases during the three months ended March 31, 2013. The Company did not have any outstanding payable to the supplier. Two suppliers accounted approximately for 31.8% and 18.9% of the Company’s purchases during the three months ended March 31, 2012, respectively. At March 31, 2012, the Company did not have any outstanding payable to the two suppliers and approximately 99.9 % of the Company’s advance payments to suppliers were made to one of the two suppliers.

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Research and Development Agreement

On March 1, 2011, the Company entered into an agreement with Maize Research Institute, Jilin Academy of Agricultural Sciences (“Jilin Academy”). The Company agrees to accept Jilin Academy as its research and development team to perform seed research and development work for the Company. The Company agrees to pay RMB 300,000 (approximately $46,000) to Jilin Academy for every new seed variety developed by Jilin Academy that passes national level approval and pay RMB 200,000 (approximately $31,000) to Jilin Academy for every new seed variety developed by Jilin Academy that passes provincial level approval. The Company will pay two RMB for every five kilograms of seed developed by Jilin. Additionally, the Company will pay RMB 500,000 (approximately $77,000) when the cumulative seed sale reaches 3 million kilograms. In addition, the Company will pay another RMB 500,000 (approximately $77,000) when the cumulative seed sale reaches 5.5 million kilograms. After the cumulative seed sale reaches 7.5 million, the Company will pay RMB 500,000 (approximately $77,000) to Jilin Academy as a reward. No reward will be given to improvement work done on the Company’s current seed products. Two new seed varieties developed by Jilin Academy for the Company passed the provincial level approval in 2012. In addition to the contracted approval award amounts, the Company agreed to reimburse the certain research and development expenses incurred by the project experts. The total amount paid for the two approval new seed varieties was RMB 4,000,000 (approximately $637,000 and $633,000 at March 31, 2013 and December 31, 2012, respectively) and was included in the intangible asset at March 31, 2013 and December 31, 2013.

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Land Lease Agreement

The Company entered into a land lease agreement with Gongzhuling Nanwaizi Town People’s Government (“Nanwaizi”) on January 1, 2012 to obtain the land operation right for 3000 hectares of corn field in Nanwaizi town, Gongzhuling. The land lease agreement started on December 1, 2011 and expires on November 30, 2027. The first year annual rent is RMB 10,000 (approximately $1,581) per hectare. The Company shall adjust the rent every year based on the corn market price using 6,000 kilograms as the per hectare corn production level base. The Company shall pay the annual lease on or before December 1 of every year. Nanweizi will enjoy all subsidized policies provided by the government and the Company will have the sole right to cultivate and operate the land. The Company is prohibited from changing the use of the land. The Company subsequently reached an agreement with Nanwaizi and revised the leased land area in 2012 from 3000 hectares to 112 hectares. Nanwaizi agreed to waive the lease payments on the land not leased by the Company in 2012. The Company is currently renegotiating with Nanwaizi on the actual hectares that will be leased in 2013.

On January 1, 2012, the Company entered into a land lease agreement with Gongzhuling Nanweizi Street Fangshengguangzi Village (“Fangshengangzi”) and Nanwaizi Street Operation & Management Station (“Street Station”) to obtain the land operation right for 200 hectares of paddy field in Nanwaizi town, Gongzhuling from Fangshengangzi. The land lease agreement started on January 1, 2012 and expires on December 31, 2027. The Company has the first right to renewal after the land lease is expired. The first year annual rent is RMB 15,000 (approximately $2,357) per hectare. The Company shall adjust the rent every year based on the rice market price using 4,800 kilograms as the per hectare corn production level base. The Company shall pay the annual lease to Fangshengangzi on or before February 28 of every year. Fangshengangzi and the Company will each enjoy certain subsidized policies provided by the government and the Company will have the sole right to cultivate and operate the land. The Company is prohibited from changing the use of the land. According to the agreement, the Company provided RMB 300,000 (approximately $47,000) to Fangshengangzi to be kept with Street Station as a guarantee deposit. The deposit will be returned to the Company one year prior to the lease expiration date. The Company subsequently reached an agreement with Fangshengangzi and revised the leased land area in 2012 from 200 hectares to 43 hectares. Fanshengangzi agreed to waive the lease payments on the land not leased by the Company in 2012. The Company is currently renegotiating with Nanwaizi on the actual hectares that will be leased in 2013.

Future minimum land lease payments required under the land lease agreements are as follows:

Periods Ending March 31:	Amount
2014	$	5,249,912
2015		5,249,912
2016		5,249,912
2017		5,249,912
2018		5,249,912
Thereafter		52,499,112
	$	78,748,672

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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 three months ended March 31, 2013 and 2012 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 in 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.  Prior to our reverse acquisition of Shiny Gold on February 11, 2011, we made no efforts to identify a possible business combination and had not previously conducted negotiations or entered into a letter of intent concerning any target business. On February 11, 2011, we completed a reverse acquisition transaction through a share exchange with Shiny Gold whereby we acquired all of the issued and outstanding ordinary shares of Shiny Gold in exchange for 12,800,000 shares of our common stock, par value $0.001 per share, which shares constituted approximately 92.8% of our issued and outstanding shares, as of and immediately after the consummation of the reverse acquisition.  As a result of the reverse acquisition, Shiny Gold became ourwholly owned subsidiary and the former shareholders of Shiny Gold became our controlling stockholders.  The share exchange transaction with Shiny Gold was treated as a reverse acquisition, with Shiny Gold as the acquirer and the Company as the acquired party.  

Upon the closing of the share exchange, Peter Goldstein, our then sole officer, resigned from all offices that he held. In addition, Mr. Goldstein resigned from his position as our sole director. Upon the closing of the reverse acquisition, our Board of Directors appointed Yushan Wei to fill the vacancy created by the resignation of Mr. Goldstein. In addition, our Board of Directors appointed Yushan Wei to serve as our President and Chief Executive Officer and Yufeng Wei as our Chief Operating Officer.

As a result of our acquisition of Shiny Gold, Shiny Gold became our wholly owned subsidiary and we have assumed the business and operations of Shiny Gold and its subsidiaries. We are now a China-based agriculture company which engages in research, genetic development and distribution of corn seed, cultivation, production, purchasing, storage, and distribution of corn and other agriculture products. We sell high quality agricultural products as raw materials for commercial livestock feeding and other renewable energy uses.  We plan to change our name to more accurately reflect our new business operations.

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Our Products

We purchase, store and sell corn and corn seed in China. We currently have the capacity to purchase and store up to 400,000 tons of corn and corn seeds on an annual basis. With respect to our corn business, we purchase fresh corn from farmers during early November of each calendar year. We dry the corn purchased, since such corn contains high moisture levels, and turn the corn into easy-to-store dry corn. After the drying process, the corn contains a safe moisture level and we are able to store the dry corn in our warehouse. The purchasing and drying process generally continues through August. The majority of the dry corn is sold to provincial granaries as food reserve in the Guangxi autonomous area, with the rest being sold to companies in the animal feed industry.

We also breed hybrid corn seeds through seed breeders. We provide the parent seed combinations to the seed breeder and the seed breeder is responsible for breeding the seeds in accordance with a set hybrid corn seed production process. Harvested seeds are shipped to us from the seed breeder at harvest. We sell the corn seeds to our customers. Our largest seed customer, Defeng Seed Co., Ltd., accounted approximately for 19.5% of our seed sales in 2012, with the rest being sold to local distributors who in turn sold to local farmers.

Facilities

Our principal executive offices are located in the Gongzhuling State Agricultural Technology Park. We operate the separation, storage and distribution processes along with the business offices on approximately 42 acres of land. We have 9 storage warehouses that can have a total capacity of 400,000 tons of product.  All storage facilities are covered with cooling and air circulating systems, and are equipped with electronic grain temperature inspection systems. We also have approximately ¼ mile of rail tracks for distribution purposes that can hold 29 train cars, each which holds approximately 65 tons of corn.

We acquired the land use rights and other fixed assets in Jilin National Agriculture Technology Demonstration Park (“Demonstration Park”) for RMB 87 million (approximately $13.6 million) in March 2011. The Demonstration Park is located on 180,000 square meters of land. The land certificate and property ownership certificate of the Demonstration Park were originally issued in the name of the Seller when the Demonstration Park was first established. Currently, we do not directly own the land use rights, but lease the rights from the Seller. We are in the process of working with the Seller to have the land use rights formally transferred to us and we expect the process will take up to a year to complete. The Demonstration Park is designated for seed research and development purposes, and majority of the land in the Demonstration Park has been used as new seed test plots since 2012.

Growth Strategy

We anticipate growing our business through developing and producing new corn seed varieties, the acquisition of additional land use rights, cultivation of that land, and modernization of farming techniques. We believe that our future success depends on our ability to provide high quality and advanced corn seed products to our customers. Although we currently do not have a dedicated research team in-house, we conduct research and development in cooperation with several research and development institutions and seed experts.  Additionally, we are also exploring an opportunity to start a joint venture with an international seed company in the PRC to further enhance our research and development effort. Once we have new corn seed varieties developed and approved by the government, we will be able to produce and distribute the hybrid corn seeds and increase our market share in the corn seed industry.

We plan to grow corn and rice on our leased land using the mechanized growing technology. We engage qualified and experienced farming professionals to manage the cultivation process for us. We believe the strategy will streamline the corn and rice growing process and help to reduce the growing costs and better control quality of the crops that we grow as we will be able to enjoy the economy of scale and utilize the in house technicians and experts we have to provide crop quality monitoring and control. We signed agreements to lease approximately 7,900 acres of farming land use right in 2012. In the summer of 2012, we began to cultivate and farm and expect to begin cultivating and farming approximately 474.5 acres of the land; the lease payment on the uncultivated land was waived by the lessor. We harvested approximately 1,500 tons of corn and 328 tons of rice and we expect to begin selling the self cultivated corn and rice in 2013. In order to cultivate the entire 7,900 acres of farm land in 2013, we will need to raise funds to meet the additional working capital needs.

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Our state of the art facilities are set up to separate, store and distribute the corn products for us and the local farmers. This unique operating process facilitates the sales of the seeds all the way through to the distribution and sales of the harvested corn. Additional growth strategy for us is in our acquisition of land use rights. We anticipate acquiring 17,000 additional land use acreage rights by end of 2014 but have not yet entered into any agreements to acquire this land. With us reaching our ultimate goal to cultivate and harvest more than 50,000 acres of corn by 2016, we will more than double our current volume, and with the increase in efficiency we expect we will continue to increase our profits. However, there is no guarantee that we will be able to achieve such land acquisitions as well as no guarantee that we will achieve the volume, efficiency or profit growth goals that we anticipate above.

We formed two agricultural cooperative associations with several other individuals in 2011. Being a founding member of the cooperative associations will enable us to have direct access to farmer members’ crop products, and obtain the crop products at a better price which in turn will allow us to enjoy higher profit margin. We will also be able to distribute our seed products directly to farmer members. Through the agricultural cooperative associations, our farmer members will be able to purchase seeds from us at a lower than market price while we are able to sell our seeds to the members at a price higher than we sell to distributors.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated 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 unaudited condensed consolidated financial statements.

Basis of presentation

Management acknowledges its responsibility for the preparation of the accompanying unaudited condensed consolidated 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 periods presented. The accompanying unaudited condensed consolidated 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 unaudited condensed consolidated financial statements in accordance with U.S. GAAP.

The Company’s unaudited condensed 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.

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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.

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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.

Deferred inventory costs

Deferred inventory costs consist of costs for crop land lease. In accordance with Accounting Standards Codification (“ASC’’) 905 “Agriculture’’ costs of growing crops shall be accumulated until the time of harvest. Growing crops shall be reported at the lower of cost or market. The amount will be transferred to inventories at the time of harvests.

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	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	%

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Land use rights

All land in the PRC is owned by the PRC government and cannot be sold to any individual or company. We have 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, we review 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. We recognize 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.

Advances from customers

Advances from customers consist of prepayments from customers for merchandise that had not yet been shipped. We recognize the deposits as revenue as customers take delivery of the goods, in accordance with its revenue recognition policy.  

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 its revenue primarily from the sale of corn crop, and branded corn seeds. The sales price of products sold is stated in the sales contract and is final and not subject to adjustment. We generally do not accept sales returns and do 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.

Related parties

Parties are considered to be related to us, if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with us. Related parties also include our principal owners, its management, members of the immediate families of our principal owners and our management and other parties with which we 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.

Recent Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-05 - Foreign Currency Matters (Topic 830) – “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. This amendment was issued to address diversity in practice related to the timing and amount of cumulative translation adjustment released into net income upon the occurrence of certain events. The amendment will be effective for the Company in its fiscal year commencing January 1, 2014. The Company has not yet determined what effect, if any, the adoption of this standard will have on its financial statements.

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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.

Results of Operations

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

	For the Three Months Ended March 31,
	2013						2012
	Dollars			Percentage			Dollars			Percentage
Net revenues	$	1,241			100.0	%	$	9,930			100.0	%
Cost of revenues		661			53.2	%		8,132			81.9	%
Gross profit		580			46.8	%		1,798			18.1	%
Operating expenses		721			58.1	%		619			6.2	%
(Loss) Income from operations		(141	)		(11.3	)%		1,179			11.9	%
Other expenses		(289)			(23.3	)%		(487	)		(4.9)	%
(Loss) Income before provision for income taxes		(430	)		(34.6	)%		692			7.0	%
Provision for income taxes		0			-	%		16			0.2	%
Net (Loss) income	$	(430	)		(34.6	)%	$	676			6.8	%
Preferred stock dividend		38			3	%		38			0.4	%
Net (Loss) income available to common shareholders	$	(468	)		(37.7	)%	$	638			6.4	%
Other comprehensive income:
Foreign currency translation adjustment		442			35.6	%		345			3.5	%
Comprehensive income	$	12			1.0	%	$	1,021			10.3	%

Results of Operations for the Three Months ended March 31, 2013 Compared to the Three Months ended March 31, 2012

Revenues. For the three months ended March 31, 2013, we had net revenues of $1,241,000, as compared to net revenues of $9,930,000 for the three months ended March 31, 2012, a decrease of 87.5%. Revenue and changes for each product line is summarized as follows (dollars in thousands):

	For the Three Months Ended March 31,
	2013		2012		(Decrease)			Percentage Change
Corn	$	206	$	7,550	$	(7,344	)		(97.3	)%
Corn seeds		1,035		2,276		(1,241	)		(54.5	)%
Other		-		104		(104	)		(100.0	)%
Total revenues	$	1,241	$	9,930	$	(8,689	)		(87.5	)%

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The decrease in revenues from the sale of corn was primarily attributable to the decrease in sales volume from 2012 to 2013. For the three months ended March 31, 2013, we sold approximately 587 metric tons of corn compared to 22,831 metric tons for the three months ended March 31, 2012, a decrease of approximately 22,244 metric tons or 97.4%. The average per metric ton selling price increase by approximately $11.5 or 3.4% from approximately $339.4 per metric ton for the period ended March 31, 2012 to approximately $350.9 per metric ton for the period ended March 31, 2013. The increase in our average per metric ton selling price was primarily due to the overall increase in the PRC corn market price. The significant decrease in sales volume in 2013 was because several of our major customers in Guangxi province reduced their purchases from us in 2013. As the northeast region of China experienced unfavorable weather conditions in 2012, the corn price in the northeast region increased in later part of 2012. However, the corn price in the southern part of China did not react as quickly. We delayed signing of corn sales contracts and/or shipping our corn products during the first quarter of 2013 in anticipation of the better market price in southern China in the later part of 2013. As a result, our revenue decreased in 2013.

The decrease in revenues from the sale of corn seed was attributable to the decrease in sales volume from 2012 to 2013 and partially offset by the higher average per metric ton selling price. We sold approximately 271 metric tons of corn seeds for the three months ended March 31, 2013 as compared to 757 metric tons of corn seeds for the three months ended March 31, 2012. For the 2013 corn growing season, we had more corn seed customers made purchases earlier in the 4th quarter of 2012; as such, we did not have as much corn seed inventory for sale in the first quarter of 2013. At the end of March 31, 2013, our entire corn seed inventory for the 2013 corn growing season was sold. We expect to start selling our corn seed products for the 2014 corn growing season in the fourth quarter of 2013. The average per metric ton selling price increase by approximately $812.6 or 27.3% from approximately $3,006.6 per metric ton for the period ended March 31, 2012 to approximately $3,819.2 per metric ton for the period ended March 31, 2013.

We generated other revenue primarily from the corn storage services we provided to a food processer. We did not generate other revenue for the three months ended March 31, 2013. For the three months ended March 31, 2012, we generated other revenue in the amount of approximately $104,000.

Cost of sales. Cost of sales decreased by $7,470,000, or 91.9%, from $8,131,000 for the three months ended March 31, 2012 to $661,000 for the three months ended March 31, 2013 and was primarily attributable to the decrease in corn cost and the corn seed costs. Our corn costs were approximately $199,000 for the three months ended March 31, 2013 and $7,021,000 in the three months ended March 31, 2012. The decrease was primarily due to the decrease in the corn sales volume and partially offset by a 7.5% increase in the corn unit cost.

Our corn seed costs were approximately $462,000 for the three months ended March 31, 2013 as compared to $1,090,000 for the three months ended March 31, 2012.  The corn seed cost was approximately $1,704 per metric tons for the three months ended March 31, 2013 as compared to $1,440 per metric tons for the three months ended March 31, 2012. The increase in corn seed per metric ton cost was primarily due to increase in corn seed cultivation costs incurred by our contracted seed grower in Xinjiang.

Cost of goods sold related to other revenue was primarily related to the amortization on our storage facility rented by our customer and related sales taxes. For the three months ended March 31, 2012, cost of goods sold for other revenue was approximately $20,000.

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Gross profit and gross margin. Our gross profit was $580,000 for the three months ended March 31, 2013 as compared to $1,798,000 for the three months ended March 31, 2012, representing gross margins of 46.8% and 18.1%, respectively. The increase in our gross margin percentage was mainly attributable to our corn seed business as a percentage of our total revenue and partially offset by the decrease in the gross margin from our corn business.  Gross margin percentages by product line are as follows:

	For the Three Months Ended March 31,
	2013			2012
Corn		3.4	%		7.0	%
Corn seeds		55.4	%		52.1	%
Other		-	%		80.5	%
Overall gross profit %		46.8	%		18.1	%

The gross profit margin percentage for our corn business decreased to 3.4% for the three months ended March 31, 2013 from 7.0% for the three months ended March 31, 2012 as the corn price continued to increase in the market and we had to fulfill previously signed contracts with sales prices that were pre-determined.

The gross profit margin percentage for our corn seed business increased to 55.4% for the three months ended March 31, 2013 from 52.1% for the three months ended March 31, 2012 as our new corn seed products were well received in the market and we were able to sell them at a higher price in 2013.

The gross margin percentage for other revenue was 80.5% in the three months ended March 31, 2012.

Research and development expenses. Research and development costs, which consist of fees incurred for third party seed experts for research and development related activities conducted for the Company and the depreciation and amortization expenses incurred on the Demonstration Park which was designated for use in seed related research and development activities, totaled $101,000 for period ended March 31, 2013. We started conducting research and development activities related to corn seeds in the Demonstration Park and other locations in the second quarter of 2012, as such, we did not incur research and development expenses in the first quarter of 2012.

Selling expenses. Selling expenses were $23,000 for the three months ended March 31, 2013 and $63,000 for the three months ended March 31, 2012, a decrease of $40,000 or 63.0%.  Selling expenses consisted of the following (in thousands):

	For the Three Months Ended March 31,
	2013		2012
Shipping and freight	$	17	$	52
Storage, packaging and handling		1		1
Other		5		10
	$	23	$	63

In the three months ended March 31, 2013, shipping and freight decreased by $35,000 or 67.3% as compared to the three months ended March 31, 2012 as fewer shipments were made in 2013.

Storage, packaging and handling fee mainly includes warehouse management fees and the corn packaging and handling fees. The costs remained materially consistent for the three months ended March 31, 2013 and 2012.

In the three months ended March 31, 2013, other selling expenses decreased by $5,000 or 50% as compared to the three months ended March 31, 2012. Other selling expenses include insurance expense, maintenance fee and other miscellaneous expenses and may vary year by year depending on specific situations.

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General and administrative expenses.General and administrative expenses amounted to $596,000 for the three months ended March 31, 2013, as compared to $557,000 for the three months ended March 31, 2012, an increase of $40,000 or 7.1%. General and administrative expenses consisted of the following (in thousands):

	For the Three Months Ended March 31,
	2013		2012
Compensation and related benefits	$	176	$	151
Depreciation and amortization		117		119
Professional fees		232		185
Other taxes		29		29
Other		42		73
	$	596	$	557

In the three months ended March 31, 2013, compensation and related benefits increased by $25,000 or 16.6% as compared to the three months ended March 31, 2012. The increase was primarily attributable to increased in the number of administrative staff and the average salary rate for our administrative staff.

Depreciation and amortization expenses remained materially consistent for the three months ended March 31, 2013 as compared to 2012.

In the three months ended March 31, 2013, professional fees increased by $47,000 or 25.4%. The increase was primarily attributable to increased in the legal fees related to the potential joint venture opportunities incurred in 2013.

Other taxes remained consistent for the three months ended March 31, 2013 as compared to 2012.

In the three months ended March 31, 2013, other general and administrative expenses decreased by $31,000 or 42.5%, and were primarily attributable to decrease in office and travel and entertainment related expenses and other miscellaneous expenses.

Income (loss) from operations. For the three months ended March 31, 2013, loss from operations was $140,000 as compared to income from operations $1,179,000 for the three months ended March 31, 2012, a decrease of $1,319,000 or 111.9%.

Other expenses. For the three months ended March 31, 2013, other expenses amounted to $290,000 as compared to other expenses of $487,000 for the three months ended March 31, 2012, a decrease of $197,000 or 40.5%. We incurred more interest expenses result of the decrease in interest expense as a result of our weight average bank loan outstanding amount was lower in 2013.

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 Agriculture has a status as an agricultural preliminary processor pursuant to the PRC tax code and Hengchang Agriculture is exempt from income taxes. The income tax expense incurred by Hengjiu was approximately $0 and $16,000 for the three months ended March 31, 2013 and 2012, respectively. The estimated tax savings due to the Hengchang Agriculture tax exemption for the three months ended March 31, 2013 and 2012 amounted to approximately $0 and $244,000, respectively.

Net income (loss). As a result of the factors described above, our net loss for the three months ended March 31, 2013 was $430,000 and our net income for the three months ended March 31, 2012 was $676,000, a decrease of $1,106,000 or 163.6%. The decrease was primarily due to the decrease of sales revenue in 2013.

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 $442,000 and $345,000 for the three months ended March 31, 2013 and 2012, respectively. This non-cash gain had the effect of increasing our reported comprehensive income.

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Comprehensive income. For the three months ended March 31, 2013 and 2012, comprehensive income of $12,000 and $1,021,000, respectively were derived from the sum of our net loss of $430,000 plus foreign currency translation gains of $442,000 in the three months ended March 31, 2013 and net income of $676,000 plus foreign currency translation gains of $345,000 in the three months ended March 31, 2012, respectively.

Liquidity and Capital Resources

On December 20, 2011, we completed a private offering (the “Offering”) consisting of 752,200 shares of the Company’s Series A Convertible Preferred Stock, par value $0.001 per share (the “Shares”), at a purchase price of $2.00 per share to certain investors. An aggregate of 752,200 Shares were sold in the Offering for gross proceeds to the Company of $1,504,400. As a result of the Offering, the Company issued an aggregate of 752,200 Shares as well as warrants to acquire an aggregate of 50,176 shares of our common stock to the placement agent in the Offering.

At March 31, 2013, our balance of cash was $21,153,305 comparing to $11,371,975 as of December 31, 2012. The increase in our cash balance was attributable to the net cash provided by operating activities and financing activities and partially offset by the net cash used in investing activities. Majority of these funds were located in financial institutions located in China.

Our primary uses of cash have been for the purchase of corn and corn seeds from farmers and seed producers, construction of our new 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,

● an increase in working capital requirements to lease farm lands for crop cultivations,

● addition of 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,

● capital expenditures for construction of plant facilities and machinery and equipments, and

● capital requirements to obtain a seed production license.

 Changes in our working capital position are summarized as follows:

	March 31, 2013		December 31, 2012		Increase
Current assets	$	78,730,246	$	71,506,310	$	7,223,936
Current liabilities		27,218,040		20,179,544		7,038,496
Working capital	$	51,512,206	$	51,326,766	$	185,440

Our working capital increased approximately $185,000 primarily attributable to:

● a net increase in cash and cash equivalent of approximately $9,781,000;

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Offset by:

● a net decrease in accounts receivable of approximately $2,304,000; and

● an increase in loan payable of approximately $6,440,000.

We require capital to purchase corn inventory and fund our working capital needs. During the three months ended March 31, 2013 and 2012, pursuant to loan agreements, we borrowed approximately $6,364,000 and $18,038,000, respectively, for the purchase of corn inventory from local growers and we repaid approximately $0 and $12,658,000 of the loan during the three months ended March 31, 2013 and 2012, respectively. 

At March 31, 2013 and December 31, 2012, loans payable consisted of the following:

	March 31, 2013		December 31, 2012
Loan payable under a group loan agreement to Jilin Gongzhuling Rural Cooperative Bank, due in September 2013 with annual interest at the banks base interest rate plus 50% (9.00% at March 31, 2013) secured by assets of the Company.	$	6,367,804	$	-
Loans payable to Gongzhuling Rural Cooperative Bank, due in November  2015 with annual interest at the banks base interest rate plus 50% (9.00% at March 31, 2013 and December 31, 2012) secured by assets of the Company.		7,004,585		6,966,324
Loan payable to China Construction Bank Siping Branch, due in August 2013 with annual interest at the banks base interest rate plus 20% (7.38% at March 31, 2013 and December 31, 2012) secured by assets of the Company.		6,288,207		6,253,859
	$	19,660,596	$	13,220,183

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, business expansion or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, 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 three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013			2012
Net cash provided by (used in) operating activities	$	3,236,841		$	(1,829,725	)
Cash flows (used in) investing activities	$	(48,271	)	$	(356,310	)
Cash flows provided by financing activities	$	6,524,937		$	10,196,974
Net increase in cash and cash equivalents	$	9,781,330		$	8,045,810

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Net cash flow provided by operating activities was approximately $3,237,000 for the three months ended March 31, 2013 as compared to net cash flow used in operating activities of $1,830,000 for the three months ended March 31, 2012.

Net cash flow provided by operating activities for the three months ended March 31, 2013 was mainly due to

● changes in operating assets and liabilities consisting primarily of, a decrease in accounts receivable of  approximately $2,451,000,and a decrease in inventories of approximately $415,000; and

● offset by net loss of approximately $430,000, adjusted for the add back of non-cash items such as depreciation and the amortization of land use rights of approximately $385,000.

Net cash flow used in operating activities for the three months ended March 31, 2012 was mainly due to

● changes in operating assets and liabilities consisting primarily of, an increase in prepaid VAT taxes of approximately $811,000, an increase in inventories of approximately $4,757,000 and a decrease in advances from customers of approximately $8,666,000; and

● offset by net income of approximately $676,000, adjusted for the add back of non-cash items such as depreciation and the amortization of land use rights of approximately $252,000, and changes in operating assets and liabilities consisting of a decrease in accounts receivable of approximately $8,153,000, a decrease in advances to suppliers of approximately $3,242,000.

Net cash flow used in investing activities was approximately $48,000 for the three months ended March 31, 2013 as compared to net cash used in investing activities of approximately $356,000 for the three months ended March 31, 2012. During the three months ended March 31, 2013, we purchased property and equipment and intangible assets for approximately $48,000. During the three months ended March 31, 2012, we purchased property and equipment and for approximately $356,000.

Net cash flow provided by financing activities was approximately $6,525,000 for the three months ended March 31, 2013 as compared to net cash flow provided by financing activities of approximately $10,197,000 for the three months ended March 31, 2012. During the three months ended March 31, 2013, we received proceeds from bank loan of approximately $6,364,000 and cash proceeds from a related party of approximately $161,000. During the three months ended March 31, 2012, we received proceeds from short-term bank loan of approximately $18,038,000 and capital contribution from our CEO and COO of approximately $4,747,000. We repaid short-term bank loan of approximately $12,658,000.

Contractual Obligations

The following tables summarize our contractual obligations as of March 31, 2013, and the effects of these obligations are expected to have on our liquidity and cash flows in future periods (in thousands).

				Payments Due by period
	Total		Less than 1 year		1-3 Years		3-5 Years		5 Years +
Contractual obligations:
Loan payable	$	19,661	$	19,661	$	-	$	-	$	-
Land lease		78,749		5,250		10,500		10,500		52,499
Total Contractual Obligations:	$	98,410	$	24,911	$	10,500	$	10,500	$	52,499

(1) Represents estimates remaining construction costs to build a grain storage facility.

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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 unaudited condensed 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 March 31, 2013 and 2012, we had unrealized foreign currency translation gain of $442,218 and $345,071, because of the change in the exchange rate.

Related Party Transactions

From time to time, the Company’s officers advanced funds to the Company for working capital purposes.  These advances are non-interest bearing, unsecured and payable on demand. The amounts due to Director are due to timing difference in actual compensation payouts to the directors.

At March 31, 2013 and December 31, 2012, due to related parties consisted of the following:

	March 31, 2013		December 31, 2012
Yushan Wei (controlling person of the Company’s majority shareholder and chief executive officer)	$	3,691,054	$	3,551,175
Yufeng Wei (Chief operating officer)		1,264,078		1,236,559
Dore Perler (Director)		11,875		5,625
Megan Penick (Director)		11,875		5,625
Li Changhua (Director)		15,625		9,375
Total	$	4,994,507	$	4,808,359

Jilin Hengchang Fertilizer Co., Ltd.

Mr. Yushan Wei, Mr. Yufeng Wei and Hengchang Agriculture formed a PRC limited company, Jilin 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.  Hengchang Agriculture owns 20% of Hengchang Fertilizer at March 31, 2013.  Hengchang Fertilizer started its operations in February 2012. 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 June 30, 2013.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Exchange Rates Risk

Substantially all of our operating revenues and expenses are denominated in RMB. We operate using RMB and the effects of foreign currency fluctuations are largely mitigated because local expenses in the PRC are also denominated in the same currency. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Because we generally receive cash flows denominated in RMB, our exposure to foreign exchange risks should be limited.

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Our assets and liabilities, of which the functional currency is the RMB, are translated into USD using the exchange rates in effect at the balance sheet date, resulting in translation adjustments that are reflected as cumulative translation adjustment in the shareholders’ equity section on our consolidated balance sheets. A portion of our net assets are impacted by changes in foreign currencies translation rates in relation to the U.S. dollar. For the periods ended March 31, 2013 and 2012, we had unrealized foreign currency translation gain of $442,218 and $345,071, respectively, because of the change in the exchange rate.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of the RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China.

To the extent we decide to convert RMB denominated cash amounts into U.S. dollars for the purpose of making any dividend payments, which we have not declared but may declare in the future, or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Conversely, if we need to convert U.S. dollars into RMB for operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount it received from the conversion. We have not used, and do not currently expect to use in the future, any forward contracts or currency borrowings to hedge exposure to foreign currency exchange risk.

Interest Rate Risk

We have interest-rate risk exposure for changes in interest rates relating to our outstanding borrowings. We did not use any interest-rate hedging contracts to manage our exposure to changing interest rates. At March 31, 2013, we had $19.7 million of debt outstanding at a weighted average interest rate of 8.4%. A one percentage change in the weighted average rate would affect annual interest by approximately $197,000.

Item 4.   Controls and Procedures.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management, including Yushsan Wei, our chief executive officer, and Yuejun Li, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2013.

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 Securities 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 our chief financial officer. Based on that evaluation, Mr. Wei and Mr. Li concluded that our disclosure controls and procedures were not effective as of March 31, 2013.

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. Our management concluded that there is a material weakness in our internal control over financial reporting as of March 31, 2013. The material weakness identified did not result in the restatement of any previously reported financial statements or any related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

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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 1. Legal Proceedings

From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company.  

Item 1A. Risk Factors

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report on Form 10-Q, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our shares of common stock could decline, and you may lose all or part of your investment. You should read the section entitled “Cautionary Note On Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this Quarterly Report.

Risks Relating to our Business and Industry

We are subject to the risks that are inherent in farming.

Our results of operations may be adversely affected by numerous factors over which we have little or no control and that are inherent in farming, including reductions in the market prices for our products, adverse weather and growing conditions, pest and disease problems, and new PRC regulations regarding farming and the marketing of agricultural products.

Our earnings are sensitive to fluctuations in market prices and demand for our products.

Excess supplies often cause severe price competition in our industry. Growing conditions in various parts of the PRC, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product.

Fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. The selling price received for each type of produce depends on all of these factors, including the availability and quality of the produce item in the market, and the availability and quality of competing types of produce.

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In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products.

Adverse weather conditions could reduce supply and/or demand for our products.

The supply of and demand for our products fluctuate significantly with weather conditions, which could have either a positive or negative effect on production. If any natural disasters, such as flood, drought, hail, tornadoes or earthquakes, occur, supply for our products would likely be reduced.

We may not be able to obtain regulatory or governmental approvals for our products.

The manufacture and sale of our agricultural products in the PRC is regulated by the PRC and the local Provincial Government. The legal and regulatory regime governing our industry is evolving, and we may become subject to different, including more stringent, requirements than those currently applicable to us. We may be vulnerable to local and national government agencies or other parties who wish to renegotiate the terms and conditions of, or terminate their agreements or other understandings with us, or implement new or more stringent requirements, which may require us to suspend or delay production of their products. Our many permits and licenses related to the agricultural and food industries may expire and there is not guarantee the government or certifying agency will renew our licenses and/or certifications.

Potential environmental liability could have a material adverse effect on our operations and financial condition.

To the knowledge of our management team, neither the production nor the sale of our products constitutes activities, or generates materials that create any environmental hazards or violates PRC environmental laws. Although it has not been alleged by PRC government officials that we have violated any current environmental regulations, we cannot assure you that the PRC government will not amend the current PRC environmental protection laws and regulations. Our business and operating results may be materially and adversely affected if we were to be held liable for violating existing environmental regulations or if we were to increase expenditures to comply with environmental regulations affecting our operations.

Any significant fluctuation in price of our raw materials may have a material adverse effect on the manufacturing cost of our products.

The prices for the raw materials that we use in processing and/or cultivating our products are subject to market forces largely beyond our control, including the price of coal, our energy costs, labor costs, market demand, and freight costs. The prices for these raw materials may fluctuate significantly based upon changes in these forces. If we are unable to pass any raw material price increases through to our customers, we could incur significant losses and a diminution of the market price of our common stock.

We require short-term financing to fund our working capital, especially due to the seasonal nature of our business.

The nature of the agricultural corn distribution and seed production industry involves expenses and revenue cycles that are seasonal in nature. From period to period, we may face costs that are in excess of our cash flow sources. The advance payments made to our corn and seed producing farmers may exceed the amount of deposits received from our customers, the distributors and end users. As a result, we sometimes rely upon short term loans to cover our expenses pending receipt of cash payment from our customers at the time of corn and seed purchases.  Although historically we have had access to sufficient financing to manage our cash flow cycles, we cannot be certain that we will be able to obtain sufficient debt financing on terms that are satisfactory to us to maintain consistent operating results given changing credit conditions worldwide and internal PRC policies.  Downgrades in our credit rating, tightening of related credit facilities or financial markets or other limitations on our ability to access short-term financing would increase our interest costs and adversely affect our operating results and operations.

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Because of the nature of our business, which has seasonal variation, it is likely that our future financial performance will fluctuate from period to period.

Our operating results likely will fluctuate due to a number of factors, many of which are beyond our control. Our quarterly and annual revenues and costs and expenses as a percentage of our revenues may be significantly different from our historical rates. Our operating results in future quarters may fall below expectations. The industry in which we operate is seasonal in nature.  As several of our major corn customers are governmental entities, the timing of their purchases may vary based on the fluctuations in the granary reserve level. The historical sales season of our corn seeds concentrated from October December. As a result, if we are unable to generate sufficient working capital from cash flow from operations and working capital facilities, we may encounter liquidity difficulties from the period to period, which may harm our operations. The seasonal nature of our business causes our operating results to fluctuate from quarter to quarter. Any unexpected seasonal or other fluctuations could cause the price of our common shares to fall. As a result, you may not rely on comparisons of our quarterly operating results as an indication of our future performance.

We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries.

We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries. Significant industry-related accidents and natural disasters may cause interruptions to various parts of our operations, or could result in property or environmental damage, increase in operating expenses or loss of revenue. The occurrence of such accidents and the resulting consequences may not be covered adequately, or at all, by the insurance policies we carry. In accordance with customary practice in China, we do not carry any business interruption insurance or third party liability insurance for personal injury or environmental damage arising from accidents on our property or relating to our operations other than our automobiles. Losses or payments incurred may have a material adverse effect on our operating performance if such losses or payments are not fully insured.

We could face increased competition.

We believe that competitors will try to expand their sales and build up their distribution networks in our principal market. We believe this trend will continue and probably accelerate. Increased competition may have a material adverse effect on our financial condition and results of operations.

Our failure to comply with increasingly stringent environmental regulations and related litigation could result in significant penalties, damages and adverse publicity for our business.

In recent years, the government of China has become increasingly concerned with the degradation of China’s environment that has accompanied the country’s rapid economic growth. In the future, we expect that our operations and properties will be subject to extensive and increasingly stringent laws and regulations pertaining to, among other things, the discharge of materials into the environment or otherwise relating to protection of the environment. Failure to comply with any laws and regulations and future changes to them may result in significant consequences to us, including civil and criminal penalties, liability for damages and negative publicity. Additional environmental issues may require currently unanticipated investigations, assessments or expenditures, or that requirements applicable to us will not be altered in ways that will require us to incur significant additional costs.

Consumer concerns regarding the safety and quality of food products or health concerns could adversely affect sales of our products.

Our sales performance could be adversely affected if consumers lose confidence in the safety and quality of our products. Consumers in the PRC are increasingly conscious of food safety and nutrition. Consumer concerns could discourage them from buying certain of our products and cause our results of operations to suffer.

We may be subject to substantial liability should the consumption of any of our products cause personal injury or illness, and we do not maintain product liability insurance to cover our potential liabilities.

The sale of food products for human consumption involves an inherent risk of injury to consumers, and we do not have product liability or any other insurance covering such risks. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions that our products caused personal injury or illness could adversely affect our reputation with customers and our corporate and brand image. We do not maintain product liability insurance. Product liability claims may be asserted against us, which could have a material adverse effect on our revenues, profitability and business reputation.

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The government of the PRC has broad powers to set price controls, which, if adopted, could impair our profitability.

The government of the PRC has broad powers to adopt price controls, and has recently expressed concern about the effect of the rising prices of food. Although it has not sought to apply price controls to grains, the government has the power to do so. If price controls are adopted, our revenue would be affected.

We require various licenses and permits to operate our business, and the loss of or failure to renew any or all of these licenses and permits could require us to suspend some or all of our production or distribution operations.

In accordance with PRC laws and regulations, we are required to maintain various licenses and permits in order to operate our business. We are required to comply with applicable hygiene and food safety standards in relation to our production processes. Our premises and transportation vehicles are subject to regular inspections by the regulatory authorities for compliance with applicable regulations. Failure to pass these inspections, or the loss of or failure to renew our licenses and permits, could require us to temporarily or permanently suspend some or all of our production or distribution operations, which could disrupt our operations and adversely affect our revenues and profitability.

Adverse weather conditions could reduce supply and/or demand for our products.

The supply of and demand for our grain products fluctuate significantly with weather conditions, which could have either a positive or negative effect on production. If any natural disasters, such as flood, drought, hail, tornadoes or earthquakes, occur, supply for our products would likely be reduced.

We may encounter substantial competition in our business and our failure to compete effectively may adversely affect our ability to generate revenue.

We believe that existing and new competitors will continue to improve their products and to introduce new products with competitive price and performance characteristics. We expect that we will be required to continue to invest in product development and productivity improvements to compete effectively in our markets. Our competitors could develop a more efficient product or undertake more aggressive and costly marketing campaigns than ours, which may adversely affect our marketing strategies and could have a material adverse effect on our business, results of operations and financial condition.

Our major competitors may be better able than we to successfully endure downturns in our sector. In periods of reduced demand for our products, we can either choose to maintain market share by reducing our selling prices to meet competition or maintain selling prices, which would likely sacrifice market share. Sales and overall profitability would be reduced in either case. In addition, we cannot assure you that additional competitors will not enter our existing markets, or that we will be able to compete successfully against existing or new competition.

We may not be able to obtain regulatory or governmental approvals for our products.

The manufacture and sale of our agricultural products in the PRC is regulated by the PRC and the local Provincial Government. The legal and regulatory regime governing our industry is evolving, and we may become subject to different, including more stringent, requirements than those currently applicable to us. We may be vulnerable to local and national government agencies or other parties who wish to renegotiate the terms and conditions of, or terminate their agreements or other understandings with us, or implement new or more stringent requirements, which may require us to suspend or delay production of their products. Our many permits and licenses related to the agricultural and food industries may expire and there is not guarantee the government or certifying agency will renew our licenses and/or certifications.

Potential environmental liability could have a material adverse effect on our operations and financial condition.

To the knowledge of our management team, neither the production nor the sale of our products constitutes activities, or generates materials that create any environmental hazards or violates PRC environmental laws. Although it has not been alleged by PRC government officials that we have violated any current environmental regulations, we cannot assure you that the PRC government will not amend the current PRC environmental protection laws and regulations. Our business and operating results may be materially and adversely affected if we were to be held liable for violating existing environmental regulations or if we were to increase expenditures to comply with environmental regulations affecting our operations.

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Any significant fluctuation in price of our raw materials may have a material adverse effect on the manufacturing cost of our products.

The prices for the raw materials that we use in the manufacture of our grain products are subject to market forces largely beyond our control, including the price of coal, our energy costs, market demand, and freight costs. The prices for these raw materials may fluctuate significantly based upon changes in these forces. If we are unable to pass any raw material price increases through to our customers, we could incur significant losses and a diminution of the market price of our common stock.

We may need to hire additional employees.

Our future success also depends upon our continuing ability to attract and retain highly qualified personnel. Expansion of our business and our management and operations will require additional managers and employees with industry experience, and our success will be highly dependent on our ability to attract and retain skilled management personnel and other employees. There can be no assurance that we will be able to attract or retain highly qualified personnel. Competition for skilled personnel in the agriculture industry is significant. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees.

Our operations are currently focused in China, and any adverse change to the economy or business environment in China could significantly affect our operations, which would lead to lower revenues and reduced profitability.

Our operations are currently concentrated in China. Because of this concentration in a specific geographic location, we are susceptible to fluctuations in our business caused by adverse economic or other conditions in this region, including natural or other disasters. A stagnant or depressed economy in China, or in any of the other markets that we serve, could adversely affect our business, results of operations and financial condition.

Labor disputes could significantly affect our operations.

Labor disputes with our employees or labor disputes, work stoppages or slowdowns at any of its subcontractors or suppliers could significantly disrupt operations or expansion plans. Delays caused by any such disruptions could materially affect projections for increased capacity, production and revenues, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

The lack of public company experience of our officers and some of our directors could adversely impact our ability to comply with the reporting requirements of U.S. Securities laws.

Our officers and some of our directors have no experience managing a public company which could adversely impact our ability to comply with the legal, regulatory, and reporting requirements of U.S. Securities laws. Our management may not be able to implement programs and policies in an effective and timely manner to adequately respond to such legal, regulatory and reporting requirements, including the establishment and maintenance of internal controls over financial reporting. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our ability to comply with the reporting requirements of the Securities Exchange Act of 1934, which are necessary to maintain public company status. If we were to fail to fulfill those obligations, our ability to operate as a U.S. public company would be in jeopardy in which event you could lose your entire investment in our Company. Our ability to operate successfully may depend on our ability to attract and retain qualified personnel with appropriate experience in the management of a public company.  Our ability to find and retain qualified personnel on our terms and budget may be very limited.

A slowdown or other adverse developments in the Chinese economy may materially and adversely affect our customers’ demand for our products and our business.

All of our operations are conducted in the PRC and all of our revenues are generated from sales to businesses operating in the PRC. Although the Chinese economy has grown significantly in recent years, such growth may not continue. We do not know how sensitive we are to a slowdown in economic growth or other adverse changes in Chinese economy which may affect demand for our grain products.  A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in China may materially reduce the demand for our products and in turn reduce our results of operations.

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Our President, Chief Executive Officer and Chairman, Yushan Wei, exercises significant control over matters requiring shareholder approval through his stock ownership held through Ally Joy Investments, Ltd., an entity over which Mr. Wei maintains voting control. Mr. Wei’s stock ownership may result in the delay or prevention of a change in our control.

Mr. Yushan Wei, our President, Chief Executive Officer and Chairman, through his control of Ally Joy Investments Ltd., currently has voting power equal to approximately 66% of our voting securities. As a result, Mr. Wei exercises significant control over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions.  This concentration of ownership by Mr. Wei may also have the effect of delaying or preventing a change in control of us that may be otherwise viewed as beneficial by shareholders other than management.

We rely on three significant customers to purchase our corn and one significant customer to purchase our corn seeds, so the decrease in business from one or both of these significant customers could have a material adverse impact on our business .

During fiscal 2012, 100% of our corn sales was from three corporate entities — Jilin Dida Starch Biochemical Co., Ltd (accounting for 56% of our corn sales), Liuzhou Granary Reserve (accounting for 27% of our corn sales) and Guangxi Nanning Granary Reserve (accounting for 17% of our corn sales). During fiscal 2011, approximately 87% of our corn sales was from two corporate entities — Nanning Granary Reserve (accounting for 61% of our corn sales) and Liuzhou Granary Reserve (accounting for 26% of our corn sales). We have no long-term agreements with our customers and a decision by any of these key customers to reduce the amount of purchases from us whether motivated by strategic and operational initiatives or financial difficulties could have a material adverse impact on our business, financial condition and results of operations. Defeng Seed Co., Ltd. purchased approximately 19.5% of our corn seeds.

We have no long-term agreements with our customers and a decision by any of these key customers to reduce the amount of corn supply provided to us could have a material adverse impact on our business, financial condition and results of operations.

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We rely on a few significant corn and corn seed suppliers, so the decrease of our receipt of corn or corn seeds from one or more of these significant suppliers could have a material adverse impact on our business.

During the year ended December 31, 2012, approximately 59.5% of our corn and corn seed supply was from two suppliers —

- Huanglong Food Industry, Co, Ltd.; (accounting for 25% of our total purchases and 39.7% of corn supply);

- Niu Miao (corn seed producer) (accounting for 34.5% of our total purchases and 100% of our corn seed supply).

During the year ended December 31, 2011, approximately 31% of our corn and corn seed supply was from two suppliers —

- Gongzhuling Jinyu Grain Purchase and Storage Co., Ltd. (accounting for 15% of our total purchases and 18% of corn supply);

- Niu Miao (corn seed producer) (accounting for 16% of our total purchases and 100% of our corn seed supply).

We have no long-term agreements with our suppliers and a decision by any of these key suppliers to reduce the amount of corn supply provided to us could have a material adverse impact on our business, financial condition and results of operations.

Our corn seed growth prospects may be materially and adversely affected if we are unable to develop or acquire new cord seed products

Our corn seed products are upstream products ultimately used by farmers in China. The profitability of our business depends on sustained and recurring orders from our direct customers, which include distributors and other intermediaries. Reorder rates are uncertain due to several factors, many of which are beyond our control. These factors include changing customer preferences, competitive price pressures, failure to develop new products to meet the evolving demands of farmers in China, the development of higher-quality corn seed products by our competitors and general economic conditions. If we are unable to develop or acquire additional corn seed products that meet the demands of farmers in China, or if our competitors develop corn seed products that are favored by farmers in China, our growth prospects may be materially and adversely affected and our revenues and profitability may decline.

Risks Relating to the People's Republic of China

Certain political, geographic and economic factors relating to operating in the PRC could adversely affect our company.

The PRC is transitioning from a planned economy to a market economy. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in the PRC's economic and social conditions as well as by changes in the policies of the PRC government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of restrictions on currency conversion in addition to those described below.

The uncertain applications of many relatively new PRC laws that may apply to us create an unpredictable environment for our business operations and could have a material adverse effect on us.

The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value. In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects.

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Labor costs may be increased due to the implementation of the new PRC Labor Contract Law.

The PRC Labor Contract Law was adopted by the Standing Committee of the National People’s Congress of PRC on June 29, 2007 and became effective on January 1, 2008. The implementation of the new law, especially the following provisions, may increase our labor costs: (a) an employer shall make monetary compensation, which shall be based on the number of an employee’s working years with the employer at the rate of one month’s wage for each year, to the employee upon termination of the employment contract with certain exceptions (for example, in the circumstances where the term of a fixed-term employment contract expires and the employee does not agree to renew the contract even though the conditions offered by the employer are the same as or better than those stipulated in the current contract); (b) the wages of an employee on probation may not be less than the lowest wage level for the same job with the employer or less than 80% of the wage agreed upon in the employment contract, and may not be less than the local minimum wage rate; (c) if an employee has been working for the employer for a consecutive period of not less than 10 years, or if a fixed-term employment contract with an employee was entered into on two consecutive occasions, generally the employer should enter into an open-ended employment with such employee, unless the employee requests for a fixed-term employment contract; (d) if an employer fails, in violation of the related provisions, to enter into an open-ended contract with an employee, it shall each month pay to the employee twice his wage, starting from the date on which an open-ended employment contract should have been entered into; (e) if an employer fails to enter into a written employment contract with an employee more than one month but less than one year after the date on which the employer started using him, the employer shall each month pay to the employee twice his wage; and (f) if an employer hires an employee whose employment contract with another employer has not yet been terminated or ended, causing the other employer to suffer a loss, it shall be jointly and severally liable with the employee for the compensation of such loss. Our labor costs may increase due to the implementation of the new PRC Labor Contract Law and our business and results of operations may be materially and adversely affected.

Currency conversion could adversely affect our financial condition.

The PRC government imposes control over the conversion of Renminbi into foreign currencies. Under the current unified floating exchange rate system, the People's Bank of China publishes an exchange rate, which we refer to as the PBOC exchange rate, based on the previous day's dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.

Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIEs, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in the PRC. Conversion of Renminbi into foreign currencies for capital account items, including direct investment, loans, and security investment, is still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items.

Enterprises in the PRC (including FIEs) which require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange, or “SAFE,” effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.

Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE and its relevant branches must be sought.

Furthermore, the Renminbi is not freely convertible into foreign currencies nor can it be freely remitted abroad. Under the PRC’s Foreign Exchange Control Regulations and the Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, Foreign Invested Enterprises are permitted either to repatriate or distribute its profits or dividends in foreign currencies out of its foreign exchange accounts, or exchange Renminbi for foreign currencies through banks authorized to conduct foreign exchange business. The conversion of Renminbi into foreign exchange by Foreign Invested Enterprises for recurring items, including the distribution of dividends to foreign investors, is permissible. The conversion of Renminbi into foreign currencies for capital items, such as direct investment, loans and security investment, is subject, however, to more stringent controls.

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Exchange rate volatility could adversely affect our financial condition.

Since 1994, the exchange rate for Renminbi against the United States dollar has remained relatively stable. However, in 2005, the Chinese government announced that it would begin pegging the exchange rate of the Chinese Renminbi against a number of currencies, rather than just the U.S. dollar and, the exchange rate for the Renminbi against the U.S. dollar became RMB8.02 to $1.00. If we decide to convert Chinese Renminbi into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the Chinese Renminbi we convert would be reduced. There can be no assurance that future movements in the exchange rate of Renminbi and other currencies will not have an adverse effect on our financial condition.

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.

We are dependent on our relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.

Future inflation in China may inhibit our ability to conduct business in China. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

Since most of our assets are located in the PRC, any dividends of proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.

Our assets are predominantly located inside PRC. Under the laws governing Foreign Invested Enterprises in PRC, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to the relevant government agency's approval and supervision as well as the foreign exchange control. This may generate additional risk for our investors in case of dividend payment and liquidation.

Risks Associated with our Securities

Our securities are restricted securities with limited transferability.

Our securities should be considered a long-term, illiquid investment. Our Common Stock has not been registered under the Act, and cannot be sold without registration under the Act or any exemption from registration. In addition, our Common Stock is not registered under any state securities laws that would permit their transfer. Because of these restrictions and the absence of an active trading market for the securities, a shareholder will likely find it difficult to liquidate an investment.

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We may be subject to penny stock rules which will make the shares of our common stock more difficult to sell.

We may be subject now and in the future to the SEC’s “penny stock” rules if our shares of common stock sell below $5.00 per share. Penny stocks generally are equity securities with a per share price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before or with the customer’s confirmation.

In addition, the penny stock rules require that prior to a transaction the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our common stock. As long as our shares of common stock are subject to the penny stock rules, the holders of such shares of common stock may find it more difficult to sell their securities.

Our shares of common stock are not currently traded on any exchange, and the price may not reflect our value and there can be no assurance that there will be an active market for our shares of common stock in the future.

Our shares of common stock are not currently traded on any exchange. There can be no assurance that there will be an active market for our shares of common stock in the future. Investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business.

Due to recent publicized accounting failures involving Chinese companies, it is possible investors may have a reduced interest in purchasing our securities.

Over the course of the past year, there have been highly publicized incidents involving accounting failures with respect to Chinese companies, including some Chinese companies that have gone public through a reverse merger. Due to the fact that these accounting failures involving Chinese companies has been so highly publicized, it is possible that investors may have a reduced interest in purchasing our securities. As a result, we may have difficulty attracting additional investors in the future, and this may also result in investors having difficulty selling their securities.

Item 2. Unregistered sales of equity securities and use of proceeds

None. 

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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Exhibit Number		Description
10.1		RMB Credit Line Loan Agreement
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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GSP-2, INC.
Date: May 20, 2013	By:	/s/ Yushan Wei
		Yushan Wei, Chief Executive Officer
		(Principal Executive Officer)

Date: May 20, 2013	By:	/s/ Yuejun Li
		Yuejun Li, Chief Financial Officer
		(Principal Financial Officer)

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