Unassociated Document

10-K/A 1 v084036_10ka.htm Unassociated Document

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 2

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

For the fiscal year ended: December 31, 2006

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: 000-49608

CHINA AGRITECH, INC.

(Exact Name Of Registrant As Specified In Its Charter)

Delaware	75-2955368
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
A# Room 0706-0707, The Spaces International Center No. 8, Dongdaqiao Road Chaoyang District, Beijing 100020 People’s Republic of China (Address of principal executive office, including zip code)
(86) 10-58702123
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

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

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

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

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý

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

The number of shares and aggregate market value of common stock held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter was 11,486,470 and $37,331,027, respectively.

There were 19,143,615 shares of common stock outstanding as of December 31, 2006.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

EXPLANATORY NOTES

China Agritech, Inc., or the Company, is filing this Amendment No. 2 on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31, 2006, or the 2006 Form 10-K, originally filed with the U.S. Securities and Exchange Commission on April 2, 2007, as amended by Amendment No. 1 on Form 10-K/A thereto filed with the U.S. Securities and Exchange Commission on April 19, 2007, to amend Item 8. “Financial Statements and Supplementary Data,” Item 9A. “Controls and Procedures,” and Item 15. “Exhibits, Financial Statement Schedules,” as more specifically described in the Explanatory Notes 1-4 below. The remainder of the information contained in the 2006 Form 10-K is not amended hereby and remains as set forth in the original filing, as previously amended.

Explanatory Note 1. The 2006 Form 10-K, as amended, did not include certain required selected quarterly financial data. The omitted selected quarterly financial data is included with this Form 10-K/A with the consolidated financial statements starting on Page F-1 of this Report.

Explanatory Note 2. The 2006 Form 10-K, as amended, is further amended by this Form 10-K/A to clarify the disclosure regarding internal controls and procedures in Item 9A.

Explanatory Note 3. The 2006 Form 10-K, as amended, is further amended by this Form 10-K/A to provide certain required financial statement schedules that were not included in the 2006 Form 10-K.

Explanatory Note 4. The 2006 Form 10-K, as amended, included an audit report that did not address our balance sheet for the year ended December 31, 2005 and the statements of income, stockholders’ equity and cash flows for the year ended December 31, 2004. This Form 10-K/A includes two separate audit reports that in combination address these periods and matters in addition to the periods and matters already addressed.

PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS FORM 10-K/A, INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT EVENTS OCCURRING AFTER THE DATE OF THE 2006 FORM 10-K OR MODIFY OR UPDATE THOSE DISCLOSURES AFFECTED BY SUBSEQUENT EVENTS.

INTRODUCTORY NOTE

Except as otherwise indicated by the context, references in this Form 10-K/A to "China Agritech," "we," "us," or "our," are references to the combined business of China Agritech, Inc. and its consolidated subsidiaries. References to "Tailong" are references to our wholly-owned subsidiary, China Tailong Holdings Company Limited, references to "Pacific Dragon" are references to Tailong’s 90% owned subsidiary, Pacific Dragon Fertilizers Co. Ltd., references to “CAI” are to our wholly owned subsidiary, CAI Investment Inc., references to “Beijing Agritech” are to our wholly-owned indirect subsidiary, Beijing Agritech Fertilizer Ltd. and references to Anhui Agritech are to our wholly-owned subsidiary, Anhui Agritech Development Co. Ltd. References to "China" or "PRC" are references to the People's Republic of China. References to "RMB" are to Renminbi, the legal currency of China, and all references to "$" and dollar are to the U.S. dollar, the legal currency of the United States.

Special Note Regarding Forward Looking Statements

In addition to historical information, this Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We use words such as "believe," "expect," "anticipate," "project," "target," “plan,” "optimistic," "intend," "aim," "will" or similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance, liquidity and capital resources and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, that, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include the risks identified in Item 1A. “Risk Factors,” included in the 2006 Form 10-K which was filed on April 2, 2007.

All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors mentioned in the "Risk Factors" section of the Company included in the 2006 Form 10-K filed on April 2, 2007; and any statements or assumptions underlying any of the foregoing. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

Item 8. Financial Statements and Supplementary Financial Data.

The consolidated financial statements, including selected quarterly financial data, for the Company begin on page F-1 of this Report.

Item 9A. Controls and Procedures.

The third paragraph of Item 9A in the original filing is amended by adding the following to the end of such paragraph:

Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving our objectives. Our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are adequate to provide reasonable assurance that our internal control objectives are met.

PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following documents are filed as part of this Report:

1. Financial Statements:

Reports of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets—December 31, 2006 and 2005.

Consolidated Income Statements—Years ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Shareowners’ Equity—Years ended December 31, 2006, 2005

and 2004.

Consolidated Statements of Cash Flows—Years ended December 31, 2006, 2005 and 2004.

Notes to Consolidated Financial Statements.

2. Financial Statement Schedules:

Schedule I—Condensed Financial Information of Registrant.

All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.

3. Exhibits:

2.1** Agreement and Plan of Reorganization, dated as of December 25, 2004, as amended, by and among China Agritech, Inc. (then named Basic Empire Corp), Tailong Holdings and Tailong Holding Stockholders.

3.1** Amended and Restated Certificates of Incorporation of China Agritech, Inc.;

3.2** Bylaws of China Agritech, Inc. adopted on 2005.

3.3** Bylaws of Tailong adopted on October 21, 2003.

3.4** Articles of Association of Pacific Dragon adopted on June 9, 2004.

10.1** Transfer Agreement, dated as of June 8, 2004, by and among shareholders of Pacific Dragon.

10.2** Escrow Agreement dated January 25, 2005 by and among the Company, Chinamerica Fund, LLP, Gary Evans, and the Securities Transfer Corporation.

10.3** Stock Purchase Agreement dated February 3, 2005, by and among Chinamerica Fund, LLP, Gary Evans and the Company

10.4** License Agreement between Chang Yu and Pacific Dragon dated January 6, 2005.

10.5** Employment Contract between Chang Yu and Pacific Dragon.

10.6** Lease between Pacific Dragon and Yinlong dated December 30, 2003.

10.7** Transfer of Capital Contribution and Profit Agreement dated June 8, 2004, by and among Tailong Holdings, Harbing Yinlong Co. Ltd., Beijing Taiming Applied Technology Institute, and Cathay-Pacific Enterprises Ltd.

10.8** Joint Venture Contract of Sino-foreign Contractual Joint

Venture Pacific Dragon dated June 9, 2004.

10.9** Stock Purchase Agreement dated June 13, 2005 by and among Chinamerica Fund, LLP, Steven S. Taylor, Jr. and the Company.

10.12** Amendment to the Lease Agreement, dated June 28, 2005, by and between Pacific Dragon Fertilizers Co. Ltd. and Yinlong Industrial Co. Ltd.

10.13** Lease Agreement, dated May 31, 2004, by and between China Tailong Holdings Company Limited and Upgrade International Trading Co., Ltd.

10.14** Lease Agreement, dated May 15, 2005, by and between China Tailong Holdings Company Limited and Beijing Guangxin Long'An Real Estate Brokerage Co., Ltd.

10.16** Permanent License Agreement, dated December 3, 2005, by and between Yu Chang and Pacific Dragon Fertilizers Co. Ltd.

14** Code of Ethics

21.1** Subsidiaries of the Registrant

31.1* Certification of Chief Executive Officer, pursuant to Rule 13a - 14(a)

31.2* Certification of Chief Financial Officer, pursuant to Rule 13a - 14(a)

32.1* Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2* Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith

** Previously filed

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	CHINA AGRITECH, INC.
August 10, 2007	By:/s/ Yu Chang
(Date Signed)	Yu Chang, Chief Executive Officer, President, and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature	Capacity	Date
/s/ Yu Chang Yu Chang	Chief Executive Officer, President, Secretary and Director	August 10, 2007
/s/ Li Jun Peng Li Jun Peng	Chief Financial Officer and Controller	August 10, 2007
/s/ Xiaorong Teng Xiaorong Teng	Vice President of Sales and Director	August 10, 2007
/s/ Tao Liang Tao Liang	Director	August 10, 2007

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of

China Agritech and Subsidiaries

We have audited the accompanying consolidated balance sheets of China Agritech Inc. and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders' equity, and cash flows for the two year periods ended December 31, 2006 and 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Agritech Inc. and Subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their consolidated cash flows for the two year periods ended December 31, 2006 and 2005, in conformity with U.S. generally accepted accounting principles.

/s/ Kabani & Company, Inc.

Certified Public Accountants

Los Angeles, California

March 10, 2007

Report of Independent Registered Public Accounting Firm

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS

OF CHINA TAILONG HOLDINGS COMPANY LIMITED

(Predecessor entity of China Agritech, Inc.)

We have audited the consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 2004 of China Tailong Holdings Company Limited and, Pacific Dragon Fertilizers Limited, its subsidiary (Predecessor entities of China Agritech, Inc.) These consolidated financial statements are the responsibility of the management of China Tailong Holdings Company Limited. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of China Tailong Holdings Company Limited (Predecessor entity of China Agritech, Inc.) for the year then ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ Kabani & Company, Inc.

Huntington Beach, California

April 10, 2005

CHINA AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005

		2006		2005
ASSETS
Current Assets
Cash and cash equivalents	$	6,430,009	$	255,831
Restricted cash		100,028		275,000
Accounts receivable, net		12,239,073		8,525,185
Inventories		1,322,244		72,827
Advances to suppliers		8,038,974		2,076,252
Prepayments and other receivables		382,463		376,064

Total Current Assets		28,512,791		11,581,159

Property, Plant and Equipment, net		2,514,123		1,065,146

Total Assets	$	31,026,914	$	12,646,305

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	108,886	$	115,024
Accrued expenses and other payables		871,495		616,363
Amount due to related parties		954		56,702
Tax payables		1,028,885		562,355

Total Current Liabilities		2,010,220		1,350,444

Minority Interests		2,160,575		1,237,910

Commitments		-		-

Stockholders' Equity
Common stocks; $0.001 par value, 100,000,000 shares
authorized, shares issued and outstanding 19,143,615
and 14,343,615		19,144		14,344
Additional paid-in capital		12,619,049		1,547,741
Statutory reserves		2,790,916		1,731,067
Accumulated other comprehensive income		601,288		228,566
Retained earnings		10,825,722		6,536,233

Total Stockholders' Equity		26,856,119		10,057,951

Total Liabilities and Stockholders' Equity	$	31,026,914	$	12,646,305
The accompanying notes are an integral part of these consolidated financial statements.

F-1

CHINA AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

		2006		2005		2004
Net revenue	$	29,525,577	$	25,335,316	$	15,850,044
Cost of revenue		(14,161,358)		(12,848,958)		(8,153,463)
Gross profit		15,364,219		12,486,358		7,696,581
Operating expenses
Selling expenses		(2,983,756)		(2,372,151)		(1,443,943)
Operating and administrative expenses		(2,015,252)		(2,633,522)		(517,831)
Total operating expenses		(4,999,008)		(5,005,673)		(1,961,774)
Income from operations		10,365,211		7,480,685		5,734,807
Other income (expense)
Other income		98,617		-		933
Finance costs		(3,590)		(160)		(115)
Total other income (expense)		95,027		(160)		818
Income before income taxes and minority interests		10,460,238		7,480,525		5,735,625
Provision for income taxes		(4,248,144)		(3,173,533)		(1,982,252)
Income before minorityinterests		6,212,094		4,306,992		3,753,373
Minority interests		(862,756)		(631,113)		-
Net income		5,349,338		3,675,879		3,753,373
Other comprehensive income
Foreign currency translation adjustment		372,722		228,566		-
Other comprehensive income	$	5,722,060	$	3,904,445	$	3,753,373
Basic and diluted weighted average shares outstanding		18,735,944		13,945,937		13,435,143
Basic and diluted net earnings per share	$	0.29	$	0.26	$	0.28

Baisc and diluted weighted average shares outstanding are the same as there is no antidilutive effect.

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

F-2

CHINA AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

	Common stock
	Number of				Partners'			Additional paid-in-		Statutory		Other comprehensive		Retained
	shares		Amount		capital			capital		reserves		income		earnings		Total
Balance at January 1, 2004	241,833	$	242	$	450,575		$	(241)	$	-	$	21,714	$	4,463,150	$	4,935,440
Stock issued for cash	11,849,796		11,850			-		(11,838)		-		-		-		12
Changes due to merger between entities undercommon control	-		-		(450,575)			276,131		-		797		-		(173,647)
Net income for the year	-		-			-		-		-		-		3,753,373		3,753,373
Dividend paid during the year	-		-			-		-		-		-		(3,137,297)		(3,137,297)
Transfer to statutory reserves	-		-			-		-		870,531		-		(870,531)		-
Balance at December 31, 2004	12,091,629		12,092			-		264,052		870,531		22,511		4,208,695		5,377,881
Recapitalization on reverse acquisition	1,343,514		1,344			-		(1,344)		-		-		-		-
Stock issued for cash	908,472		908			-		1,349,092		-		-		-		1,350,000
Reclassification and adjustment to minority interest	-		-			-		(64,059)		(89,895)		(49,207)		(397,910)		(601,071)
Foreign currency translation	-		-			-		-		-		255,262		-		255,262
Net income for the year	-		-			-		-		-		-		3,675,879		3,675,879
Transfer to statutory reserves	-		-			-		-		950,431		-		(950,431)		-
Balance at December 31, 2005	14,343,615		14,344			-		1,547,741		1,731,067		228,566		6,536,233		10,057,951
Stock issued for cash	4,800,000		4,800			-		11,074,905		-		-		-		11,079,705
Stock option expenses	-		-			-		(3,597)		-		-		-		(3,597)
Foreign currency translation	-		-			-		-		-		372,722		-		372,722
Net income for the year	-		-			-		-		-		-		5,349,338		5,349,338
Transfer to statutory reserves	-		-			-		-		1,059,849		-		(1,059,849)		-
Balance at December 31, 2006	19,143,615	$	19,144	$		-	$	12,619,049	$	2,790,916	$	601,288	$	10,825,722	$	26,856,119
	The accompanying notes are an integral part of these consolidated financial statements

F-3

CHINA AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

		2006			2005			2004
Cash flows from operating activities:
Net income	$	5,349,338		$	3,675,879		$	3,753,373
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Stock based compensation		(3,597	)		-			-
Minority Interest		862,756			631,113			-
Depreciation		155,292			102,901			103,679
Loss on disposal of fixed assets		-			-			36,141
Delivery charges		-			-			(387	)
Decrease / (Increase) in current assets:
Accounts receivable		(3,357,026	)		(2,759,236	)		(3,581,853	)
Other receivables		55,024			(65,730	)		103,886
Inventory		(1,502,205	)		487,630			431,537
Advances to suppliers		(5,769,071	)		(1,914,346	)		-
Prepayments		(62,887	)		100,289			232,500
Other assets		2,024			(226,162	)		-
(Decrease) / Increase in current liabilities:
Accounts payable		262,020			(281,234	)		127,299
Tax payables		365,731			131,998			(50,489	)
Accrued expenses and other payables		305,739			280,280			(23,712	)
Net cash provided by (used in) operating activities		(3,336,862	)		163,382			1,131,974
Cash flows from investing activities:
Acquisition of property & equipment		(1,541,812	)		(8,238	)		(11,789	)
Restricted cash		174,972			(275,000	)		-
Proceeds from disposal of fixed assets		-			-			205
Net cash used in investing activities		(1,366,840	)		(283,238	)		(11,584	)
Cash flows from financing activities:
Repayment of instalment loan		-			-			(9,639	)
Payments to shareholders / related parties		(51,312	)		(1,026,846	)		2,053,998
Capital contributed		11,079,705			1,350,000			12
Dividend paid		-			-			(3,137,297	)
Net cash provided by (used in) financing activities		11,028,393			323,154			(1,092,926	)
Net increase in cash and cash equivalents		6,324,691			203,298			27,464
Effect of exchange rate change on cash and cash equivalents		(150,513	)		14,468			-
Cash and cash equivalents, beginning of year		255,831			38,065			10,601
Cash and cash equivalents, end of year	$	6,430,009		$	255,831		$	38,065
Supplement disclosure of cash flow information:
Interest expense paid	$	3,590		$	160		$	115
Income taxes paid	$	3,760,570		$	3,043,223		$	2,066,497
Cash from issue of common stock placed in escrow account	$	11,079,705		$	1,350,000		$	12

F-4

CHINA AGRITECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

China Agritech, Inc. (the "Company") was originally incorporated on January 5, 1925 under the laws of the State of Nevada as Argyle Mining Company for the development of mining claims. Throughout our existence we have changed our business model several times, and conducted no substantive business from 1986 until February 2005 as discussed below.

On August 10, 2004, we merged with and into a newly formed wholly-owned Delaware subsidiary of the same name for the purpose of changing our corporate domicile from Nevada to Delaware.

We have experienced several corporate name changes as follows: Argyle Corporation in January 1960, Basic Empire in November 1963, Basic Empire Corp in December 1976 and China Agritech, Inc. in May 2005.

On December 25, 2004, the Company, China Tailong Holdings Company Limited ("Tailong"), and the stockholders of Tailong (the "Tailong stockholders") entered into the Agreement and Plan of Reorganization ("Reorganization Agreement"), as amended and such Reorganization became effective on February 3, 2005. The Reorganization Agreement provided for the acquisition by the Company from the Tailong stockholders of all of the issued and outstanding Tailong shares in exchange for 10,606,158 shares of newly issued restricted common stock of the Company, whereby the Tailong stockholders obtained control of the Company. In this connection, Tailong became a wholly-owned subsidiary of the Company.

As a result of the acquisition of Tailong, the Company became a fertilizer manufacturer and conducts operations in the People's Republic of China (the "PRC") through its wholly-owned subsidiary, Tailong and Tailong's 90% owned subsidiary, Pacific Dragon Fertilizers Co. Ltd. ("Pacific Dragon").

Tailong was incorporated on October 27, 2003 under the laws of Hong Kong. On October 9, 2004, Tailong acquired 90% of Pacific Dragon, which conducts Tailong's only business operation. Pacific Dragon is a foreign investment joint venture and was incorporated in the PRC on May 20, 1994. Pacific Dragon is classified as a Foreign Invested Enterprise ("FIE") in the PRC and is subject to the FIE laws of the PRC. Its legal structure is similar to a limited liability company organized under state laws in the United States. The Articles of Associations provide for a term of 15 years with registered capital of $500,000. Pacific Dragon engages in the business of manufacturing and marketing a series of organic liquid compound fertilizers. These products are marketed and sold to farmers in 11 provinces of China. Pacific Dragon conducts ongoing research and development to enhance concentration of the organic liquid compound fertilizer and lower the manufacturing cost. The principal researchers in Pacific Dragon are Liu Shuhua and Liu Kangde. Our major products include "LvLingBao II", LvLingBao III" and "Tailong I".

Prior to the acquisition of Tailong, the Company was a non-operating public shell corporation. Pursuant to Securities and Exchange Commission rules, the merger or acquisition of a private operating company into a non-operating public shell corporation with nominal net assets is considered a capital transaction in substance, rather than a business combination. Accordingly, for accounting purposes, the transaction has been treated as a reverse acquisition and a recapitalization, and pro-forma information is not presented. Transaction costs incurred in the reverse acquisition have been charged to expense.

On April 21, 2005, the Company filed a Form Definitive 14C - Information Statement pursuant to Section 14(c) of the Securities Exchange Act of 1934 giving notice that the Company received written consents in lieu of a meeting from the holders of a majority of the Company's issued and outstanding common stock of a proposal to amend and restate the Company's Certificate of Incorporation (the "Restatement") to effect, among other things, a forward stock split whereby each share of issued and outstanding common stock is converted into 1.14 shares of the Company's common stock. The Form Definitive 14C became effective on May 12, 2005 when the Company filed its amended and restated Certificate of Incorporation with the Secretary of the State of Delaware. The effect of this action is reflected in the Company's financial statements as of the first day of the first period presented.

F-5

On June 29, 2006, the Company established a wholly owned subsidiary, Anhui Agritech Agriculture Development Limited (“Anhui Agritech”). Anhui Agritech engages in the business of manufacturing and marketing in series of organic liquid compound fertilizers.

On November 1, 2006, the Company and the stockholders of CAI Investment, Inc (the “CAI stockholders”) entered into an equity transfer agreement. The CAI stockholders shall transfer 100% equity interest in CAI Investment, Inc. (“CAI”) to the Company in exchange for USD1,000.

Prior to the equity transfer, CAI established a wholly owned subsidiary, Agritech Fertilizer Limited (“Agritech Fertilizer”). Agritech Fertilizer engages in the business of manufacturing and marketing in series of organic liquid compound fertilizers.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principle of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Tailong, Anhui Agritech, Agritech Fertilizer and its 90% owned subsidiary, Pacific Dragon (collectively referred to hereinafter as the “Company"). All significant inter-company accounts and transactions have been eliminated in consolidation.

b. Use of estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.

c. Cash and cash equivalents

For Statement of Cash Flows purposes, the Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.

d. Accounts receivable

The Company's policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of December 31, 2006 and 2005, the Company had accounts receivable of $12,239,073 and $8,525,185, net of allowance of $170,236 and $164,739, respectively.

e. Advances to suppliers

The Company advances to certain vendors for purchase of its material. As of December 31, 2006 and 2005, the advances to suppliers amounted to $8,038,974 and $ 2,076,252, respectively.

f. Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or net realizable value. The management compares the cost of inventories with the net realizable value and an allowance is made for writing down the inventories to their net realizable value, if lower than the cost.

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2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

g. Property, plant and equipment

Property, plant and equipment are recorded at cost. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of plant, property, and equipment are capitalized. These capitalized costs may include structural improvements, equipment, and fixtures. All ordinary repair and maintenance costs are expensed as incurred.

Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets: 5 to 15 years for machinery; 3 to 5 years for leasehold improvement, 5 to 10 years for office equipment; and 3 to 5 years for motor vehicles.

h. Impairment

The Company applies the provisions of Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS No. 144"), issued by the Financial Accounting Standards Board ("FASB"). FAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

The Company tests long-lived assets, including property, plant and equipment and intangible assets subject to periodic amortization, for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. There was no impairment of long-lived assets for the years ended December 31, 2006 and 2005.

i. Revenue recognition

The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

The Company's revenue consists of invoiced value of goods, net of a value-added tax (VAT). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discount is normally not granted after products are delivered.

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2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

j. Advertising costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the years ended December 31, 2006, 2005 and 2004 were $686,384, $428,040, and $246,840, respectively.

k. Income taxes

The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

The Company records a valuation allowance for deferred tax assets, if any, based on its estimates of its future taxable income as well as its tax planning strategies when it is more likely than not that a portion or all of its deferred tax assets will not be realized. If the Company is able to utilize more of its deferred tax assets than the net amount previously recorded when unanticipated events occur, an adjustment to deferred tax assets would increase the Company net income when those events occur. The Company does not have any significant deferred tax asset or liabilities in the PRC tax jurisdiction.

l. Foreign currency translation

The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes. The Company's subsidiaries maintain their books and records in their functional currency, being the primary currency of the economic environment in which their operations are conducted. In general, for consolidation purposes, the Company translates the subsidiaries' assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as component of comprehensive income. The functional currency of the Company is Chinese Renminbi.

In particular, Renminbi ("RMB"), the PRC's official currency, is the functional currency of Pacific Dragon. Until July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.28: US$1.00. On July 21, 2005, the PRC government reformed the exchange rate system into a managed floating exchange rate system based on market supply and demand with reference to a basket of currencies. In addition, the exchange rate of RMB to US$ was adjusted to RMB8.11: US$1.00 as of July 21, 2005. The People's Bank of China announces the closing price of a foreign currency such as US$ traded against RMB in the inter-bank foreign exchange market after the closing of the market on each working day, which will become the unified exchange rate for the trading against RMB on the following working day. The daily trading price of US$ against RMB in the inter-bank foreign exchange market is allowed to float within a band of 0.3% around the unified exchange rate published by the People's Bank of China. This quotation of exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. Approval of foreign currency payments by the Bank of China or other institutions required submitting a payment application form together with invoices, shipping documents and signed contracts.

The rates used to translate subsidiaries' assets and liabilities at December 31, 2006 and its statement of income are RMB1:US$0.128138 and RMB1:US$0.125434, respectively. No representation is made that RMB amounts have been, or could be, converted into US$ at these rates.

F-8

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

m. Fair values of financial instruments

Statement of Financial Accounting Standard No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values of financial instruments.

The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, advances to suppliers, accounts payable, other payable, tax payable, and related party advances and borrowings.

As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates.

n. Earning per share (EPS)

Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings per share”. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Earnings per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Basic and diluted earning per share were $0.29, $0.26, and $0.28 for the years ended December 31, 2006, 2005 and 2004.

o. Segment reporting

Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS No. 131 has no effect on the Company's consolidated financial statements as the Company operates in one reportable business segment - manufacture and marketing of fertilizers in China.

p. Statement of cash flows

In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

F-9

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

q. Recent accounting pronouncements

In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company's first fiscal year that begins after September 15, 2006. The Company has not evaluated the impact of this pronouncement its financial statements.

In March 2006 FASB issued SFAS 156 'Accounting for Servicing of Financial Assets' this Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:

1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract.

2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.

3. Permits an entity to choose 'Amortization method' or Fair value measurement method' for each class of separately recognized servicing assets and servicing liabilities.

4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.

5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statement.

In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on the consolidated financial statements.

In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement

F-10

plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:

1.	A brief description of the provisions of this Statement

2.	The date that adoption is required

3.	The date the employer plans to adopt the recognition provisions of this Statement, if earlier.

The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on the consolidated financial statements.

In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new Statement. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements.

The new Statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities.

r. Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

3. QUARTERLY FINANCIAL DATA (UNAUDITED)

F-11

Quarter Ended		M ar. 31		Jun. 30		Sep. 30		Dec. 31		Total
Fiscal year 2004
Revenue	$	2,161,774	$	5,519,830	$	5,326,047	$	2,842,393	$	15,850,044
Gross profit		1,065,489		2,085,390		2,992,939		1,552,763		7,696,581
Net income		555,633		964,538		1,734,151		499,051		3,753,373
Basic earnings per share		0.05		0.08		0.14		0.04		0.28
Diluted earnings per share		0.05		0.08		0.14		0.04		0.28

Fiscal year 2005
Revenue	$	4,985,120	$	10,184,925	$	5,760,407	$	4,404,864	$	25,335,316
Gross profit		2,617,518		4,642,910		2,563,319		2,662,611		12,486,358
Net income		221,770		1,848,990		525,475		1,079,644		3,675,879
Basic earnings per share		0.02		0.13		0.04		0.08		0.26
Diluted earnings per share		0.02		0.13		0.04		0.08		0.26

Fiscal year 2006
Revenue	$	5,685,397	$	10,235,393	$	7,601,819	$	6,002,968	$	29,525,577
Gross profit		2,820,082		5,382,941		4,011,947		3,149,249		15,364,219
Net income		1,014,328		2,087,802		1,108,226		1,138,982		5,349,338
Basic earnings per share		0.05		0.11		0.06		0.06		0.29
Diluted earnings per share		0.05		0.11		0.06		0.06		0.29

4.	RESTRICTED CASH

Proceeds amounting $1,350,000 from the issuance of shares during the year 2005 were deposited in an escrow account. The purchase price was to be released from escrow. In accordance with the terms of the stock purchase agreement, $600,000 of the proceeds was kept in a trust account for certain corporate communication program. At December 31, 2006 and 2005, the Company had $100,028 and $275,000 in this account for the corporate communication program.

5.	INVENTORIES

Inventories consist of the following as of December 31, 2006 and 2005:

		2006		2005
Raw materials	$	483,100	$	18,980
Packing materials		46,133		18,968
Finished goods		791,380		34,879
Work-in-progress		1,631		-
	$	1,322,244	$	72,827

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6.	PREPAYMENTS AND OTHER RECEIVABLE

As of December 31, 2006 and 2005, Company had prepayments and other receivable was amounted to $382,463 and $376,064, respectively and include mainly prepaid rent and advanced travel expenses to employees.

7.	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following as of December 31, 2006 and 2005:

	2006		2005
Manufacturing machinery	$	2,388,716	$	1,171,266
Leasehold improvements		57,706		1,471
Office equipment		228,172		84,155
Motor vehicles		342,570		142,095
		3,017,164		1,398,987
Less: Accumulated depreciation		(503,041)		(333,841)
	$	2,514,123	$	1,065,146

Depreciation expenses for the years ended December 31, 2006, 2005 and 2004 were $155,292, $102,901 and $103,679, respectively.

8.	AMOUNT DUE TO RELATED PARTIES

The amount due to related parties were the advances to the Company’s officers and shareholders, and was unsecured, non-interest bearing and due on demand. As of December 31, 2006 and 2005, due to related parties amounted to $954 and $56,702, respectively.

9.	ACCOUNTS PAYABLE

Accounts payable consist of the following as of December 31, 2006 and 2005:

		2006		2005

Accounts payable are mainly payable to vendors	$	108,886	$	115,024

10.

ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables of the following as of December 31, 2006 and 2005:

As of December 31, 2006, accrued expenses include $577,571 accrued commission payables, $90,000 accrued professional expenses, and $17,678 other accrued expenses. Other payables include $148,395 vendor deposits and $37,851 payables to other parties.

As of December 31, 2005, accrued expenses include $310,683 accrued commission payables, $60,000 accrued professional expenses, and $219,757 other accrued expenses. Other payables include $25,923 vendor deposits and payable to other parties.

11.

TAX PAYABLES

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Tax payables consist of the following as of December 31, 2006 and 2005:

	2006		2005
Income tax payable	$	880,716	$	544,215
VAT tax payable		144,641		18,140
Individual income tax payable		1,002		-
Others		2,526		-
	$	1,028,885	$	562,355

12.

OTHER INCOME (EXPENSES)

Other income (expenses) consists of the following as of December 31, 2006, 2005 and 2004:

	2006		2005		2004

Interest income	$	115,162	$	-	$	933
Listing fees		(2,852)		-		-
Exchange gain (loss)		(13,693)		-		-
Financial cost		(3,590)		(160)		(115)
	$	95,027	$	(160)	$	818

13.

INCOME TAXES

The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company is subject to PRC Enterprise Income Tax at a rate of 33% on the net income. The income tax expenses for the years ended December 31, 2006, 2005 and 2004 are $4,248,144, $3,173,533 and $1,982,252 respectively.

	2006	2005	2004

Tax at statutory rate	34%	34%	34%
Foreign tax rate difference	-1%	-1%	-1%

	33%	33%	33%

F-14

Net operating loss carry forward for the US and Hong Kong tax jurisdictions amounted to $1,460,000, $2,004,000 and $0, for the years ended December 31, 2006, 2005, and 2004, respectively. A 100% valuation allowance has been recorded for the deferred tax asset of $746,400 due to uncertainty of its realization. There were no other significant book and tax basis difference.

14.

MAJOR CUSTOMERS AND VENDORS

There were no major customers which accounting over 10% of the total net revenue for the year ended December 31, 2006 and 2005. Ten major customers accounted for 34% and 49% of the net revenue for the years ended December 31, 2006 and 2005, respectively. The Company had $2,982,820 and $2,736,378 accounts receivable to theses customers as of December 31, 2006 and 2005, respectively.

Three vendors provided 76% of the Company’s purchase of raw materials for the year ended December 31, 2006 with each vendor individually accounting for about 34%, 27% & 15%. Three vendors provided 79% of the Company’s purchase of raw material for the year ended December 31, 2005 with each individually accounting for about 65%, 18% and 8%. The Company had $74,785 and $53,922 accounts payable to these vendors as of December 31, 2006 and 2005, respectively.

The Company extends credit to its customers based upon its assessment of their credit worthiness and generally does not require collateral. Credit losses have not been significant.

15.

RELATED PARTY TRANSACTIONS

On January 6, 2005, Pacific Dragon entered into a License Agreement with Mr. Chang Yu, director of the Company. Under this License Agreement, Mr. Chang Yu authorized Pacific Dragon to use the know-how in manufacturing organic liquid compound fertilizer owned by him for free until December 31, 2009.

The Company's PRC subsidiary, Pacific Dragon, has entered into a tenancy agreement with Harbin Yinlong Enterprise Co. Ltd. ("Yinlong"), the joint venture partners holding 10% equity interest in Pacific Dragon to lease two factory plants and one office building with a total floor area of 7,018 sq. meters for a term of 10 years from January 1, 2004 to December 31, 2013 at an annual rent of RMB1,200,000 (equivalent to $144,578). The tenancy agreement was revised by increasing the annual rent to RMB3,600,000 (equivalent to $442,800) effective from July 1, 2005. During the years ended December 31, 2006 and 2005, the Company paid RMB 3,600,000 (equivalent to $451,562) and RMB2,400,000 (equivalent to $295,200) to Yinlong respectively.

16.

MINORITY INTEREST

The amounts of $2,160,575 and $1,237,910, as of December 31, 2006 and 2005, represent the minority shareholder, Harbin Yinlong Enterprise Co., Ltd., a related party of the Company, interest in Pacific Dragon, a 90% subsidiary.

17.

CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

Pacific Dragon's operations are all carried out in the PRC. Accordingly, Pacific Dragon's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.

Pacific Dragon's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. Pacific Dragon'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.

18.

STOCKHOLDERS’ EQUITY

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Pursuant to the Reorganization Agreement (as defined in Note 1 "Organization and Description of Business" above), the Company issued 10,606,158 shares of newly issued restricted common stock in exchange for all of the issued and outstanding common stock of Tailong.

On February 3, 2005, and following the combination with Tailong, the Company completed the sale of 590,283 shares of its restricted common stock ("Private Placement Shares") for $1.6941 per share for a total of $1,000,000 to accredited investors pursuant to the stock purchase agreement dated February 3, 2005.

On May 12, 2005, the Company made a forward stock split whereby each share of issued and outstanding common stock is converted into 1.14 shares of the Company's common stock. As a result, the common stock amount has been increased proportionately based on the forward stock split ratio and the additional paid-in capital has been reduced by the same amount.

On June 13, 2005, the Company entered into a stock purchase agreement for the sale of 235,516 shares of the Company's common stock for $1.4861 per share for a total of $350,000. Out of the amount of $350,000 received, $275,000 was held in escrow at December 31, 2005 for the purpose of disbursing expenses as set forth in the escrow agreement. The funds shall be released subject to the fulfillment of the conditions set out in the escrow agreement entered into by the Company pursuant to the stock purchase agreements.

On January 13, 2006, the Company entered into a stock purchase agreement for the sale of 4,800,000 shares of the Company's common stock for $2.50 per share for a total of $12,000,000. The proceeds have been received in March, 2006. The direct costs related to this stock sale, including legal and professional fees, were deducted from the related proceeds and the net amount in excess of par value was recorded as additional paid-in capital.

19.

STOCK OPTIONS

The Company adopted SFAS No. 123 (Revised 2004), Share Based Payment ("SFAS No. 123R"), under the modified-prospective transition method on January 1, 2006. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all share-based payments granted prior to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method proscribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and allowed under the original provisions of SFAS No. 123. Prior to the adoption of SFAS No. 123R, the Company accounted for our stock option plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations.

Primarily as a result of adopting SFAS No. 123R, the Company recognized $3,597 in share-based compensation expense for the year ended December 31, 2006 and $0 for the year ended December 31, 2005 as there was no stock options issued in year 2005. The impact of this share-based compensation expense on the Company's basic and diluted earnings per share was $0.00 per share. The fair value of our stock options was estimated using the Black-Scholes option pricing model.

On May 10, 2006, the Company granted an unrelated party 125,000 stock options vesting over 5 years proportionately. The option exercise price is $3.50. The fair value of the shares at the time of granting of the options was $3.00. Following is a summary of the stock option activity:

	Options outstanding	Weighted Average Exercise Price	Aggregate Intrinsic Value
Outstanding, December 31, 2005	0	$0.00	$0.00
Granted		$3.50	$0.00

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	125,000
Forfeited	-	-	-
Exercised	-	-	-
Outstanding, December 31, 2006	125,000	$3.50	$0.00

Following is a summary of the status of options outstanding at December 31, 2006:

Outstanding Options			Exercisable Options
Exercise Price	Number	Average Remaining Contractual Life	Average Exercise Price	Number	Average Exercise Price
$3.50	125,000	4.25	$3.50	125,000	$3.50

The assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model are as follows:

Risk-free interest rate	6.0%
Expected life of the options	5.00 years
Expected volatility	80%
Expected dividend yield	0

20.

STATUTORY RESERVES

As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:

i) Making up cumulative prior years' losses, if any;

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

iii) Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities

and other collective benefits to the Company's employees; and

iv) Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.

In accordance with the Chinese Company Law, the company has allocated 10% of its net income to surplus. The amount included in the statutory reserves as of December 31, 2006 and 2005 amounted to $1,860,610 and $1,169,455, respectively.

The Company established a reserve for the annual contribution of 5% of net income to the common welfare fund. The amount included in the statutory reserves as of December 31, 2006 and 2005 amounted to $930,306 and $561,612, respectively.

21.

COMMITMENTS AND LEASES

The Company incurred rent expenses $621,106 and $461,580 for the years ended December 31, 2006 and 2005. The rent expenses for the next five years after December 31, 2006 are as follows:

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Year 2007	$	635,515
Year 2008		557,918
Year 2009		546,892
Year 2010		546,892
Year 2011		524,941
Year 2012 and thereafter		992,434
	$	3,804,592

22. ALLOWANCE FOR DOUBTFUL ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
			Balance at		Charged to costs		Write-offs		Balance at
Year Ended June 30		beginning of period			and expenses		and other		end of period

2004	$		48,193	$	-	$	-	$	48,193
2005	$		48,193	$	116,546	$	-	$	164,739
2006	$		164,739	$	5,497	$	-	$	170,236

FINANCIAL STATEMENT SCHEDULES

SCHEDULE I


CHINA AGRITECH INC.
BALANCE SHEET - US HOLDING COMPANY ONLY
AS OF DECEMBER 31, 2006 AND 2005

		2006		2005
ASSETS
Cash and cash equivalent	$	2,047,788	$	7,322
Restricted cash		100,028		275,000

Investment in subsidiary		1,500,000		125,775
Intercompany receivable		7,661,775		-

TOTAL ASSETS	$	11,309,591	$	408,097

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Other payables	$	330,773	$	331,845

Accrued expenses		91,760		90,960

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Total current liabilities		422,533			422,805

STOCKHOLDERS' EQUITY:
Common stock, $0.001 per share; authorized 100,000,000 shares;
19,143,615 and 14,343,615 issued and outstanding		19,144			14,344
Additional paid-in capital		12,414,159			1,335,656
Foreign currency translation		(3,878	)		(4,427	)
Accumulated deficit		(1,542,367	)		(1,360,281	)
Total stockholders' equity		10,887,058			(14,708	)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	11,309,591		$	408,097

CHINA AGRITECH INC.
STATEMENTS OF OPERATIONS - US HOLDING COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

		2006		2005		2004
Operating expenses
General and administrative expenses	$	(269,258)	$	(119,404)	$	(60,597)
Non-operating income (expense):

Listing fee		-		(1,241,022)		5,000
Interest income		87,311		145		-
Interest expense		(139)		-		-
Total non-operating income (expense)		87,172		(1,240,877)		5,000

Net loss	$	(182,086)	$	(1,360,281)	$	(55,597)

F-19

CHINA AGRITECH INC
STATEMENTS OF CASH FLOWS - US HOLDING COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

		2006		2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss	$	(182,086)	$	(1,360,281)		$	(55,597)
Adjustments to reconcile net loss to net cash
Warrants/stock option issued to a shareholder		3,597		-			2,232
Gain on settlement of debt		-		-			(5,000)
Increase in current Liabilities		979		90,661			12,705

Net cash used in operating activities		(177,510)		(1,269,620	)		(45,660)

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities		(1,500,000)		-			-
Decrease of cash in acquisition		-		(198,340)			-
Decrease in amount due to a shareholder		-		-			(11,000	)
Net cash used in investing activities		(1,500,000)		(198,340)			(11,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Due from China Tailong		(7,536,000)		(125,362)			-
Due to related party		-		330,755			-
Proceeds from issuance of common stock		11,079,705		1,350,000			200,000
Cash received from promissory notes		-		-			30,000
Restricted cash		174,972		(275,000	)		-
Cash received from exercise of warrants		-		-			25,000

Net cash provided by financing activities		3,718,677		1,280,393			255,000

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Effect of exchange rate change on cash and cash equivalents		(701)		(3,452)		-
NET INCREASE IN CASH & CASH EQUIVALENTS		2,040,466		(191,020)		198,340

CASH & CASH EQUIVALENTS, BEGINNING BALANCE		7,322		198,340		-

CASH & CASH EQUIVALENTS, ENDING BALANCE	$	2,047,788	$	7,322	$	198,340

2004 includes the financial statements for the US holding company prior to merger.

F-21