-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jv+yruZinSRiu0C5RipW3hFgCKMyYHo0nrghpTdu3iamuN+N0iec6gsGepn1TRSa 66DT7pL9K+MzZOi/63vsBw== 0001144204-07-034061.txt : 20070628 0001144204-07-034061.hdr.sgml : 20070628 20070628161139 ACCESSION NUMBER: 0001144204-07-034061 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20070628 DATE AS OF CHANGE: 20070628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Agfeed Industries, Inc CENTRAL INDEX KEY: 0001331427 STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000] IRS NUMBER: 202597168 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-144131 FILM NUMBER: 07947039 BUSINESS ADDRESS: STREET 1: 1095 QINGLAN AVENUE STREET 2: ECONOMIC AND TECHNOLOGICAL DEVELOPMENT Z CITY: NAN CHANG CITY, JIANGXI PROVIN STATE: F4 ZIP: 330013 BUSINESS PHONE: 662-262-9347 MAIL ADDRESS: STREET 1: 1095 QINGLAN AVENUE STREET 2: ECONOMIC AND TECHNOLOGICAL DEVELOPMENT Z CITY: NAN CHANG CITY, JIANGXI PROVIN STATE: F4 ZIP: 330013 FORMER COMPANY: FORMER CONFORMED NAME: Wallace Mountain Resources Corp. DATE OF NAME CHANGE: 20050627 SB-2 1 v079351_sb-2.htm Unassociated Document
As filed with the Securities and Exchange Commission on June 28, 2007.
Registration No. 333-_______
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 

 
AgFeed Industries, Inc.
(Exact name of Registrant as specified in its charter)
 

 
Nevada
0200
20-2597168
(State or jurisdiction of
(Primary Standard Industrial
(I.R.S. Employer
incorporation or organization)
Classification Code Number)
Identification No.)
 
AgFeed Industries, Inc.
1095 Qing Lan Avenue
Economic and Technical Development Zone
Nan Chang City, Jiangxi Province
China, 330013
86-0791-2189878
(Address and telephone number of principal executive offices)
 
Junhong Xiong
President and Chief Executive Officer
AgFeed Industries, Inc.
1095 Qing Lan Avenue
Economic and Technical Development Zone
Nan Chang City, Jiangxi Province
China, 330013
86-0791-2189878
(Name, address and telephone number of agent for service)


 
with copies to:
William W. Uchimoto, Jr., Esquire
Saul Ewing LLP
Centre Square West
1500 Market Street, 38th Floor
Philadelphia, PA 19102-2186
(215) 972-1888
 

 
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨
 

 
CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered
 
 
Amount to be Registered
 
Proposed Maximum Offering Price Per Share (1)
 
Proposed Maximum Aggregate Offering Price
 
 
Amount of Registration Fee
 
                   
Common Stock
   
3,638,540
 
$
5.575
 
$
20,284,860.50
 
$
622.75
 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended, using the average of the bid and ask price as reported on the Over-the-Counter Bulletin Board on June 22, 2007, which was $5.575 per share.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 


The information in this prospectus is not complete and may be changed. The Selling Stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.


PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 28, 2007

AgFeed Industries, Inc.

3,638,540 Shares of
Common Stock


 
This prospectus covers the resale, from time to time, of up to 3,638,540 shares of our common stock, by the selling stockholders named in this prospectus in the section “Selling Stockholders,” including their pledgees, assignees and successors-in-interest, whom we collectively refer to in this document as the “Selling Stockholders.” We completed a private placement offering in April 2007 pursuant to which we issued to the Selling Stockholders an aggregate of (i) 2,276,753 shares of common stock and (ii) warrants to purchase up to an aggregate of 364,287 shares of common stock. We also completed a private placement offering in June 2007 pursuant to which we issued to the selling stockholders (i) 750,000 shares of common stock and (ii) warrants to purchase up to an aggregate of 247,500 shares of common stock (collectively, with the warrants issued in the April 2007 private placement offering, the “Warrants”). The common stock being offered in this prospectus may include shares issued pursuant to the exercise of the Warrants. The common stock offered by this prospectus shall be adjusted to cover any additional securities as may become issuable to prevent dilution resulting from stock splits, stock dividends or similar transactions. We will not receive any of the proceeds from the sale of any of the shares covered by this prospectus. References in this prospectus to “the Company,” “we,” “our,” and “us” refer to AgFeed Industries, Inc.

Our common stock is eligible for quotation on the Over-the-Counter Bulletin Board under the symbol “AGFI.” On June 27, 2007, the last reported sale price for our common stock was $5.95 per share.

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the “Risk Factors” beginning on page 3 before you decide whether to invest in shares of our common stock. 

No other underwriter or other person has been engaged to facilitate the sale of shares of common stock in this offering. None of the proceeds from the sale of stock by the selling stockholders will be placed in escrow, trust or any similar account.

We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is             , 2007



TABLE OF CONTENTS


 
1
RISK FACTORS
 
3
USE OF PROCEEDS
 
13
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
13
EQUITY COMPENSATION PLAN INFORMATION
 
14
DESCRIPTION OF OUR BUSINESS
 
14
MANAGEMENT’S DISCUSSION AND ANALYSIS
 
21
DIRECTORS AND EXECUTIVE OFFICERS
 
29
EXECUTIVE COMPENSATION
 
31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
32
SELLING STOCKHOLDERS
 
34
PLAN OF DISTRIBUTION
 
37
DESCRIPTION OF CAPITAL STOCK
 
38
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
 
39
LEGAL MATTERS
 
40
EXPERTS
 
40
 
40
FINANCIAL STATEMENTS
 
F-1

i


You should rely only on the information contained or incorporated by reference in this prospectus and in any accompanying prospectus supplement. We have not authorized anyone to provide you with different information.
 
We have not authorized the Selling Stockholders to make an offer of these shares of common stock in any jurisdiction where the offer is not permitted.

You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of the documents.
 
PROSPECTUS SUMMARY

This summary highlights material information regarding us and the offering described in this prospectus. You should read the entire prospectus carefully, including the financial information and related notes, before making an investment decision.

History

We were incorporated in Nevada on March 30, 2005 as Wallace Mountain Resources Corp. Our business consisted of 18 unit material claims known as the South Wallace Mountain Project. In October and December 2006, we completed a series of share exchange transactions pursuant to which we acquired three companies located in The People’s Republic of China that are engaged in that country’s domestic animal husbandry markets.

Our common stock became eligible for quotation on the Over-the-Counter Bulletin Board on October 31, 2006 under the symbol “AGFI.OB.”

For the year ended December 31, 2006, we had net revenue of $8,594,876, gross profits of $3,148,544 and net income of $1,175,280. For the three months ended March 31, 2007, we had net revenue of $4,978,295, gross profits of $1,543,206 and net income of $779,181.

Business

We operate our business through three subsidiaries located in the People’s Republic of China:

Nanchang Best Animal Husbandry Co., Ltd. (“Nanchang Best”)
1095 Qinglan Avenue, Nanchang City, Jiangxi Province, China 330013

Shanghai Best Animal Husbandry Co., Ltd. (“Shanghai Best”)
No. 158 Huiping Road, Jia Ding District, Shanghai, China 201802

Guangxi Huijie Sci, & Tech. Feed Co., LTD. (“Guangxi Huijie”)
No. 5 Lianling Street, Nanning Industrial Park, NanNing, GuangXi Province, China 530221

Nanchang Best and Shanghai Best are each engaged in the business of the research and development, manufacture, marketing and sale of fodder and blended feed for use in China’s domestic animal husbandry markets. Guangxi Huijie is engaged in the business of research and development, manufacture, marketing, distribution and sale of premix fodder blended feed and feed additives primarily for use in China’s domestic pork husbandry markets.

Each of these companies (the “Companies”) are engaged in the manufacturing, distribution, marketing and sale of two main product lines: additive premix fodder for use in all stages of a pig’s life, and blended feeds designed specifically for the infant stage of a pig’s life. Nanchang Best and Guangxi Huijie also engage in the research and development of new products and improvement of existing formulas. Nanchang Best shares the results of such work with Shanghai Best. Shanghai Best also manufactures and markets premixed chicken feed. Nanchang Best and Guangxi Huijie produce substantially all of the Companies’ sales of blended feed.
 
1

 
In combination, the Companies’ total feed output in 2006 was approximately 20,344 metric tons. Together they produced a combined 15,534 metric tons of premix fodder; Nanchang Best produced 7,948 metric tons of premix fodder, Shanghai Best 5,714 metric tons and Guangxi Huijie 1,872 metric tons. Nanchang Best produced 2,610 metric tons of blended feed and Guangxi Huijie 1,517 metric tons. Shanghai Best and Guangxi Huijie produced approximately 683 metric tons of other feed product.

Our principal executive offices are located at 1095 Qing Lan Avenue, Economic and Technical Development Zone, Nan Chang City, Jiangxi Province, People’s Republic of China, 330013. Our telephone number is 0086-29-85381586. Our website is http://www.agfeedinc.com. The information on our website is not incorporated into this prospectus.

The Offering
     
Common stock offered by selling stockholders
 
3,638,540 shares including up to 364,287 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $5.00 per share and up to 247,500 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $5.60 per share.
     
Common stock outstanding and to be outstanding after the offering
 
27,026,756
     
Use of proceeds
 
We will not receive any proceeds from the sale of the common stock hereunder. See “Use of Proceeds” for a complete description. However, 611,787 of these shares will only be issued upon exercise of warrants. If all of these warrants are exercised, we may receive gross proceeds of up to $3,207,435.
     
OTCBB symbol
 
AGFI.OB

The Selling Stockholders may sell these shares in the over-the-counter market or otherwise, at market prices prevailing at the time of sale, at prices related to the prevailing market price, or at negotiated prices. We will not receive any proceeds from the sale of shares by the Selling Stockholders.

Summary of Recent Transactions

On April 29, 2007, we completed a final closing of a private placement offering of units pursuant to which we sold an aggregate of 2,276,753 units at an offering price of $3.00 per unit for aggregate gross proceeds of $6,830,259. Each unit consisted of one share of common stock and a warrant to purchase 8% of one share of common stock. The warrants are exercisable for a period of three years at an exercise price of $5.00 per share. We compensated two participating selected dealers and one finder that assisted us in the sale of securities in this private placement offering by (i) paying them cash equal to 8% of the gross proceeds from the sale of units placed plus (ii) issuing them warrants to purchase that number of shares of our common stock equal to 8% of the units placed, as follows:

Selected dealer or finder
 
Cash
 
Warrants
 
Four Tong Investments, Ltd.
 
$
360,000
   
120,000
 
Legend Securities, Inc.
 
$
151,861
   
50,621
 
Maxim Group LLC
 
$
34,560
   
11,520
 
 
2

 
The warrants granted to these finders have the same terms and conditions as the warrants granted in the offering. The net proceeds of this private placement offering will be used primarily for working capital purposes.

On June 22, 2007, we completed a private placement offering of units pursuant to which we sold an aggregate of 750,000 units at an offering price of $4.00 per unit for aggregate gross proceeds of $3,000,000. Each unit consisted of one share of common stock and a warrant to purchase 25% of one share of common stock. The warrants are exercisable for a period of three years at an exercise price of $5.60 per share. We compensated Four Tong Investments, Ltd. for assisting us in the sale of securities in this private placement offering by (i) paying them $240,000, plus (ii) issuing them warrants to purchase 60,000 shares of our common stock on the same terms and conditions as the warrants granted in the offering. The net proceeds of this private placement offering will be used primarily for acquisitions we hope to make in the next six to twelve months.

RISK FACTORS

You should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and related notes.  

Risks Related to Our Business

We cannot be certain that our product innovations and marketing successes will continue.
 
We believe that our past performance has been based on, and our future success will depend upon, in part, our ability to continue to improve our existing products through product innovation and to develop, market and produce new products. We cannot assure you that we will be successful in the introduction, marketing and production of any new products or product innovations, or that we will develop and introduce in a timely manner innovations to our existing products which satisfy customer needs or achieve market acceptance. Our failure to develop new products and introduce them successfully and in a timely manner could harm our ability to grow our business and could have a material adverse effect on our business, results of operations and financial condition.

Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.

Our future success will depend in substantial part on the continued service of our senior management and founders. The loss of the services of one or more of our key personnel could impede implementation and execution of our business strategy and result in the failure to reach our goals. We do not carry key person life insurance in respect of any of our officers or employees. Our future success will also depend on the continued ability to attract, retain and motivate highly qualified personnel in many fields of our operations. The rapid growth of the economy in The People’s Republic of China has caused intense competition for qualified personnel. We cannot assure you that we will be able to retain our key personnel or that we will be able to attract, train or retain qualified personnel in the future.
 
Our acquisition strategy involves a number of risks and we have a limited history of successful acquisitions. Even when an acquisition is completed, we may have integration issues that may not produce as positive results as management may have projected.
 
We have completed one acquisition since 2006 and intend to grow through the acquisition of additional companies.
 
We are regularly engaged in acquisition discussions with a number of companies located in China and anticipate that one or more potential acquisition opportunities, including those that would be material, may become available in the near future. If and when appropriate acquisition opportunities become available, we intend to pursue them actively. Acquisitions involve a number of special risks, including:
 
 
·
 
failure of the acquired business to achieve expected results;
 
3

 
 
·
 
diversion of management’s attention;
 
 
·
 
failure to retain key personnel of the acquired business;
 
 
·
 
additional financing, if necessary and available, could increase leverage, dilute equity, or both;
 
 
·
 
the potential negative effect on our financial statements from the increase in goodwill and other intangibles; and
 
 
·
 
the high cost and expenses of completing acquisitions and risks associated with unanticipated events or liabilities.
 
These risks could have a material adverse effect on our business, results of operations and financial condition.

We have faced, and expect to continue to face, increased competition for acquisition candidates, which may limit our number of opportunities to acquire companies and may lead to higher acquisition prices. We cannot assure you that we will be able to identify, acquire, or manage profitably additional businesses or to integrate successfully any acquired businesses into our existing business without substantial costs, delays or other operational or financial difficulties. In future acquisitions, we also could incur additional indebtedness or pay consideration in excess of fair value, which could have a material adverse effect on our business, results of operations and financial condition. In addition, we may inadvertently assume unknown liabilities in acquisitions that we complete. Assumption of unknown liabilities in acquisitions may harm our financial condition and operating results. Acquisitions may be structured in such a manner that would result in the assumption of unknown liabilities not disclosed by the seller or uncovered during pre-acquisition due diligence. These obligations and liabilities could harm our financial condition and operating results.
 
Rising energy prices could adversely affect our operating results.
 
In the last few years, energy prices have risen dramatically, which has resulted in increased fuel costs for our businesses and raw materials costs for our branded products. Rising energy prices could adversely affect demand for our products and increase our operating costs, both of which would reduce our sales and operating income.

We rely on independently owned wholesale distributors who do not exclusively offer our products to their customers.
 
The loss of, or significant adverse change in, our relationship with any of our key wholesale distributors could cause our net sales, income from operations and cash flow to decline. The loss of, or reduction in, orders from any significant customer, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major customer could reduce our income from operations and cash flow.
 
We have high expectations for our financial performance for 2007 and may not be able to reach our revenue and net income targets due to unpredictable market conditions.
 
Our primary end user customers are commercial hog farms and individual farmers. Although hog prices in The People’s Republic of China have reached multi-year highs, we can not predict how long such favorable environment may last or predict the buying behavior of our customers as they adjust to market conditions. Therefore, our market expectations and projections may exceed our actual financial performance.

We are a major purchaser of many commodities that we use for raw materials and packaging, and price changes for the commodities we depend on may adversely affect our profitability.

We enter into contracts for the purchase of raw materials at fixed prices, which are designed to protect us against raw material price increases during their term. However, when necessary, we attempt to recover our commodity cost increases by increasing prices, promoting a higher-margin product mix and creating additional operating efficiencies. Nevertheless, the raw materials used in our business are largely commodities that experience price fluctuations caused by external conditions and changes in governmental agricultural programs.
 
4


We also use paper products, such as corrugated cardboard, aluminum products, films and plastics to package our products. Substantial increases in prices of packaging materials or higher prices of our raw materials could adversely affect our operating performance and financial results.

Commodity price changes may result in unexpected increases in raw material and packaging costs, and we may be unable to increase our prices to offset these increased costs without suffering reduced volume, revenue and income. Any substantial fluctuation in the prices of raw materials, if not offset by increases in our sales prices, could adversely affect our profitability.

We are subject to international economic and political risks over which we have little or no control and may be unable to alter our business practice in time to avoid the possibility of reduced revenues.

All of our business is conducted in The People’s Republic of China. Doing business outside the United States, particularly in The People’s Republic of China, subjects us to various risks, including changing economic and political conditions, major work stoppages, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter out business practice in time to avoid the possibility of reduced revenues.

The People’s Republic of China’s economic policies could affect our business.

Substantially all of our assets are located in The People’s Republic of China and substantially all of our revenue is derived from our operations in The People’s Republic of China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in The People’s Republic of China.
 
While The People’s Republic of China’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of The People’s Republic of China, but they may also have a negative effect on us. For example, operating results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations. The economy of The People’s Republic of China has been changing from a planned economy to a more market-oriented economy. In recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in The People’s Republic of China are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over The People’s Republic of China’s economic growth through the allocation of resources, the control of payment of foreign currency-denominated obligations, the setting of monetary policy and the provision of preferential treatment to particular industries or companies.
 
5


We may have difficulty establishing adequate management, legal and financial controls in The People’s Republic of China.

The People’s Republic of China historically has not adopted a Western style of management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in The People’s Republic of China. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.

Our bank accounts are not insured or protected against loss.

We maintain our cash with various banks and trust companies located in The People’s Republic of China. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust company.

As we have limited business insurance coverage in The People’s Republic of China, any loss which we suffer may not be insured or may be insured to only a limited extent.

The insurance industry in The People’s Republic of China is still in an early state of development and insurance companies located in The People’s Republic of China offer limited business insurance products. In the event of damage or loss to our properties, our insurance may not provide as much coverage as if we were insured by insurance companies in the United States.

We may face judicial corruption in The People’s Republic of China.

Another obstacle to foreign investment in The People’s Republic of China is corruption. There is no assurance that we will be able to obtain recourse in any legal disputes with suppliers, customers or other parties with whom we conduct business, if desired, through The People’s Republic of China’s poorly developed and sometimes corrupt judicial systems.

We may face obstacles from the communist system in The People’s Republic of China.

Foreign companies conducting operations in The People’s Republic of China face significant political, economic and legal risks. The Communist regime in The People’s Republic of China, including a cumbersome bureaucracy, may hinder Western investment.

If relations between the United States and The People’s Republic of China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.

At various times during recent years, the United States and The People’s Republic of China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and The People’s Republic of China, whether or not directly related to our business, could reduce the price of our common stock.

The government of The People’s Republic of China could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of our and your investment.

Our business is subject to significant political and economic uncertainties and may be affected by political, economic and social developments in The People’s Republic of China. Over the past several years, the government of The People’s Republic of China has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The government of The People’s Republic of China may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice.
 
6


Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, or devaluations of currency could cause a decline in the price of our common stock, should a market for our common stock ever develop. Nationalization or expropriation could even result in the total loss of your investment.

The nature and application of many laws of The People’s Republic of China create an uncertain environment for business operations and they could have a negative effect on us.

The legal system in The People’s Republic of China 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 as precedents. In 1979, The People’s Republic of China 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 People’s Republic of China 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 cause a decline in the price of our common stock. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

Although we do not import goods into or export goods out of The People’s Republic of China, fluctuation of the Renminbi may indirectly affect our financial condition by affecting the volume of cross-border money flow.

Although we use the United States dollar for financial reporting purposes, all of the transactions effected by our operating subsidiaries are denominated in The People’s Republic of China’s Renminbi. The value of the Renminbi fluctuates and is subject to changes in The People’s Republic of China’s political and economic conditions. We do not currently engage in hedging activities to protect against foreign currency risks. Even if we chose to engage in such hedging activates, we may not be able to do so effectively. Future movements in the exchange rate of the Renminbi could adversely affect our financial condition as we may suffer financial losses when transferring money raised outside of China into the country or paying vendors for services performed outside of China.

 
Domestic competition in the animal feed industry is largely fragmented and foreign competition is minimal. However, as a result of The People’s Republic of China becoming a member of the World Trade Organization (“WTO”), import restrictions on agricultural products are expected to be reduced. With the lowering of import restrictions and the WTO’s requirement for a reduction of import tariffs as condition of membership, such reduced import restrictions and tariffs may result in an increase of foreign products and could in turn lead to increased competition in the domestic agricultural market.

Outbreaks of livestock disease can adversely affect sales of our products.

Outbreaks of livestock diseases can significantly affect demand for our products. An outbreak of disease could result in governmental restrictions on the sale of livestock products to or from customers, or require our customers to destroy their flocks. This could result in the cancellation of orders by our customers and create adverse publicity that may have a material adverse effect on the agricultural products industry and our ability to market our products successfully.
 
Our products and processes can expose us to product liability claims.

Product liability claims or product recalls can adversely affect our business reputation and expose us to increased scrutiny by local, provincial, and central governmental regulators. The packaging, marketing and distribution of agricultural feed products entail an inherent risk of product liability and product recall and the resultant adverse publicity. We may be subject to significant liability if the consumption of any of our products causes injury, illness or death of livestock, other animals or humans. We could be required to recall certain of our products in the event of contamination or damage to the products. In addition to the risks of product liability or product recall due to deficiencies caused by our production or processing operations, we may encounter the same risks if any third party tampers with our products. We cannot assure you that we will not be required to perform product recalls, or that product liability claims will not be asserted against us, in the future. Any claims that may be made may create adverse publicity that would have a material adverse effect on our ability to market our products successfully or on our business, reputation, prospects, financial condition and results of operations. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on us and could prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms.
 
7


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

The manufacture and sale of agricultural products in The People’s Republic of China is regulated by The People’s Republic of China and the local provincial governments. Although our licenses and regulatory filings are current, the uncertain legal environment in The People’s Republic of China and its industry may be vulnerable to local government agencies or other parties who wish to renegotiate the terms and conditions of, or terminate their agreements or other understandings with us.

We face significant competition in the sales of our agricultural feed products.

Competition in the agricultural feed industry, especially with companies with greater resources, may make us unable to compete successfully in these industries, which could adversely affect our business.

In general, the competitive factors in the agricultural feed industry in The People’s Republic of China include:

 
·
Price;

 
·
Product quality;

 
·
Brand identification;

 
·
Breadth of product line; and

 
·
Customer service.

To the extent that our products and services do not exhibit these qualities, our ability to compete will be hindered.

Concerns with the safety and quality of agricultural feed products could cause customers to avoid our products.

We could be adversely affected if our customers and the ultimate consumers of our products lose confidence in the safety and quality of various feed products. Adverse publicity about these types of concerns, such as the recent publicity concerning the substance melamine, whether or not valid, may discourage our customers from buying our products or cause production and delivery disruptions. Any negative change in customer perceptions about the safety and quality of our products could adversely affect our business and financial condition.

If our feed products become adulterated or misbranded, we would need to recall those items and may experience product liability claims if consumers are injured as a result.

Animal feed products occasionally contain contaminants due to inherent defects in those products or improper storage or handling. Under adverse circumstances, animal feed manufacturers may need to recall some of their products if they become adulterated or misbranded and may also be liable if the consumption of any of their products causes injury.
 
8


While we have never been required to recall any of our products and we maintain insurance that we believe is adequate to cover this type of loss, a widespread product recall could result in changes to one or more of our business processes, product shortages, a loss of customer confidence in our food or other adverse effects on our business.

If we are required to defend against a product liability claim, whether or not we are found liable under the claim, we could incur substantial costs, our reputation could suffer and our customers might substantially reduce their existing or future orders from us.

We may not be able to adequately protect and maintain our intellectual property, trademark, and brand names.

Our success will depend on our ability to continue to develop and market fodder and blended feed products. We currently have not applied for patents for our products or formulas, as our management believes an application for such patents would result in public knowledge of our proprietary technology and formulas. As we do not have patent protection for this technology or formulae, we may not be able to protect our rights to this intellectual property, if our competitors discover or illegally obtain this technology or formulae. Our inability to protect our rights to this intellectual property may adversely affect our ability to prevent competitors from using our products and developments.

Some of our significant customer and supplier contracts are short-term.

Some of our customers and suppliers operate through purchase orders or short-term contracts. Though we have long-term business relationships with many of our customers and suppliers and alternative sources of supply for key items, we cannot be sure that any of these customers or suppliers will continue to do business with us on the same basis. Additionally, although we try to renew these contracts as they expire, there can be no assurance that these customers or suppliers will renew these contracts on terms that are favorable to us, if at all. The termination of or modification to any number of these contracts may adversely affect our business and prospects, including our financial performance and results of operations.

Risks Related to our Securities

It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in The People’s Republic of China.

As our executive officers and several of our directors, including the chairman of our Board of Directors, are Chinese citizens, it may be difficult, if not impossible, to acquire jurisdiction over these persons in the event a lawsuit is initiated against us and/or our officers and directors by a stockholder or group of stockholders in the United States. Also, because our operating subsidiaries and assets are located in The People’s Republic of China, it may be extremely difficult or impossible for you to access those assets to enforce judgments rendered against us or our directors or executive offices by United States courts. In addition, the courts in The People’s Republic of China may not permit the enforcement of judgments arising out of United States federal and state corporate, securities or similar laws. Accordingly, United States investors may not be able to enforce judgments against us for violation of United States securities laws.

Our common stock price is subject to significant volatility, which could result in substantial losses for investors.

During the 25-week period ended June 22, 2007, the high and low bid prices of our common stock on the Over-The-Counter Bulletin Board (“OTCBB”) were $7.80 per share and $1.85 per share, respectively. Prices for our shares are determined in the marketplace and may accordingly be influenced by many factors, including, but not limited to:

 
·
the depth and liquidity of the market for the shares;
 
9

 
 
·
quarter-to-quarter variations in our operating results;

 
·
announcements about our performance as well as the announcements of our competitors about the performance of their businesses;

 
·
investors’ evaluations of our future prospects and the food industry generally;

 
·
changes in earnings estimates by, or failure to meet the expectations of, securities analysts;

 
·
our dividend policy; and

 
·
general economic and market conditions.

In addition, the stock market often experiences significant price fluctuations that are unrelated to the operating performance of the specific companies whose stock is traded. These market fluctuations could adversely affect the trading price of our shares.

The price at which investors purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. Investors may be unable to sell their shares of common stock at or above their purchase price, which may result in substantial losses.

Shares of our common stock lack a significant trading market.

Shares of our common stock are not eligible for trading on any national or regional exchange. Our common stock is eligible for trading in the over-the-counter market on the Over-The-Counter Bulletin Board pursuant to Rule 15c2-11 of the Securities Exchange Act of 1934. This market tends to be highly illiquid. There can be no assurance that an active trading market in our common stock will develop, or if such a market develops, that it will be sustained. In addition, there is a greater chance for market volatility for securities that trade on the Over-The-Counter Bulletin Board as opposed to securities that trade on a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available quotations, the absence of consistent administrative supervision of “bid” and “ask” quotations and generally lower trading volume.

Future sales of shares of our common stock by our stockholders could cause our stock price to decline.

We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time. As of June 26, 2007, we had outstanding 27,026,756 shares of common stock. As a result of this offering, an aggregate of 3,026,753 of these shares and an additional 611,787 shares issuable upon the exercise of warrants will become eligible for resale into the public market. Sales of shares of our common stock in the public market covered under an effective registration statement, or the perception that those sales may occur, could cause the trading price of our common stock to decrease or to be lower than it might be in the absence of those sales or perceptions.

We may issue additional shares of our capital stock or debt securities to raise capital or complete acquisitions, which would reduce the equity interest of our stockholders.

Our certificate of incorporation authorizes the issuance of up to 75,000,000 shares of common stock, par value $.001 per share. There are approximately 47,325,000 authorized and unissued shares of our common stock which have not been reserved and accordingly, are available for future issuance. Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional shares of our common stock, to complete a business combination or to raise capital. The issuance of additional shares of our common stock:

 
·
may significantly reduce the equity interest of investors in this offering; and

 
·
may adversely affect prevailing market prices for our common stock.
 
10

 
The application of the “penny stock” rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

Holders of shares of our common stock may have difficulty selling those shares because our common stock will probably be subject to the penny stock rules. Shares of our common stock are subject to rules adopted by the Securities and Exchange Commission that regulate broker-dealer practices in connection with transaction in “penny stocks.” Penny stocks are generally equity securities with a price of less than $5.00 which are not registered on a national securities exchange, provided that current price and volume information with respect to transaction in those securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission, which contains the following:

 
·
a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;

 
·
a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violation to such duties or other requirements of securities laws;

 
·
a brief, clear, narrative description of a dealer market, including “bid” and “ask” prices for penny stocks and the significance of the spread between the “bid” and “ask” price;

 
·
a toll-free telephone number for inquiries on disciplinary actions;

 
·
definitions of significant terms in the disclosure document or in the conduct of trading in penny stocks; and

 
·
such other information and is in such form (including language, type, size and format), as the Securities and Exchange Commission shall require by rule or regulation.

Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer with the following:

 
·
the bid and offer quotations for the penny stock;

 
·
the compensation of the broker-dealer and its salesperson in the transaction;

 
·
the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and

 
·
monthly account statements showing the market value of each penny stock held in the customer’s account.

In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, 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 acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules.
 
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may cause us to incur substantial expenditures and may discourage lawsuits against our directors, officers and employees.

Our articles of incorporation contain specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders, to the extent provided by Nevada law. We may also have or may create contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
 
11


Our management owns a significant amount of our common stock, giving them influence or control in corporate transactions and other matters, and their interests could differ from those of other stockholders.

Our principal executive officers and directors, own approximately 29% of our outstanding common stock. As a result, they are in a position to significantly influence the outcome of matters requiring a stockholder vote, including the election of directors, the adoption of any amendment to our articles of incorporation or bylaws, and the approval of significant corporate transactions. Their control may delay or prevent a change of control on terms favorable to our other stockholders and may adversely affect your voting and other stockholders rights.

Our articles of incorporation, our bylaws and provisions of Nevada law could make it more difficult for a third party to acquire us, even if doing so could be in our stockholders’ best interest.

Provisions of our articles of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be in the best interest of our stockholders. It could be difficult for a potential bidder to acquire us because our articles of incorporation and bylaws contain provisions that may discourage takeover attempts. These provisions may limit stockholders’ ability to approve a transaction that stockholders may think is in their best interests. These provisions include a requirement that certain procedures must be followed before matters can be proposed for consideration at meetings of our stockholders.

Provisions of Nevada’s business combinations statute also restrict certain business combinations with interested stockholders. We have elected not to be governed by these provisions in our amended and restated articles of incorporation. However, this election may not be effective unless we meet certain conditions under the Nevada statute.

Capital outflow policies in The People’s Republic of China may hamper our ability to declare and pay dividends to our shareholders.

The People’s Republic of China has adopted currency and capital transfer regulations. These regulations may require us to comply with complex regulations for the movement of capital. Although our management believes that we will be in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, we may not be able to pay dividends to our shareholders outside of The People’s Republic of China. In addition, under current Chinese law, we must retain a reserve equal to 10 percent of net income after taxes, not to exceed 50 percent of registered capital. Accordingly, this reserve will not be available to be distributed as dividends to our shareholders. We presently do not intend to pay dividends in the foreseeable future. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business.
 
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USE OF PROCEEDS 

Any net proceeds from any sale of shares of our common stock covered by this prospectus will be received by the Selling Stockholders. We will not receive any proceeds from the sale of shares by the Selling Stockholders. However, 611,787 of these shares will only be issued upon exercise of warrants. If all of these warrants are exercised and their holders do not elect to use cashless exercise provisions of these warrants, then we will receive gross proceeds of $3,207,435. For those holders who elect to exercise their warrants using the cashless exercise provisions, we will receive less cash than the exercise price but issue a lower number of shares of common stock upon exercise than we would if they did not elect to use cashless exercise provisions. The amount of cash received and shares issued upon a cashless exercise will vary based on the market price of our common stock on the exercise date of each warrant exercised using cashless exercise provisions. We will use these proceeds for general corporate and working capital purposes.
 
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Trading History
 
Our common stock is not listed on any stock exchange. On October 31, 2006, our Common Stock became eligible for quotation on the Over-the-Counter Bulletin Board under the symbol “AGFI.OB.” The following table sets forth the high and low bid prices per share of our Common Stock for the periods indicated, which information was provided by NASDAQ Trading and Market Services. Prior to October 31, 2006, the shares traded very infrequently and the actual price information is not readily available. The quotations set forth below reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. On June 27, 2007, the closing bid price for our common stock was $5.80.
 
 
 
2006 
 
 
 
High
 
Low
 
1 Quarter
 
$
N/A
 
$
N/A
 
2 Quarter
   
N/A
   
N/A
 
3 Quarter
   
N/A
   
N/A
 
4 Quarter
   
2.50
   
0.15
 
 
 
 
2007 
 
 
 
High
 
Low  
 
1 Quarter
 
$
7.80
 
$
1.85
 

As of June 26, 2007, there were approximately 125 holders of record of our common stock.

Dividends

We have never paid any dividends on the Common Stock. We currently anticipate that any future earnings will be retained for the development of our business and do not anticipate paying any dividends on the Common Stock or the Preferred Stock in the foreseeable future.

Equity Compensation Plan Information

During the year ended December 31, 2006 and the fiscal quarter ended March 31, 2007, the Company did not have any equity compensation plans in effect.
 
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EQUITY COMPENSATION PLAN INFORMATION

Plan category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
 
Weighted average
exercise price of
outstanding options,
warrants and rights
 
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
 
 
 
(a)
 
(b)
 
(c)
 
Equity compensation plans approved by security holders
   
-0-
   
N/A
   
-0-
 
 
             
Equity compensation plans not approved by security holders
   
-0-
   
N/A
   
-0-
 
 
             
Total
   
-0-
   
N/A
   
-0-
 
 
DESCRIPTION OF OUR BUSINESS

Cautionary Statement Regarding Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this registration statement are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” “anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations. Some factors that might cause or contribute to such discrepancy include those factors listed in the section “Risk Factors” beginning on page 3.

Overview of Business

We were incorporated as Wallace Mountain Resources Corp. on March 30, 2005 in Nevada. Since October 31, 2006, our principal place of business has been based in the People’s Republic of China (“PRC”). As the result of a merger into a wholly-owned subsidiary, we changed our name to AgFeed Industries, Inc. on November 17, 2006. Our executive offices are located at 1095 Qing Lan Avenue, Economic and Technical Development Zone, Nanchang City, Jiangxi Province, People’s Republic of China 330013, Telephone: +86-0791-2189878. Our primary business is the research and development, manufacture, marketing and sale of fodder and blended feed for use in the domestic animal husbandry markets in the People’s Republic of China.

Business

We operate through three subsidiaries in the PRC.

Nanchang Best Animal Husbandry Co., Ltd (“Nanchang Best,”) was incorporated under the laws of the People’s Republic of China on May 15, 1995, in Jiangxi Province. It is headquartered at 1095 Qinglan Avenue, Nanchang City, Jiangxi Province, China 330013. Nanchang Best is in the business of the research and development, manufacture, marketing and sale of fodder and blended feed for use in China’s domestic animal husbandry markets.

Shanghai Best Animal Husbandry Co., Ltd. (“Shanghai Best,”) was incorporated under the laws of the People’s Republic of China on July 23, 1999, in Shanghai and is headquartered at No. 158 Huiping Road, Jia Ding District, Shanghai, China 201802. Shanghai Best is also in the business of the manufacture, marketing and sale of fodder and blended feed for use in China’s domestic animal husbandry markets.
 
14


Guangxi Huijie Sci. & Tech. Feed Co., LTD., (“Guangxi Huijie”) was incorporated under the laws of the People’s Republic of China on August 2, 2004 and is headquartered at No. 5 Lianling Street, Nanning Industrial Park, NanNing, GuangXi Province, China 530221. Guangxi is engaged in the research and development, manufacture, marketing, distribution and sale of premix fodder blended feed and feed additives primarily for use in China’s domestic pork husbandry markets.

History

From incorporation to October 31, 2006, the business of the Company, as Wallace Mountain Resources Corp., consisted of 18 unit mineral claims known as the South Wallace Mountain Project having a total surface area of approximately 946 acres. At that time the property was without known reserves and the proposed program was exploratory in nature. We paid a $3,000 retainer to the geologist to commence the Phase 1 exploration work on the claim.

On October 31, 2006, we entered into and closed a share purchase agreement with Nanchang Best, and each of Nanchang Best’s shareholders (the “Nanchang Purchase Agreement”). Pursuant to the Nanchang Purchase Agreement, we acquired all of the issued and outstanding capital stock of Nanchang Best from the Nanchang Best shareholders in exchange for 5,376,000 shares of common stock.

Contemporaneously, on October 31, 2006, we entered into and closed a share purchase agreement with Shanghai Best, and each of Shanghai Best’s shareholders (the “Shanghai Purchase Agreement”). Pursuant to the Shanghai Purchase Agreement, Wallace acquired all of the issued and outstanding capital stock of Shanghai Best from the Shanghai Best shareholders in exchange for 1,024,000 shares of common stock.

Concurrently with the closing of the Nanchang Purchase Agreement and Shanghai Purchase Agreement (collectively the “Purchase Agreements” or the “Transaction” as the context may require) and as a condition thereof, we entered into an agreement with Robert Gelfand, our former President and Chief Financial Officer, pursuant to which Mr. Gelfand returned 2,600,000 shares of our common stock to the treasury for cancellation. Mr. Gelfand was not compensated in any way for the cancellation of his shares of our Common Stock. Upon completion of the foregoing transactions, we had an aggregate of 8,000,000 shares of common stock issued and outstanding. The shares of common stock issued to the shareholders of Nanchang Best and Shanghai Best were issued in reliance upon the exemption from registration provided by Regulation S under the Securities Act of 1933, as amended.

Subsequent to the acquisition of Nanchang Best and Shanghai Best, on October 31, 2006, Robert Gelfand resigned as our sole officer and Mr. Songyan Li was appointed as a director. On November 17, 2006, we declared a stock dividend of two additional shares of common stock for each share of common stock outstanding, and changed our name to AgFeed Industries, Inc.

Nanchang Best and Shanghai Best share a common founder and Chief Executive Officer, Junhong Xiong. Nanchang Best shares the results of its research and development efforts with Shanghai Best. In addition, Nanchang Best provides general management and administrative services to Shanghai Best as well as human resources services at no expense.

On December 20, 2006, we entered into and closed a share purchase agreement with Guangxi Huijie Sci. & Tech. Feed Co, Ltd. , a company founded in the People’s Republic of China (“Guangxi Huijie”), and the shareholders of Guangxi Huijie, pursuant to which we acquired all the outstanding shares of Guangxi Huijie for a total purchase price of eight million six hundred thousand Chinese Renminbi (8,600,000 RMB), equivalent to approximately U.S. $1,100,420 based on exchange rates reported in the Wall Street Journal for December 20, 2006.

Products

Livestock producers may directly buy animal feed in finished form, referred to as “blended” feed, which already contains the concentrate and the foundational grains blended together, or, they may choose to buy the premix and then combine it with protein, corn, hay, wheat and other elements readily available in the market to make their own blended feed. Additive premix fodder provides the essential amino acids and binder necessary for proper absorption of protein by pigs. Feeding pigs a balanced diet is an essential part of the pork profit equation. Feed costs comprise 55-70% of a piggery’s expenses; therefore the quality of feed and nutrition has a significant effect on piggery profits.
 
15


The Companies are engaged in the manufacturing, distribution, marketing and sale of two main product lines: additive premix fodder for use in all stages of a pig’s life, and blended feeds designed specifically for the infant stage of a pig’s life. Nanchang Best and Guangxi Hijie also engage in the research and development of new products and improvement of existing formulas. Nanchang Best shares the results of such work with Shanghai Best. Shanghai Best also manufactures and markets pre-mixed chicken feed. Nanchang Best and Guangxi Huijie produce substantially all of the Companies’ sales of blended feed.

In combination, the Companies’ total feed output in 2006 was approximately 20,344 metric tons. Together they produced a combined 15,534 metric tons of premix fodder; Nanchang Best produced 7,948 metric tons of premix fodder, Shanghai Best 5,714 metric tons and Guangxi Huijie 1,872 metric tons. Nanchang Best produced 2,610 metric tons of blended feed and Guangxi Huijie 1,517 metric tons. Shanghai Best and Guangxi Huijie produced approximately 683 metric tons of other feed product.

Pork premix
According to the different growth stages of a pig, different additives are necessary to accelerate the growth of the animal and provide safe products for consumption. Premix additives are composed mainly of essential amino acids, vitamins, minerals, antibiotics and growth promoters. The Companies market 21 different brands of premix fodder that are priced from standard to premium to satisfy wide ranging customer demand. Within each brand there are 7 different mixes that correspond to the different stages of a pig’s life cycle: newborn to 15 kg, 15-30 kg, 30-60 kg, market ready, over 60 kg boar, mating/pregnant, and lactating. The Companies attempt to provide superior customer service by customizing the premix to the specific needs of each customer. Large scale pig farms are typically the biggest consumers of premix. The Companies employ veterinarians to work with these large pig farms to determine the optimal formulation of feed.

Premix sales represent approximately 85% of annual revenues and carry a gross profit margin of approximately 40%. The willingness of the Companies to formulate customized premix fodder to meet customer specifications allows them to charge a premium for their products. The average price of premix is $570/metric ton. Competitors charge $500/metric ton on average. The Companies are able to justify premium pricing due to their strong brand name recognition, hands-on after market support, and superior, more effective products developed as a result of a strong R&D program. In Shanghai City, Shanghai Best is a market leader in the lactating and pregnant sow market, according to management estimates. Large scale piggeries are willing to pay a premium for more effective products as they are concerned with producing healthy piglets, controlling disease and marketing profitable pork products.

Guangxi Huijie has approximately a 6% market share of pre mix fodder category in its home province of Guangxi.

The Companies also provide extensive technical and veterinary support free of charge to their customers. Overall, the Companies maintain approximately one technical support person to every five sales persons while the competitors generally average one technician to every twelve sales persons.

Piglet blended feed

Nanchang Best and Guangxi Huijie produce piglet blended feed. It is designed to both nourish and protect newborns and is composed primarily of proteins, such as fish meal and soy bean (30%), and raw material grains, such as corn and chaff (roughly 65%). Local climate and environment also influence the formulation of the piglet blend.

We sell blended feed for an average price of $420/metric ton. Blended feed contributes approximately 15% to our total revenues, and has gross margins of approximately 15%. As a result of government policies aimed at increasing the economic success of the agriculture industry as a whole and greater regulation requiring advanced technology to provide safeguards to the country’s food supply, the smaller pig farms are being forced out of business or to merge with larger pig raising operations. The large operations increasingly purchase premix as opposed to blended feeds in order to realize significant cost savings by leveraging their economies of scale. For this reason, we expect the blended feed business to diminish over time. This was also a factor in Shanghai Best’s decision not to enter this market. However, we believe that our blended feed revenue will be replaced by selling more of the profitable premix products to the increasing number of large scale pig farms.
 
16


Chicken premix

We also produce three brands of premix for the poultry industry. Most of this production takes place at the Shanghai Best production facility. It produces approximately 500 metric tons annually and it has a nominal impact on our total revenues. While there are no current plans to expand the chicken feed product line, future expansion remains a possibility.

Market information

The feed industry in China, initially developed during the 1980s, was transformed by the issuance of the feed and feed additives regulations in the early 1990s. These regulations emphasized labeling standards for the different grades of product. These standards assisted in regulating the feed industry’s expansion and aimed to eliminate substandard products and fraudulent labeling.

China’s feed manufacturing industry is second only to the United States in volume and is forecast to surpass the United States within the coming five year period. The feed industry grew to approximately 66 million tons in 1998, after growing at an annual rate of 15% from 1990 to 1998 and in 2006 totaled 81.2 million tons. As incomes rise in China, annual meat consumption is expected to rise from the current 23 kg per person to 32 kg per person in the next five years. Developing countries average 24 kg per person annually while developed countries average 75 kg per person annually. It is estimated that 4 kg of feed grain are needed to produce 1 kg of pork, according to USDA Foreign Agricultural Services.

The animal feed industry in China is highly competitive with many regional players and locally recognized brands. The company believes that the initial capital requirements with respect to entry into the industry are low and consequently there is a great deal of competition between many smaller companies. The animal feed sector for pork has three primary markets:

 
·
additive premix fodder
     
 
·
proteins
     
 
·
blended feed

We predominantly produce additive premix fodder (“premix”) and blended feeds and do not presently compete in the protein market. A nutritionally complete feed includes three components: energy sources, such as course grains; protein sources such as fish and soy meals; and premix consisting of essential amino acids, vitamins, minerals and antibiotics. Premix and proteins together are often referred to in the industry as “concentrate.” Premix fodders require greater technology to produce, and are often customized to each customer’s specifications. As such, premix carries the highest selling price per metric ton of all feed components. Livestock producers may directly buy animal feed in finished form, referred to as “blended feed” or buy the component ingredients and mix the blend on their own generating 15-20% cost savings. Typically, large scale piggeries will purchase, as they have the scale to mix their own blended feeds.

The hog feed manufacturing industry is concentrated in the Yangtze River Basin. In the past decade, feed mills have become more efficient, with new, high capacity mills replacing old, small, inefficient ones. As part of its effort to improve agricultural output and improve the economic vitality of China’s rural industries, the government has adopted favorable tax policies for the industry, such as exemption from the value-added tax.
 
17


Blended Feed Industry

According to a recent China Animal Feed Industry Development Report, the blended feed market for pork was approximately $12 and $14 billion for 2004 and 2005, respectively. The largest player in the market has approximately a 7% market share, and forty companies share the top 33% of the market. From 2000 to 2005, blended feed sales have grown at an average annual rate of 4.5%. From 2005 to 2006, blended feed sale growth was 4.6%.

Premix Industry

In 2005, the premix market in China totaled $1.45 billion and included over 2,500 companies. From 2000 to 2005 premix industry sales grew at an average annual rate of 14.3%. In 2006, the premix market increased 4% from 2005.  There is no single dominant market participant, with the largest player in the market realizing only 1.2% market share. Of the various components that make up blended feed, the premix, while constituting the smallest proportion of the total blend at 4%, requires the most sophisticated formulas to produce. The research, development and technology necessary to produce premix makes it necessary for premix to carry a higher price per ton than blended feed.

Sales and Marketing

Since the founding of Nanchang Best and the subsequent founding of Shanghai Best, the Companies have aggressively marketed and promoted the “Best” brand. Guangxi Huijie markets its products under the “Huijie” brand name. None of our operating subsidiaries currently owns any retail outlets. The Companies send their sales force and technicians to the pig farms to educate their clients on new product developments and improvements to existing products. The Companies conduct educational seminars in pig farming regions to explain the benefits of a balanced, nutritious diet for pigs in producing a healthy herd and educate the farmers to properly prepare and mix the various feed components. Although not unique among premix manufacturers, management believes its services in this area are superior to competitors due to its high ratio of technicians to sales people, which allows the sales team to develop a stronger relationship with its customers. As the Companies market and sell directly to pig farmers they are able to collect and analyze data from the farmer which assists in preparation and design of new products. The Companies also attend agricultural conventions that take place in the market areas where they currently conduct business as well as in provinces that they expect to enter. The Companies also place advertisements and promotional pieces in agricultural trade journals.

Historically, the Companies sold their products to distributors and large scale pig farms. Large scale farms generally refer to those with over 2,000 pigs and 100 sows annually, however it is not uncommon to have a single farm raise 20,000 to 30,000 pigs. The distributors sell to the smaller privately owned farms. Recent sales data of distributors indicates that they tend to be more sensitive to price increases than the large-scale piggeries, whereas the piggeries place more emphasis on customer service and other ancillary services provided by the Companies.

Starting in January 2007, we began to open independently owned and operated franchise chain stores. The franchise program allows us to cost effectively sell our products to the individual “mom and pop” farmer that may raise only a few hogs per year for personal consumption or for sale in the marketplace as an additional source of income. Some of the more successful franchise stores have reached sales levels of 3-4 metric tons per month. At June 11, 2007, we had 120 locations open and operating under the AgFeed brand name. We began a small test program of the franchise concept in June 2006 and began to roll out the full franchise program in January 2007 and estimate that by year end 2007, 500 franchise stores will be in operation. Approximately 70% of the franchise store operators were previously in the animal feed distribution business. The franchisees do not pay an initiation fee to become franchised distributors but do receive marketing and technical training from our staff. Each franchise operator signs an exclusive agreement with us, agrees to not sell any other brand of animal feed products and to decorate their store with approved AgFeed marketing materials and signage.

In addition, each franchise operator must also: (i) during a three month probationary period pass a screening process based on performance benchmarks, (ii) abide by our rules and receive ongoing training from our sales and technical staff, (iii) support the sales of new AgFeed products when launched in their territory, and (iv) remain within our guidelines for payment of products purchased from us.
 
18

 
The franchisees receive discounted prices from the regular wholesale listed prices and have payment terms that are typically 15 days from the date of sale. These discounted prices earn the franchisee an increased gross profit margin of approximately 5-10%. They build a relationship with the small farmers that in many cases are illiterate and continue to do business as they have always done. As part of the franchise agreement they have a specified territory that entitles them to the exclusive right to sell AgFeed products to the small farm owners.


Shanghai Best currently sells to approximately 300 customers, consisting of 90 local distributors and 210 large scale pig farms.

Guangxi Huijie currently sells to approximately 325 customers, consisting of 140 local distributors and 185 large scale pig farms.

Suppliers

The Companies do not have any long term supply contracts. For each raw material purchased, they maintain at least two suppliers who offer the same product. Management believes that any one of its suppliers could be easily replaced. Normally, purchases of raw materials are made on an “as needed” basis each month. Orders are managed by both the warehouse and purchasing manager together, who are familiar with the on-site inventory levels. China has more than 2,000 raw material producers involved in supplying the animal feed industry.

Research and Development

To maintain a competitive advantage in the marketplace and keep pace with current developments, the Companies engage in continuous research and development. Nanchang Best and Guangxi Huijie conduct research and development. Historically, Nanchang Best has shared its R & D results with Shanghai Best. The Company sponsors research alliances with Jiangxi Agricultural University, South China Agricultural University, and Nanjing Agricultural University.

In addition to sponsoring national and provincial academic research projects at various academic institutions, in November 2004, Nanchang Best launched a fund called Best Fund contributing RMB 98,000 ($12,250) to sponsor 12 research projects at Jiangxi Agricultural University. Nanchang Best retains proprietary rights to any research findings from these projects.

Intellectual Property

Management has registered the “Best” and Huijie trade name used on its products with the China Trademark Bureau and their goods are known in the provinces in which the Companies conduct business.

None of the Companies hold any patents or intend to apply for patents on proprietary technology or formulas. The formulas for the Companies’ products are considered a trade secret and are protected as such.

Government and Environmental Regulation

Through the laws and regulations of the People’s Republic of China and the provincial governments of Jiangxi Province, Guangxi Province and the Shanghai City government, the Company’s products and services are subject to material regulation by governmental agencies responsible for the agricultural and commerce industries.

As such, business and company registrations, production license, and all products are certified on a regular basis and must be in compliance with the laws and regulations of provincial and other local governments and industry agencies.

All of the Companies’ production facilities have received production licenses as promulgated by the Ministry of Agriculture with Nanchang Best’s license valid through February, 2009, Shanghai Best through February, 2010, and Guangxi Juijie through April, 2010.
 
19


All products have earned formal approval pursuant to the National Code of Feed and Feed Additives as dictated by National State Council of the PRC. Product approval includes qualified quality reports from the council’s technology and supervision bureau prior to engaging in any production of marketing activities.

There is no material cost in obtaining and maintaining these licenses as it is illegal to do business without them. The issuance of the production licenses and product permits is seen as a cost of doing business and associated fees are minimal. If any production license(s) or product license(s) were lost, production would need to cease with a minimum time period of 30-45 days to issue a new license and the possibility of regulatory fines.
 
The Companies are also subject to China’s National Environmental Protection Law as well as a number of other national and local laws and regulations regarding pollutant discharge, air, water and noise pollution.

A production permit is mandatory for all entities involved in the manufacture of animal feed and feed components. The Ministry of Agriculture dispatches officials at the local level to review staff qualifications, production facilities, quality control, and management departments for competency.

Nanchang Best’s production permit was issued in 2004 (#3751) and is valid until 2009.

Shanghai Best’s production permit was issued in 2005 (#0216) and is valid until 2010.

Guangxi Huijie’s production permit was issued in 2005 (#4146) and is valid until 2010.

All products must earn a formal approval production number pursuant to Code of Premix and Additive, promulgated by China State Council, and qualified products reports from Technology and Supervision Bureau, prior to engaging in any production or marketing of feeds.

Competition

The premix market in China is particularly fragmented with many companies and locally recognized brands. The largest player in the premix industry commands only 1.2% of the national market and no one company has yet taken a sizable market lead in terms of service, brand, or technology. Nanchang Best leads the pork premix market in the Jiangxi Province with a 3.5% market share and also sells product in neighboring regions such as Hubei, Henan and Fujian. Nanchang Best faces price competition from Da Bei Nong in the large-scale farm market; however management believes Da Bei Nong’s service is considered inferior to Nanchang Best’s. Therefore Nanchang Best has been able to maintain its lead in sales.

Sales made by Nanchang Best and Shanghai Best in Fujian province face strong competition in the large-scale piggery market from Fuj Minke Biology Company, which has well-known service, a flexible credit policy, and whose prices are competitive, if not lower than the prices at which Nanchang Best and Shanghai Best sell their products. While both Nanchang Best and Shanghai Best are working to further develop and strengthen their connections to large-scale farms, Fuj Minke does not pose a threat to their distributor sales.

Zheng Da, a Sino-Thai JV part of Charoen Pokphand, is one of the largest premix producers in Fujian province; however its prices tend to be higher than the prices at which Nanchang Best and Shanghai Best sell their products, and it focuses only on the distributor market.

In the Shanghai area, Xinnong leads the market in sales with 7,800 metric tons, competing directly with Shanghai Best on both pricing and service to large scale piggeries.

Guangxi Huijie has approximately a 6% share of the overall feed market and competes directly with Guangxi Provimi. Guangxi Provimi sells the same products as Guangxi Huijie at similar price points, and is considered by the marketplace to offer the same quality as Guangxi Huijie. The Company management believes that Guangxi Provimi does not provide the same quality of after sale technical support to its customers.
 
20


Employees
 
As of June 22, 2007, we have a total of 340 employees.

Nanchang Best has approximately 125 employees, in the following departments: 8 management, 3 general administration, 2 human resources, 26 production, 3 sales administration, 60 marketing, 1 purchasing, 6 finance, 12 technical services, 4 quality control.

Shanghai Best has approximately 95 employees in the following departments: 6 management, 5 general administrative, 19 production, 10 sales administration, 39 marketing, 1 purchasing, 5 finance, 7 technical services, 3 quality control.

Guangxi Huijie has approximately 120 employees, in the following departments: 5 management, 3 general administration, 6 human resources, 21 production, 4 sales administration, 65 marketing, 1 purchasing, 4 finance, 5 technical services, 6 quality control.

Facilities

Nanchang Best is located in Chang Bei District Industrial Park, in Nanchang, Jiangxi province. It owns three buildings, one each for the office, manufacturing, and a worker dormitory. Nanchang Best has been granted the right to use the land in Nanchang by the Municipal Administration of state-owned land through December, 2049.

Shanghai Best is located in the Nanxiang, Jia Ding district, Shanghai. It rents two workshop buildings and office space on which it conducts all manufacturing and business operations. The annual rent on the Shanghai property is approximately $33,000 and the lease runs through September, 2009.

Guangxi Huijie Co. is located in Coastal Industrial Park, Liangqin district, Nanning city, Guangxi province. Guangxu Huijie owns three buildings, an office building, production plant and a worker dormitory. The right to use the land was granted by Housing Bureau and Land Administrative Bureau of Langqin District, Nanning City through October, 2056.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Overview

We are incorporated under the laws of the state of Nevada. We engage in the business of the research and development, manufacture, marketing and sale of fodder and blended feed for use in China’s domestic animal husbandry markets. Our chief source of revenues is the sale of feed products for pigs, however, we do produce other feed products for chickens and cows. We sell our products in approximately ten provinces within the People’s Republic of China.

We currently conduct our business through the following three operating subsidiaries in China:

 
·
Nanchang Best is located in the province of Jiangxi,
     
 
·
Shanghai Best is located in Shanghai City, and
     
 
·
Guangxi Huijie is located in the province of Guangxi.

We operate each subsidiary independently with regard to manufacturing and marketing and sales efforts. We do have some sharing of sales referrals and leads amongst the subsidiaries, but they do not compete against each other for new sales. Most of our research and development occurs at Nanchang and Guangxi, and each shares their efforts with the other and Shanghai. In addition, many of the administrative duties are performed by Nanchang for Shanghai, and we are attempting to study the feasibility of centralizing more administrative functions.
 
21


We are targeting growth through three main channels: (i) organic growth through increasing sales at each of our current operating subsidiaries, (ii) the distribution of our products through 120 new franchise chain stores (as of June 11, 2007), and (iii) an aggressive acquisition program to increase the number of provinces in China in which we do business.

Our revenues increased 12.9% in 2006 as compared to 2005 and our net income increased 110% in 2006 as compared to 2005. Similarly, in the first quarter of 2007, our revenues increased 137.71% and our net income increased 179.9% compared to the first quarter of 2006. The increases we experienced in both periods are the result of our organic growth at each operating subsidiary. In addition, the growth in the first quarter of 2007 also reflects the acquisition of our Guangxi Huijie subsidiary in December 2006. Since we acquired Nanchang Best and Shanghai Best in October 2006, we have effectively marketed our products through a team based approach, sharing sales leads and referrals. We also developed the new Arubao Series of product at Nanchang Best and introduced the product in our three current subsidiaries.

Starting in January 2007, we established 120 franchise chain stores to compliment our existing distribution channels. We will continue to market our products to the operators of large swine farms and large distributors. We will now rely on the franchisees to market and sell our products to the smaller swine farms. Even though the number of small swine farms in China is declining, we did not want to lose revenues by forgoing sales to this market segment. We determined that the best and most efficient use of our resources is to concentrate on the larger customers and allow the franchisees to sell to the smaller farmers.

We also continue to aggressively search for acquisition targets in our industry, throughout China. The growth in sales and net revenues we experienced in the first quarter of 2007 compared to the first quarter of 2006 was due in part to our acquisition of Guangxi Huijie late in December 2006.

Critical Accounting Policies

USE OF ESTIMATES: Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of long-lived assets, and allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

FOREIGN CURRENCY TRANSLATION: Our accounts are maintained and our consolidated financial statements were expressed in the Chinese Yuan Renminbi (CNY). Such consolidated financial statements are translated into U.S. Dollars (USD) in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation,” with the CNY as the functional currency. According to the Statement, all assets and liabilities are translated at the exchange rate on the balance sheet date, stockholder’s equity are translated at the historical rates and statement of operations items are translated at the weighted average exchange rate for the year. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income.”
 
REVENUE RECOGNITION: Our revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. We are not subject to VAT withholdings. We give volume rebates to certain customers based on volume achieved. We accrue sales rebates based on actual sales volume.
 
22


STOCK BASED COMPENSATION: We account for stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.” We recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

For a description of these and other generally accepted accounting policies that we follow, see note 2, Summary of Significant Accounting Policies contained in the explanatory notes to our annual consolidated financials statements included with our Audited Financial Statements for the year ended December 31, 2006 and Notes thereto included in this prospectus.

Recent Accounting Pronouncements

Fair Value Measurements

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value, and expands disclosures about fair value measurements required under the accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for fiscal year, including financial statements for an interim period within the fiscal year. The Company is currently evaluating the impact, if any, that SFAS No. 157 will have on its consolidated financial statements.

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R

In September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The new reporting requirements and related new footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending after December 15, 2006. We adopted the provisions of SFAS No. 158 for the year end 2006, and the effect of recognizing the funded status in accumulated other comprehensive income was not significant. The new measurement date requirement applies for fiscal years ending after December 15, 2008.

Fair Value Option for Financial Assets and Financial Liabilities

In February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are analyzing the potential accounting treatment.
 
23


Other-Than-Temporary Impairment

FASB Staff Position on FAS No. 115-1 and FAS No. 124-1 (the “FSP”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” was issued in November 2005 and addresses the determination of when an investment is considered impaired, whether the impairment on an investment is other-than-temporary and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of other-than-temporary impairments on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance on Emerging Issues Task Force (EITF) Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations. Under the FSP, losses arising from impairment deemed to be other-than-temporary, must be recognized in earnings at an amount equal to the entire difference between the securities cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also required that an investor recognize other-than-temporary impairment losses when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The adoption of this statement will not have a material impact on our consolidated financial statements.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.109.”

Interpretation 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. The amount of tax benefits to be recognized for a tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax benefits relating to tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met or certain other events have occurred. Previously recognized tax benefits relating to tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of tax reserves for unrecognized tax benefits, interest and penalties and accounting in interim periods. Interpretation 48 is effective for fiscal years beginning after December 15, 2006. The change in net assets as a result of applying this pronouncement will be a change in accounting principle with the cumulative effect of the change required to be treated as an adjustment to the opening balance of retained earnings on January 1, 2007, except in certain cases involving uncertainties relating to income taxes in purchase business combinations. In such instances, the impact of the adoption of Interpretation 48 will result in an adjustment to goodwill. While the Company analysis of the impact of adopting Interpretation 48 is not yet complete, it do not currently anticipate it will have a material impact on the Company’s consolidated financial statements.

Considering the Effects of Prior Year Misstatements in Current Year Financial Statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”),which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The Company adopted SAB 108 in the fourth quarter of 2006 with no impact on its consolidated financial statements.
 
24


Results of Operations

Three Months Ended March 31, 2007 compared to Three Months Ended March 31, 2006

   
 
Fiscal 2007-
First Quarter
 
 
Fiscal 2006 -
First Quarter
 
 
$ Change
 
 
% Change
 
Revenues
 
$
4,978,295
 
$
2,094,289
 
$
2,884,006
   
137.71
%
Cost of Sales
   
3,435,089
   
1,305,090
   
2,129,099
   
163.21
%
Gross Profits
   
1,543,206
   
789,199
   
754,007
   
95.54
%
Selling, General and Administrative Expenses
   
565,315
   
374,983
   
190,332
   
50.76
%
Net Income
   
779,181
   
278,382
   
500,799
   
179.90
%

Revenues. The increase in revenues was due to an increase in the volume of feed products that we sold, the acquisition of the Guangxi Huijie subsidiary and the introduction of the Airubao Series, a new special blended feed product formulated especially for baby pigs. We sold 4,330.5 metric tons (MT) of premix feed for the three months ended March 31, 2007, an increase of 418.5 metric tons or 10.7%, versus 3,912 MT for the three months ended March 31, 2006. Blended feed (not including 1,900 MT of Airubao Series) sold during the three months ended March 31, 2007 was 1128.3 MT, an increase of 530.2 MT or 88.6%, versus 598.1 MT for the three months ended March 31, 2006. In addition, sales of other feeds increased from 161.4 MT for the three months ended March 31, 2006 to 272 MT during the three months ended March 31, 2007, an increase of 110.6 MT or 68.5%.

During March 2007, we launched a new special blended feed designed specifically for baby pigs, called the Airubao Series. The Airubao Series is intended to be used four days after weaning. Its main ingredients are amino acids, vitamins, feed additives and minerals. It is intended to maximize the baby pig’s feed intake, help the baby pig adapt to corn feeding, enhance immunity and digestibility, and reduce post-weaning syndrome. The large pig farms are expected to be the largest users of the Airubao Series although we have introduced the Series to the small individual farmers as well. We have gained immediate acceptance from our customers, signing sales contracts for approximately $2,000,000 as of mid-April 2007. We delivered approximately $1.2 million of this new product during the three month period ended March 31, 2007. This product line consists of a series of three distinct formulations, the average gross margin is approximately 24%, and the average selling price is approximately $670 per MT. The Annual Report on China’s Feed Industry, published by the Chinese government, estimates that the market for premium baby pig feed is approximately $3.8 billion per year.

Cost of Goods Sold. We experienced approximately 37.8% and 5.9% increase in the unit cost of goods sold for blended feed and premix products, respectively, during the three month period ended March 31, 2007 compared to the same period in 2006. In order to provide excellent customer service and differentiate ourselves from our competition, at our customer’s request, we supply to them customized formulations of our products. In any given month, the cost of the various additives used fluctuates, which can be reflected in temporary increases in unit cost of goods sold. We believe even though this may have an effect on our short term profits, we take the long term view that it builds customer loyalty and builds the AgFeed brand.

Gross Profit. Gross margins decreased to 31.00% from 37.68% for the same period last year. The decrease in gross margin can be attributed to several factors: (i) the cost of introducing the Airubao Series, which we believe is a great introductory product with a gross profit margin of approximately 24% in comparison to our blended feed products which during the three month period ended March 31, 2007 had a gross profit margin of approximately 17.0%; (ii) we experienced approximately a 37.8% increase in the unit cost of goods sold of blended feed during the three months ended March 31, 2007 compared to the same period in 2006; (iii) the unit cost of goods sold for premix products increased approximately 5.9% during the three months ended March 31, 2007 compared to the same period in 2006.
 
25


Selling, General and Administrative Expenses. We incurred legal and audit expense in the three month period ended March 31, 2007 associated with being a publicly traded United States reporting company that we did not incur during the same period in 2006. General and administrative expense includes the overhead expenses of our office (rent, management and staff salaries, general insurance, marketing, accounting and legal). Selling expenses for the period increased by 29.33% due to the 137.71% increase in revenues and the costs associated with entering markets in neighboring provinces. We attempted to control our selling expenses through the use of strict cost controls and efficient use of our distribution channels.

Net Income. Our increase in net income was due to an increase in income from operations offset by an increase in non-operating expenses. The major reason for the increase in non-operating expense during this period in 2007 was interest paid in connection with the acquisition of Guangxi Huijie. In addition, our Nanchang Best subsidiary became a Sino Foreign Joint Venture due to an investment by a foreign investor in July of 2006. Nanchang Best receives favorable tax status and is exempt from income tax through July 14, 2008 and will pay a reduced rate of 15% for the next three years. As a result income taxes were only paid by our Shanghai Best and Guangxi Huijie subsidiaries during the three month period ended March 31, 2007.

Year Ended December 31, 2006 compared to Year Ended December 31, 2005

   
 
 
2006
 
 
 
2005
 
 
$ Change
 
 
% Change
 
Revenues
 
$
8,594,876
 
$
7,611,845
 
$
983,031
   
12.9
%
Cost of Sales
   
5,446,332
   
5,339,067
   
107,265
   
2.0
%
Gross Profits
   
3,148,544
   
2,272,778
   
875,766
   
38.5
%
Selling, General and Administrative Expenses
   
2,114,650
   
1,392,007
   
722,643
   
51.9
%
Net Income
   
1,175,280
   
560,706
   
614,574
   
110.0
%

The increase in revenues was due to an increase in all feed products sold by us. Premix sold for the twelve months ended December 31, 2006 was 13,325 metric tons, an increase of 1,147 metric tons or 9.4%, versus 12,178 for the twelve months ended December 31, 2005. Blended feed sold in the twelve months ended December 31, 2006 was 2,572 metric tons, an increase of 848 metric tons or 49%, versus 1,724 metric tons for the twelve months ended December 31, 2005. In addition, other feeds increased from 111 metric tons for the twelve months ended December 31, 2005 to 534 metric tons during the year ended December 31, 2006, an increase of 423 metric tons or 381%. While we expect sales of blended feed through our Nanchang Best and Guangxi Huijie subsidiaries to increase in volume, we anticipate that premix will become the principal segment of total sales volume in the future.

Cost of Good Sold. The cost of sales in the period ended December 31, 2006 was $5,446,332, an increase of $107,265 or 2.0% compared to $5,339,067 for the same period ended December 31, 2005.

Gross Profit. Gross margins improved to 36.6% in 2006 from 29.9% for 2005. The increase in gross margin was due to a strategic shift to focus on the sale of higher margin products, particularly premix. Premix typically carries gross margins of approximately 40%, whereas blended feed carries gross margins of approximately15%.
 
26


Selling, General and Administrative Expenses. Our general and administrative expense increased by 98%. We incurred significant expenses associated with the share purchase agreements with Nanchang Best, and Shanghai Best. General and administrative expense includes the overhead expenses of our office (rent, management and staff salaries, general insurance, marketing, accounting and legal). Selling expenses for the period increased by 32% and is due to the approximately 13% increase in revenues and the costs associated with entering markets in neighboring provinces.

Net Income. Our net income increased due to an approximately 17% increase in income from operations and non operating income of $41,000 for the twelve months ended December 31, 2006, compared to a non operating loss of $47,655 during the twelve months ended December 31, 2005. In addition, due to an investment in us by a British Virgin Island investor, we received favorable tax status and are exempt from income tax in 2006, and a portion of taxes that were due for 2005. As such we received a tax credit of $100,386 for the twelve months ended December 31, 2006.

Liquidity and Capital Resources

At March 31, 2007, we had $2,672,889 cash and cash equivalents on hand. Our principal demands for liquidity are to increase capacity, raw materials purchase, sales distribution and the possible acquisition of new subsidiaries in our industry as opportunities present themselves, as well as general corporate purposes.

On April 29, 2007, we completed the final closing of a private placement of securities to accredited investors pursuant to which we received aggregate gross proceeds of $6,830,259. A total of 2,276,753 units were sold, each unit represented one share of our common stock and a three year common stock purchase warrant. Each unit was priced at $3.00 per unit, each stock purchase warrant provided for 8% warrant coverage of the number of units purchased. In connection with the private placement, fees of 8% of the securities placed was payable in cash and a number of common stock purchase warrants equal to 8% of the units placed were paid to participating dealers and a finder. All stock purchase warrants have a three year term and have an initial exercise price of $5.00. We received net proceeds from the private placement of $6,231,602 after deduction of costs associated with the financing of $598,657. We used $1,131,000 of the net proceeds to repay the short term bank loan we had in connection with our acquisition of Guangxi Huijie. We also used $160,000 to make a good faith deposit with a company that we are in negotiations to acquire.

On June 22, 2007, we completed a private placement of securities to one accredited investor pursuant to which we received aggregate gross proceeds of $3,000,000. 750,000 units were sold at a price of $4.00 per unit, resulting in the issuance of 750,000 shares of our common stock and a three year common stock purchase warrant to purchase 187,500 shares of our common stock at an exercise price of $5.60 per share. In connection with the private placement, fees of $240,000 and a warrant to purchase 60,000 shares of our common stock on the same terms and conditions as the warrants issued in the offering was paid to one finder. We received net proceeds from the private placement of $2,700,000 after deduction of costs associated with the financing. We intend to use the net proceeds to fund potential acquisitions over the next six to twelve months.

As of March 31, 2007, we had total loans payable of $699,192, comprised of two loans. A short term bank loan of $582,660, with an interest rate of 7.02% payable monthly, and due May 17, 2007, collateralized by our office building, workshop, employee dorms, and use right of land. A short term bank loan of $116,532, payable December 4, 2007, with an interest rate between 5.58% and 6.125%, payable monthly, and is collateralized by our machinery and equipment. The two outstanding loans were paid in full out of our working capital.

We have purchased and sold products to other business entities in which our President, Mr. Junhong Xiong has an ownership stake.

As of March 31, 2007, these other entities have a balance due to us in the amount of $93,187 for products that we sold to them. The following chart provides the amount due from each entity and the percentage ownership of Mr. Xiong in each entity.

 
 
Amount due to AgFeed
 
Percentage ownership of Mr. Xiong
 
Beijing Best Animal Husbandry Co., Ltd.
 
$
21,728
   
51
%
Nanchang Tiandiren Tech. Development Co., Ltd.
   
37
   
73
%
Xiamen Best Animal Husbandry Co., Ltd
   
5,338
   
52
%
Guangzhou Best Animal Husbandry Co., Ltd.
   
20,670
   
78.5
%
Jiujiang Best Hog Farm
   
45,414
   
87
%
Total Amount Due
 
$
93,187
     
 
These amounts have subsequently been paid to us.
 
27

 
As of March 31, 2007, we owed Nanchang Tiandiren Technology Development Co., Ltd $4,661 for products that we purchased from them. Mr. Xiong owns 73% of this entity. We have subsequently paid this amount.

At March 31, 2007, our accounts payable was $1,339,353 and other payables were $44,458. Our accounts receivable increased by $1,655,257 for the three months ended March 31, 2007. Other receivables decreased by $115,817. Advances to suppliers increased $167,177 while inventory increased $127,704 during the period.

Our accounts payable increased $529,770, other payables decreased $12,453, unearned revenues decreased $30,666 and accrued expenses decreased $43,655. Tax and welfare payable increased $131,608, for the three months ended March 31, 2007.

We used $24,125 in investing activities during the three month period ended March 31, 2007 for the acquisition of property and equipment.

Before we acquired Guangxi Huijie, it borrowed $753,521 from its shareholders for working capital purposes. After we acquired Huijie, we assumed ownership of its assets and liabilities.

We received $2,024,846 in cash from financing activities. We received $2,723,665, net of offering costs, from the sale of our securities during the three months ended March 31, 2007. We used $1,102,004 to repay the note payable associated with the acquisition of Guangxi Huijie. We used $160,000 to make a good faith payment to a company that we are in negotiations to acquire. We also received $226,083 on the collection of a subscription receivable, and $930,623 was received from advances that were made to related parties. During the three month period ended March 31, 2007 we used $753,521 to pay advances from the original shareholders of Guangxi, Huijie.

We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations and funds raised through private placement offerings of our securities. On February 28, 2007, we closed the first round of a private placement offering to an accredited investor. We sold $3,000,000 of units of our securities, each unit consisting of one share of common stock and a warrant to purchase .08 share of common stock.  Each unit was priced at $3.00. Fees of (i) 8% of the securities placed payable in cash, and (ii) a number of common stock purchase warrants equal to 8% of the number of units placed were paid to participating selected dealers. The stock purchase warrants have a term of three years and are exercisable at an initial exercise price of $5.00 per share.

On April 6, 2007, we closed on the second round of the private placement. We received $2,138,259 for the sale of 712,753 units of our securities, before deductions of offering expenses. We closed the third round of the private placement on April 29, 2007 and we received $1,692,000 for the purchase of 564,000 units of our securities, before deductions of offering expenses. The terms of these two rounds of the private placement offering were the same as the first described above.

On June 22, 2007, we closed an additional private placement offering with one accredited investor pursuant to which we received net proceeds of $2,760,000.

We believe that adequate cash flow will be available to fund our operations, although we may raise additional funds in the future.
 
28


The majority of the Company’s revenues and expenses were denominated primarily in Renminbi (“RMB”), the currency of the People’s Republic of China.

There is no assurance that exchange rates between the RMB and the U.S. Dollar will remain stable. The Company does not engage in currency hedging. Inflation has not had a material impact on the Company’s business.

DIRECTORS AND EXECUTIVE OFFICERS

The following sets forth certain biographical information concerning our current directors and executive officers:

Name
 
Position
 
Age
Junhong Xiong
 
Chief Executive Officer, President, Vice Chairman and Director
 
37
         
Liangfan Yan
 
Chief Financial Officer
 
53
         
Feng Zhou
 
Secretary, Treasurer and Vice President
 
38
         
Songyang Li
 
Chairman of the Board and Director
 
40
         
Lixiang Zhang
 
Director
 
40
         
John J. Egan, Jr.
 
Director
 
64
         
Robert N. Masucci
 
Director
 
70

Junhong Xiong, 37, has served as President of the Company since May 2007. Mr. Xiong also has served as Chief Executive Officer since founding the Company in 1995. Prior to that, Mr. Xiong worked for Guangzhou Huashi Animal Nutritionals Company as a sales representative, sales manager, and head of marketing from 1993 to 1995 He was a technician at the Chongming Progressing Farm Company in Shanghai from 1992 to 1993. Mr. Xiong graduated from Animal Husbandry & Veterinary College in Jiangxi Agricultural University and received a Bachelors Degree in 1992.

Liangfan Yan, 53, has served as Chief Financial Officer of the Company since 2006. Prior to that, Mr. Yan served as a financial consultant to the Company in 2003. Mr. Yan was the senior manager of Chengdu Accounting Firm from 2002 to 2003. From 1996 to 2001 he was the section chief of the Audit Inspection Department of the New Hope Group. Mr. Yan holds the certification of CPA in China and graduated from Correspondence College of Economics of Beijing in 1989.

Feng Zhou, 38, has served as Secretary and Treasurer of the Company since May 2007. Mr. Zhou also has served as the Vice President of Finance since 1995 as one of the original founders of the Company. Prior to that, Mr. Zhou was a sales representative at Guangzhou Huashi Industry from 1993 to 1995. He worked for Shanghai Daying Industry as a technician from 1992 to 1993. Mr. Zhou graduated from Jiangxi Agricultural University with a degree in Animal Feed in 1992. He obtained his EMBA from Tsinghua University in 2004.


Lixiang Zhang, PhD, 40, has served as a director since May 2007. Dr. Zhang is a leading expert in animal nutritional science and management consulting in China. Dr. Zhang is a Professor of Agricultural Management and has served as the Assistant Dean of the College of Agricultural Development at Renmin University of China since July 2003. Prior to that, Dr. Zhang was a PhD candidate in Management Science of the School of Business at Renmin University of China from July 2000 to July 2003. In addition, Dr. Zhang served as the Assistant Dean of the Social Sciences Department of Jinan University and the Director of the Strategic Planning Institute of Jinan University from July 1990 to July 2000. Also, Dr. Zhang served as President of the Magazine House of Public Relations Journal. In 2006, Dr. Zhang was awarded the title of Excellent Teacher by Renmin University. In 2005, he was named a Top Ten Enterprise Strategist by the Chinese government. In 2004, Dr. Zhang was named a Top Ten Best Management Consulting Expert by the Chinese Government. In 2002, he was awarded the top prize for Innovative Management Science by the Chinese Ministry of Commerce. Dr. Zhang has authored over 60 books and articles in the topics of agricultural science and management science. He has conducted management training programs for global companies including SONY, Panasonic, General Motors, Motorola, China Life Insurance, China Telecom among others. Dr. Zhang received a PhD in Management Science from Renmin University in 2003.
 
29


John J. Egan, Jr., 64, has served as a director since May 2007. Mr. Egan has served as Chief Executive Officer of Egan Bloom & Associates, LLC since October 2004. Prior to that, Mr. Egan served as the Senior Vice President of Raymond James & Associates, a company listed on the New York Stock Exchange that provides full financial institution services throughout the United States, Canada, Europe and Asia, from January 1992 to October 2004. He also served as a Board Member of Raymond James & Associates from 1976 to 1982. Mr. Egan also served as the Chairman of the Philadelphia Stock Exchange from 1998 to 2003. He has served as President of the Board of City Trusts of Philadelphia since 2006, and he has served as a Board Member since 1980. The Board of City Trusts finances and oversees Girard College, Wills Eye Hospital and 120 other Trusts with more than $750 million in total assets. He served on the original Board of the Pennsylvania Intergovernmental Cooperation Authority established by Pennsylvania Governor Tom Ridge as Treasurer overseeing the finances of the City of Philadelphia in the early 1990s. Prior to that, Mr. Egan served as Chairman of the Hospital Authority of Philadelphia from 1981 to 1983. During his service as Chairman, the Authority issued over $1 billion in various bonds. Mr. Egan was the Republican Candidate for the Mayor of Philadelphia in 1983 and 1987.  He also served as the Philadelphia leader for President Reagan’s reelection campaign in 1984. In addition, Mr. Egan served as Governor Rendell’s Finance Chairman when Governor Rendell ran for District Attorney in Philadelphia in 1981. Mr. Egan has served on a variety of non-profit boards including Girard College, Wills Eye Hospital, Variety Club, Catholic Charity Appeal, Health Planning Organization of the Delaware Valley and the Business Leaders Organization for Catholic Schools. Mr. Egan has lived in the Philadelphia area his entire life and attended the University of Pennsylvania.

Robert N. Masucci, 70, has served as a director since May 2007. Mr. Masucci has over 45 years of experience in financial, accounting, manufacturing, and distribution management. Since 2002, Mr. Masucci has served as a director of IntriCon Corporation, a company listed on the American Stock Exchange. Mr. Masucci has served as Chairman and has been a principal shareholder of Barclay Brand Ferdon, a material handling distributor, since 1996. Under his leadership, the company’s revenues grew from $15 million to $30 million. Since 1991, Mr. Masucci also has served as Chairman and principal of Montgomery Capital Advisors where he has provided guidance to clients in strategic and operational planning. Prior to that, Mr. Masucci served as CEO of Drexel Industries Inc from 1970 to 1990. At Drexel Industries, he turned this small public company in the material handling business into a highly profitable business that was acquired by a New York Stock Exchange listed company in 1990. Mr. Masucci began his career as a Certified Public Accountant working in the audit department of Arthur Young & Company (predecessor to Ernst & Young). Mr. Masucci also has devoted extensive service to various non-profit boards. He served as a LaSalle University Trustee from 1991 through 2006 and Chair of the LaSalle University Finance Committee from 1996 through 2006. In addition, he served as a Gwynedd Mercy College Trustee from 1988 to 1998. Mr. Masucci earned his Bachelor of Science degree in Accounting from LaSalle University in Philadelphia.

Our directors are elected by the vote of a plurality in interest of the holders of our voting stock and hold office for a term of one year and until a successor has been elected and qualified. Our executive officers are appointed annually by the Board of Directors, at our annual meeting, to hold such office until an officer’s successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.

Lixiang Zhang, John J. Egan, Jr., and Robert N. Masucci are independent directors as that term is defined by Rule 4200(a)(15) of the NASDAQ Marketplace Rules.
 
30


Our Board of Directors has designated the following committees composed solely of independent directors:

Audit:
 
Robert N. Masucci (Chairman), John J. Egan, Jr. and Lixiang Zhang.
Compensation:
 
Robert N. Masucci (Chairman), John J. Egan, Jr. and Lixiang Zhang.
Nominating:
 
John J. Egan, Jr. (Chairman), Robert N. Masucci, and Lixiang Zhang.

We have adopted a Code of Conduct which is applicable to all directors, officers and employees of the Company. The Code of Conduct is available on the Company’s website at http://www.agfeedinc.com.

Audit Committee Financial Expert

The board of directors has an Audit Committee, which is comprised of Robert Masucci, John J. Egan, Jr. and Dr. Lixiang Zhang. The board of directors has examined the composition of the Audit Committee in light of the listing standards of the Nasdaq Stock Market and the regulations under the Exchange Act applicable to audit committees. Based upon this examination, the board of directors has determined that each of the Audit Committee members is an “independent” director within the meaning of such listing standards and the Exchange Act and the rules and regulations thereunder. Each of Messrs. Masucci and Egan qualifies as an “audit committee financial expert” as that term is defined in applicable regulations of the Securities and Exchange Commission.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth all compensation paid to our Chief Executive Officer and those individuals who received compensation in excess of $100,000 per year for 2006.

Name and Principal Position
 
 
Year
 
 
Salary ($)
 
 
Bonus ($)
 
 
Total
 
                   
Junhong Xiong, Chief Executive Officer, President, and Director
   
2006
 
$
9,000
   
-0-
 
$
9,000
 
                           
Robert Gelfand, Former President(1)
   
2006
   
-0-
   
-0-
   
-0-
 

(1) Mr. Gelfand resigned as our President on November 1, 2006.

Equity Compensation Plan Information

There has been no common stock authorized for issuance with respect to any equity compensation plan as of the fiscal year ended December 31, 2006.

Option Grants During 2006 Fiscal Year
 
None.

Aggregated Option Exercises During 2006 Fiscal Year and Fiscal Year-End Option Values

None.
 
31


Directors’ Compensation

In 2006, our directors did not receive any compensation for their service as directors.    On May 15, 2007, three individuals, Robert N. Masucci, John J. Egan Jr. and Dr. Lixiang Zhang joined the board of directors.  Messrs. Masucci, Egan, and Zhang are each independent directors, satisfying the definition of “independence” as defined in Rule 4200 of the NASDAQ Rules.  We have agreed to pay the following annual compensation to our independent directors:

Mr. Masucci will receive $50,000 in cash, to be paid quarterly, consisting of $10,000 for serving as Chairman of the Audit Committee.  In addition, Mr. Masucci received options to purchase 12,000 shares of our common stock, expiring on May 31, 2012, at an exercise price of $5.30 per share, with a three year vesting schedule as follows:  4,000 shares shall vest on May 31, 2008; 4,000 shares shall vest on May 31, 2009; and 4,000 shares shall vest on May 31, 2010.

Mr. Egan will receive $40,000 in cash, to be paid quarterly.  In addition, Mr. Egan received options to purchase 10,000 shares of our common stock, expiring on May 31, 2012, at an exercise price of $5.30 per share, with a three year vesting schedule as follows:  3,334 shares shall vest on May 31, 2008; 3,333 shares shall vest on May 31, 2009; and 3,333 shares shall vest on May 31, 2010.
 
Dr. Zhang will receive 100,000 RMB to be paid quarterly. 100,000 RMB was approximately $12,900 on the date Dr. Zhang joined the board of directors.

Our remaining directors will not receive any additional compensation for their service as directors.

Employment Agreements

We currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


 
·
each person known to us to be the beneficial owner of more than 5% of our common stock;
     
 
·
each of our directors;
     
 
·
each of our executive officers; and
     
 
·
all of our executive officers and directors as a group.
 
32

 
Unless otherwise specified, we believe that all persons listed in the table possess sole voting and investment power with respect to all shares of our common stock beneficially owed by them. As of June 26, 2007, 27,026,756 shares of our common stock were issued and outstanding.
 
   
Number of
Shares
Beneficially
Owned
   
Percentage of
Shares
Beneficially
Owned (2)
 
Junhong Xiong
   
4,036,074
   
14.93
%
Feng Zhou
   
1,885,674
   
6.98
%
Zhengru Xiong
   
1,885,674
   
6.98
%
Yunlin Zheng(3)
   
1,885,674
   
6.98
%
Songyan Li
   
1,766,328
   
6.54
%
Liangfan Yan
   
0
   
*
 
Lixiang Zhang
   
0
   
*
 
John J. Egan, Jr.(4)
   
2,000
   
*
 
Robert N. Masucci(5)
   
1,000
   
*
 
Good Energy Enterprise, Ltd.(6)
   
2,228,541
   
8.25
%
All officers and directors as a group (7 persons)
   
7,691,076
   
28.46
%
 
* Less than 1 percent

(1) Except as otherwise indicated, the address of each beneficial owner is c/o Nanchang Best Animal Husbandry Co., Ltd., 1095 Qing Lan Avenue, Economic and Technical Development Area, Nan Chang City, Jiangxi Province, China 330013.

(2) Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

(3) The address of Yunlin Zheng is Room 408, Dong Keyuan East Area, Building 4, Jiangxi Agricultural University, Economic and Technical Development Area, Nan Chang City, Jiangxi Province, China 330045.

(4) The address of John Egan, Jr. is 610 West Germantown Pike, Suite 340, Plymouth Meeting, PA 19462.

(5) The address of Robert N. Masucci is P.O. Box 182, Gwynedd Valley, PA 19437.

(6)  Chang Jiansheng (neither an officer or director of registrant) has the voting and dispositive rights over the shares held by Good Energy Enterprise, Ltd. The address of Chang Jian Sheng and Good Energy Enterprise, Ltd. is 601 #1 Gate, 9th Building, Shangyin-Yuan, Star River Panyu District, Guangzhou, China 510000.
 
33

 
SELLING STOCKHOLDERS 

Of the 3,638,540 shares of our common stock registered for public resale pursuant to this prospectus and listed under the column “Shares Available for Sale Under This Prospectus” on the table set forth below, 2,276,753 shares were issued and 364,287 are issuable upon exercise of warrants that were issued in connection with our private placement offering that had a final closing in April 2007, in which we sold units at $3.00 per share, with each unit consisting of one share of common stock and warrants to purchase 8% of one share of common stock at an exercise price of $5.00 per share. Two selected dealers, Legend Securities, Inc. and Maxim Group and one finder, Four Tong Investments, Ltd., each received warrants to purchase shares of common stock at $5.00 per share. In addition, 750,000 shares were issued and 187,500 are issuable upon exercise of warrants that were issued in our private placement offering that closed in June 2007, in which we sold units at $4.00 per share, with each unit consisting of one share of common stock and warrants to purchase 25% of one share of common stock at an exercise price of $5.60 per share. One finder, Four Tong Investments, Ltd., received warrants to purchase 60,000 shares of common stock at an exercise price of $5.60 per share. All of these shares of our common stock are included in this prospectus pursuant to registration rights we granted in these private placement offerings.

The following table presents information as of June 26, 2007 and sets forth the number of shares beneficially owned by each of the Selling Stockholders as of the date of this prospectus. We are not able to estimate the amount of shares that will be held by each Selling Stockholder after the completion of this offering because: (1) the Selling Stockholders may sell less than all of the shares registered under this prospectus; (2) the Selling Stockholders may exercise less than all of their warrants; and (3) to our knowledge, the Selling Stockholders currently have no agreements, arrangements or understandings with respect to the sale of any of their shares. The following table assumes that all of the currently outstanding warrants will be exercised into common stock and all of the shares being registered pursuant to this prospectus will be sold. The Selling Stockholders are not making any representation that any shares covered by this prospectus will be offered for sale. Except as otherwise indicated, based on information provided to us by each Selling Stockholder, the Selling Stockholders have sole voting and investment power with respect to their shares of common stock.
 
Name of Selling Stockholder
 
Total Shares Owned and Issuable Upon Exercise of Warrants Before the Offering
 
Number of Shares to be Sold in the Offering
 
Number of Shares Owned After the Offering**
 
Percent of Shares of Common Stock Owned After the Offering
 
Strong Growth Capital Ltd.
   
1,080,000
(1)
 
1,080,000
(1)
 
-
   
-
 
Finchley Intl. Investments Ltd.
   
1,110,000
(2)
 
540,000
(2)
 
570,000
   
2.11
%
Bi Jun Cheng
   
10,800
(3)
 
10,800
(3)
 
-
   
-
 
Chao Liang Feng
   
23,696
(4)
 
23,696
(4)
 
-
   
-
 
Chen Li Fang & Zhou Pei Ping
   
13,660
(5)
 
13,660
(5)
 
-
   
-
 
Chen Li Ren & Yang Jing
   
18,001
(6)
 
18,001
(6)
 
-
   
-
 
Chen Mei Rong
   
10,811
(7)
 
10,811
(7)
 
-
   
-
 
Du Yan & Cao Xue Lei
   
75,600
(8)
 
75,600
(8)
 
-
   
-
 
Fan Min
   
11,232
(9)
 
11,232
(9)
 
-
   
-
 
He Yue Ping
   
10,800
(10)
 
10,800
(10)
 
-
   
-
 
Hui Qi Wu
   
10,800
(11)
 
10,800
(11)
 
-
   
-
 
Jia Hua Wang
   
37,757
(12)
 
37,757
(12)
 
-
   
-
 
Jin Cheng Yue
   
10,800
(13)
 
10,800
(13)
 
-
   
-
 
 
34

 
Ju Zhi Fang
   
8,640
(14)
 
8,640
(14)
 
-
   
-
 
Jun Wei Wang
   
32,558
(15)
 
32,558
(15)
 
-
   
-
 
Li Jun Zheng
   
50,884
(16)
 
50,884
(16)
 
-
   
-
 
Lin Yan
   
11,880
(17)
 
11,880
(17)
 
-
   
-
 
Lu Ai Zhen
   
8,640
(18)
 
8,640
(18)
 
-
   
-
 
Wang Ling Ming
   
24,472
(19)
 
24,472
(19)
 
-
   
-
 
Wang Mei Lan
   
42,872
(20)
 
42,872
(20)
 
-
   
-
 
Wu Qin Chuan
   
19,116
(21)
 
19,116
(21)
 
-
   
-
 
Xiang Wen Yuan
   
10,003
(22)
 
10,003
(22)
 
-
   
-
 
Xin Guo Qiang
   
162,329
(23)
 
162,329
(23)
 
-
   
-
 
Xin Ya Zhang
   
8,640
(24)
 
8,640
(24)
 
-
   
-
 
Xu Lin
   
8,640
(25)
 
8,640
(25)
 
-
   
-
 
Yang Wei Ming
   
10,800
(26)
 
10,800
(26)
 
-
   
-
 
Yu Hong Lin
   
10,628
(27)
 
10,628
(27)
 
-
   
-
 
Zang Ping Li
   
8,640
(28)
 
8,640
(28)
 
-
   
-
 
Zhe Jing
   
11,240
(29)
 
11,240
(29)
 
-
   
-
 
Zi Chen Wang
   
19,440
(30)
 
19,440
(30)
 
-
   
-
 
Anthony G. Polak
   
34,560
(31)
 
34,560
(31)
 
-
   
-
 
Funcorp Associates, Ltd.
   
8,640
(32)
 
8,640
(32)
 
-
   
-
 
Geri Investments NV
   
17,280
(33)
 
17,280
(33)
 
-
   
-
 
La Legetax Private Foundation
   
17,280
(34)
 
17,280
(34)
 
-
   
-
 
Ronald M. Lazar
   
8,640
(35)
 
8,640
(35)
 
-
   
-
 
Domaco Venture
   
17,280
(36)
 
17,280
(36)
 
-
   
-
 
RL Capital Partners L.P.
   
51,840
(37)
 
51,840
(37)
 
-
   
-
 
Apollo Asia Opportunity Master Fund, L.P.
   
937,500
(38)
 
937,500
(38)
 
-
   
-
 
Four Tong Investments Ltd.
   
180,000
(39)
 
180,000
(39)
 
-
   
-
 
Legend Securities, Inc.
   
50,621
(40)
 
50,621
(40)
 
-
   
-
 
Maxim
   
11,520
(41)
 
11,520
(41)
 
-
   
-
 
Total
   
4,208,540
(42)
 
3,638,540
(42)
 
570,000
   
2.11
%
 
**
Assumes that all securities registered will be sold.
(1)
Includes 80,000 shares of common stock issuable upon the exercise of 80,000 warrants.
(2)
Includes 40,000 shares of common stock issuable upon the exercise of 40,000 warrants.
(3)
Includes 800 shares of common stock issuable upon the exercise of 800 warrants.
(4)
Includes 1,756 shares of common stock issuable upon the exercise of 1,755.20 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(5)
Includes 1,012 shares of common stock issuable upon the exercise of 1,011.84 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(6)
Includes 1,334 shares of common stock issuable upon the exercise of 1,333.36 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
   
35

 
(7)
Includes 801 shares of common stock issuable upon the exercise of 800.80 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(8)
Includes 5,600 shares of common stock issuable upon the exercise of 5,600 warrants.
(9)
Includes 832 shares of common stock issuable upon the exercise of 832 warrants.
(10)
Includes 800 shares of common stock issuable upon the exercise of 800 warrants.
(11)
Includes 800 shares of common stock issuable upon the exercise of 800 warrants.
(12)
Includes 2,797 shares of common stock issuable upon the exercise of 2,796.8 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(13)
Includes 800 shares of common stock issuable upon the exercise of 800 warrants.
(14)
Includes 640 shares of common stock issuable upon the exercise of 640 warrants.
(15)
Includes 2,412 shares of common stock issuable upon the exercise of 2,411.68 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(16)
Includes 3,770 shares of common stock issuable upon the exercise of 3,769.12 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(17)
Includes 880 shares of common stock issuable upon the exercise of 880 warrants.
(18)
Includes 640 shares of common stock issuable upon the exercise of 640 warrants.
(19)
Includes 1,813 shares of common stock issuable upon the exercise of 1,812.72 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(20)
Includes 3,176 shares of common stock issuable upon the exercise of 3,175.68 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(21)
Includes 1,416 shares of common stock issuable upon the exercise of 1,416 warrants.
(22)
Includes 741 shares of common stock issuable upon the exercise of 740.96 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(23)
Includes 12,025 shares of common stock issuable upon the exercise of 12,024.32 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(24)
Includes 640 shares of common stock issuable upon the exercise of 640 warrants.
(25)
Includes 640 shares of common stock issuable upon the exercise of 640 warrants.
(26)
Includes 800 shares of common stock issuable upon the exercise of 800 warrants.
(27)
Includes 788 shares of common stock issuable upon the exercise of 787.20 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(28)
Includes 640 shares of common stock issuable upon the exercise of 640 warrants.
(29)
Includes 833 shares of common stock issuable upon the exercise of 832.56 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(30)
Includes 1,440 shares of common stock issuable upon the exercise of 1,440 warrants.
(31)
Includes 2,560 shares of common stock issuable upon the exercise of 2,560 warrants.
(32)
Includes 640 shares of common stock issuable upon the exercise of 640 warrants.
(33)
Includes 1,280 shares of common stock issuable upon the exercise of 1,280 warrants.
(34)
Includes 1,280 shares of common stock issuable upon the exercise of 1,280 warrants.
(35)
Includes 640 shares of common stock issuable upon the exercise of 640 warrants.
(36)
Includes 1,280 shares of common stock issuable upon the exercise of 1,280 warrants.
(37)
Includes 3,840 shares of common stock issuable upon the exercise of 3,840 warrants.
(38)
Includes 187,500 shares of common stock issuable upon exercise of 187,500 warrants.
(39)
Includes 180,000 shares of common stock issuable upon the exercise of 180,000 warrants.
(40)
Includes 50,621 shares of common stock issuable upon the exercise of 50,620.24 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants to the nearest whole share.
(41)
Includes 11,520 shares of common stock issuable upon the exercise of 11,520 warrants.
(42)
Includes 611,787 shares of common stock issuable upon the exercise of 611,780.48 warrants. Pursuant to Section 4 of the Stock Purchase Warrant, we will round up the number of shares issued upon exercise of the warrants in any case where the stock purchase warrant calls for the issuance of a fractional share of our common stock.
 
36

 
PLAN OF DISTRIBUTION
 
The Selling Stockholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares:
 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits investors;
 
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

·
an exchange distribution in accordance with the rules of the applicable exchange;

·
privately negotiated transactions;

·
to cover short sales and other hedging transactions made after the date that the registration statement of which this prospectus is a part is declared effective by the Securities and Exchange Commission (“SEC”);

·
Broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

·
a combination of any such methods of sale; and

·
any other method permitted pursuant to applicable law.

The Selling Stockholders may also sell shares under Rule 144 promulgated under the Securities Act, if available, rather than under this prospectus.

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the investor of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.

The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of Selling Stockholders to include the pledgees, transferees or other successors in interest as Selling Stockholders under this prospectus.

Upon our being notified in writing by a Selling Stockholder that any material arrangement has been entered into with a broker-dealer for the sale of common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such shares of common stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon our being notified in writing by a Selling Stockholder that a donee or pledge intends to sell more than 500 shares of common stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.
 
37

 
The Selling Stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of securities will be paid by the Selling Stockholders and/or the purchasers of the securities.

Each Selling Stockholder that is affiliated with a registered broker-dealer has confirmed to us that, at the time it acquired the securities subject to the registration statement of which this prospectus is a part, it did not have any agreement or understanding, directly or indirectly, with any person to distribute any of such securities. We have advised each Selling Stockholder that it may not use shares registered on the registration statement of which this prospectus is a part to cover short sales of our common stock made prior to the date on which such registration statement was declared effective by the SEC.

We are required to pay certain fees and expenses incident to the registration of the shares. We have agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the Selling Stockholders without registration and without regard to any volume limitations by reason of Rule 144(e) under the Securities Act or any other rule of similar effect and (ii) such time as all of the shares have been publicly sold.

DESCRIPTION OF CAPITAL STOCK

The following description of our securities and provisions of our articles of incorporation and bylaws is only a summary. You should also refer to the copies of our certificate and bylaws, copies of which have been incorporated by reference as exhibits to the registration statement, of which this prospectus forms a part. The following discussion is qualified in its entirety by reference to such exhibits. The following discussion is qualified in its entirety by reference to such exhibits.

Our authorized capital stock consists of 75,000,000 shares of common stock, par value $0.001. As of June 26, 2007, 27,026,756 shares of common stock were deemed outstanding and held of record by 100 stockholders (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms).

Under the articles of incorporation and bylaws, holders of common stock do not have cumulative voting rights. Holders of common stock, on the basis of one vote per share, have the right to vote for the election of the members of the board of directors and the right to vote on all other matters, except those matters on which a separate class of stockholders vote by class to the exclusion of the shares of common stock. Holders of common stock do not have any preemptive, subscription or conversion rights.

Holders of common stock are entitled to receive dividends declared by the board of directors out of legally available funds. Since our inception, we have not declared or paid any cash dividends on our common stock. We presently intend to retain future earnings, if any, for use in the operation and expansion of our business. We do not anticipate paying cash dividends in the foreseeable future. See “Dividends.” In the event of our liquidation, dissolution or winding up, common stockholders are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities, subject to the prior rights of any holders of outstanding shares of preferred stock, if any.
 
38


Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Holliday Stock Transfer, Inc., 2939 N. 67th Place, Scottsdale, Arizona 85251. Our transfer agent’s telephone number is (480) 481-3940.

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS

During September and October, 2006, Leader Industrial Development, Corp., a company controlled by Mr. Zhou Sheng, provided $300,000 to Nanchang Best to pay legal and accounting fees and other costs related to our share exchange transactions that occurred in October 2006. In exchange for this financing, 1,756,800 shares of Nanchang Best’s common stock were issued to Leader Industrial Development, Corp. These shares were converted into 4,193,355 shares of our common stock (post split) in the share exchange transaction. In April 2007, Leader Industrial transferred shares of our common stock to Good Energy Enterprise Ltd. The principal owner of Good Energy Enterprise Ltd. is Mr. Chang Jiansheng, the brother-in-law of Mr. Sheng Zhou. Mr. Sheng Zhou is the brother of our corporate secretary and treasurer, Mr. Feng Zhou.

In December 2006, Sunrise Capital International loaned us approximately $1,146,667 for use in our purchase of Guangxi Huijie. This loan accrued interest at a rate of 7% per annum. Mr. Zhou Sheng is a director of Sunrise Capital International, which is owned by his sister-in-law, Ms. Chun Mei Chang. We repaid this loan in full in March 2007.

During the years ended December 31, 2006 and 2005 and the three months ended March 31, 2007, we had sales to related parties aggregating approximately $170,000, $82,000 and $77,054, respectively. These sales were of raw materials and finished feed goods for resale. Mr. Junhong Xiong, our chief executive officer, owns a majority interest in the five companies we sold products to during 2006 and 2007. As of March 31, 2007, these other entities had a balance due to us in the amount of $93,187 for products that we sold to them. The following chart provides the amount due from each entity and the percentage ownership of Mr. Xiong in each entity.

 
Name of Business Entity
 
Amount due to AgFeed
 
Percentage ownership of
Mr. Xiong
 
Beijing Best Animal Husbandry Co., Ltd.
 
$
21,728
   
51
%
Nanchang Tiandiren Tech. Development Co., Ltd.
   
37
   
73
%
Xiamen Best Animal Husbandry Co., Ltd
   
5,338
   
52
%
Guangzhou Best Animal Husbandry Co., Ltd.
   
20,670
   
78.5
%
Jiujiang Best Hog Farm
   
45,414
   
87
%
Total Amount Due
 
$
93,187
     
 
During the second quarter of 2007, Mr. Junhong Xiong sold all of his ownership interest in the above companies to unaffiliated companies that supply products to us. Subsequent to these sale transactions, we have not had sales to related parties.

During the years ended December 31, 2006 and 2005 and the three months ended March 31, 2007, we made purchases of raw materials and finished feed goods for resale from Nanchang Tiandiren Tech. Development Co., Ltd. aggregating approximately $700, $1,800 and $9,284, respectively.

Prior to consummation of the share exchange transactions in October 2006, three managers of Guangxi Huijie provided personal funds from time to time to fund its business in the aggregate amount of approximately $755,000. Advances to and from related parties and shareholders were non-interest bearing and were payable or receivable on demand. At December 31, 2006, there were advances from related parties and shareholders of approximately $738,000. By the end of March 2007, these amounts were all repaid to these individuals. We no longer accept advances from our executive officers, directors or other related parties.
 
39

 
At December 31, 2006, there were advances to related parties of approximately $924,517. These advances were all made by Nanchang Best and Shanghai Best prior to October 31, 2006, the closing date of our share exchange transactions. Mr. Junhong Xiong owns a majority interest in the five companies we have advanced funds to during 2006.

 
Name of Business Entity
 
Amount due to AgFeed at December 31, 2006
 
Percentage ownership of
Mr. Xiong
 
Beijing Best Animal Husbandry Co., Ltd.
  $ 39,752    
51
%
Nanchang Tiandiren Tech. Development Co., Ltd.
    107,629    
73
%
Jiangxi Best Animal Anti-disease Co. Ltd.
    37,251    
52
%
Guangzhou Best Animal Husbandry Co., Ltd.
    68,687    
78.5
%
Jiujiang Best Hog Farm
    671,198    
87
%
Total Amount Due
  $ 924,517      

By the end of March 2007, these amounts were all repaid to us. We no longer make loans or advances to executive officers, directors or other related parties.

LEGAL MATTERS 

The validity of the shares of our common stock offered by the Selling Stockholders will be passed upon by the law firm of Hale, Lane, Peek, Dennison and Howard, Reno, Nevada.

EXPERTS 

The consolidated financial statements of the Company as of and for the years ended December 31, 2005 and December 31, 2006 have been included herein and in the Registration Statement in reliance upon the reports of Goldman & Parks, LLP, independent registered public accountants, appearing elsewhere herein and upon the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION 

This prospectus is part of a Registration Statement we have filed with the SEC. We have not included in this prospectus all of the information contained in the Registration Statement, and you should refer to the Registration Statement and its exhibits for further information.

We file annual, quarterly, and special reports, proxy statements, and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room at 100 F. Street, N.E., Washington, D.C. 20549. Copies of these materials may also be obtained from the SEC at prescribed rates by writing to the Public Reference Section of the SEC, 100 F. Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Our filings are also available to the public from commercial document retrieval services and at the Web site maintained by the SEC at http://www.sec.gov. 

Our Web site address is http://www.agfeedinc.com. The information on our Web site is not incorporated into this prospectus.
 
40


INDEX TO FINANCIAL STATEMENTS
 
   
Page
 
Report of Independent Registered Public Accounting Firm
   
F-1
 
         
Audited Financial Statements:
       
         
Consolidated Balance Sheet as of December 31, 2006
   
F-2
 
         
Consolidated Statements of Income and Other Comprehensive Income
for the years ended December 31, 2006 and 2005
   
F-3
 
         
Consolidated Statement of Stockholders’ Equity
for the years ended December 31, 2006 and 2005
   
F-4
 
         
Consolidated Statements of Cash Flows
for the years ended December 31, 2006 and 2005
   
F-5
 
         
Notes to Consolidated Financial Statements
   
F-6
 
         
Unaudited Financial Statements
       
         
Consolidated Balance Sheet as of March 31, 2007 (unaudited)
   
F-23
 
         
Consolidated Statements of Income and Other Comprehensive Income
for the three months ended March 31, 2007 and 2006 (unaudited)
   
F-24
 
         
Consolidated Statements of Cash Flows for the
three months ended March 31, 2007 and 2006 (unaudited)
   
F-25
 
         
Notes to Consolidated Financial Statements (unaudited)
   
F-26
 
 


Report of Independent Registered Public Accounting Firm


Board of Directors and Stockholders of
AgFeed Industries, Inc.

We have audited the accompanying consolidated balance sheet of AgFeed Industries, Inc. (a Nevada corporation) and subsidiaries as of December 31, 2006, and the related consolidated statements of income and other comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2006. 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 AgFeed Industries, Inc. and Subsidiaries as of December 31, 2006, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
 

Goldman & Parks LLP
Certified Public Accountants
Tarzana, California
March 7, 2007
 
F-1

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2006
 
   
December 31,
 
   
2006
 
ASSETS
       
         
CURRENT ASSETS:
       
Cash & cash equivalents
 
$
1,204,100
 
Accounts receivable, net of allowance for doubtful accounts of $49,845
   
1,796,085
 
Advances to suppliers
   
77,649
 
Other receivable
   
203,051
 
Stock subscription receivable
   
226,083
 
Due from related parties
   
87,018
 
Advances to related parties
   
924,806
 
Inventory
   
802,822
 
Prepaid expense
   
11,885
 
Other current assets
   
2,253
 
           
Total current assets
   
5,335,752
 
         
PROPERTY AND EQUIPMENT, net
   
1,390,611
 
         
INTANGIBLE ASSETS
   
539,468
 
           
TOTAL ASSETS
 
$
7,265,831
 
         
LIABILITIES AND STOCKHOLDERS' EQUITY
       
         
CURRENT LIABILITIES:
       
Accounts payable
 
$
809,583
 
Other payables
   
56,911
 
Unearned revenue
   
81,541
 
Accrued expenses
   
92,739
 
Accrued payroll
   
37,216
 
Short term loans
   
1,793,960
 
Advance from related party
   
737,846
 
Tax and welfare payable
   
280,208
 
           
Total current liabilities
   
3,890,004
 
         
STOCKHOLDERS' EQUITY:
       
Common stock, $0.001 per share; 75,000,000 shares authorized;
       
24,000,000 shares issued and outstanding
   
24,000
 
Additional paid-in capital
   
1,299,379
 
Other comprehensive income
   
116,846
 
Statutory reserve
   
271,115
 
Retained earnings
   
1,664,487
 
Total stockholders' equity
   
3,375,827
 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
7,265,831
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
F-2

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

   
Years Ended December 31,
 
   
2006
 
2005
 
           
Net Revenue
 
$
8,594,876
 
$
7,611,845
 
               
Cost of Revenue
   
5,446,332
   
5,339,067
 
               
Gross profit
   
3,148,544
   
2,272,778
 
               
Operating expenses
             
Selling expenses
   
1,287,110
   
974,332
 
General and administrative expenses
   
827,540
   
417,675
 
Total operating expenses
   
2,114,650
   
1,392,007
 
                   
Income from operations
   
1,033,894
   
880,771
 
               
Non-operating income (expense):
             
Other income (expense)
   
35,681
   
(27,695
)
Interest income
   
28,851
   
-
 
Interest expense
   
(23,532
)
 
(19,960
)
                   
Total non-operating income (expense)
   
41,000
   
(47,655
)
               
Income before income tax
   
1,074,894
   
833,116
 
               
Income tax
   
(100,386
)
 
272,410
 
                   
Net income
 
$
1,175,280
 
$
560,706
 
               
Other comprehensive income
             
Foreign currency translation gain
   
84,382
   
32,457
 
                   
Comprehensive Income
 
$
1,259,662
 
$
593,163
 
               
Weighted average shares outstanding :
             
Basic
   
17,911,296
   
15,006,720
 
Diluted
   
17,911,296
   
15,006,720
 
               
Earnings per share:
             
Basic
 
$
0.07
 
$
0.04
 
Diluted
 
$
0.07
 
$
0.04
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
F-3

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 
 
   
 
 
Additional
 
 
 
Other
 
 
 
 
 
Total
 
 
 
Common Stock
 
Paid in
 
Subscription
 
Comprehensive
 
Statutory
 
Retained
 
Stockholders'
 
 
 
Shares
 
Amount
 
Capital
 
Receivable
 
Income
 
Reserve
 
Earnings
 
Equity
 
Balance January 1, 2005
   
15,006,720
 
$
15,007
 
$
722,527
 
$
(157,712
)
$
7
 
$
33,955
 
$
165,661
 
$
779,445
 
                                                   
Cumulative translation adjustment
                           
32,457
               
32,457
 
 
                                                 
Net income for the year ended December 31, 2005
                                       
560,706
   
560,706
 
 
                                                 
Reduction in subscription receivable
                     
157,712
               
-
   
157,712
 
 
                                                 
Transfer to statutory reserve
                                 
84,106
   
(84,106
)
 
-
 
 
                                                                 
Balance December 31, 2005
   
15,006,720
   
15,007
   
722,527
   
-
   
32,464
   
118,061
   
642,261
   
1,530,320
 
                                                   
Common stock subscribed
   
4,193,280
   
4,193
   
221,890
                           
226,083
 
                                                   
Recapitalization on reverse acquisition
   
4,800,000
   
4,800
   
54,962
                           
59,762
 
 
                                                 
Capital contribution by stockholders
               
300,000
                           
300,000
 
 
                                                 
Change in foreign currency translation gain
                           
84,382
               
84,382
 
 
                                                 
Net income for the year ended December 31, 2006
                                       
1,175,280
   
1,175,280
 
 
                                                 
Transfer to statutory reserve
                                 
153,054
   
(153,054
)
 
-
 
 
                                                                 
Balance December 31, 2006
   
24,000,000
 
$
24,000
 
$
1,299,379
   
-
 
$
116,846
 
$
271,115
 
$
1,664,487
 
$
3,375,827
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
F-4

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005