10-Q 1 v122698_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended June 30, 2008

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to _______________

001-33674
(Commission file number)

AGFEED INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
 
Nevada
20-2597168
(State or other jurisdiction
(IRS Employer
of incorporation or organization)
Identification No.)
 
Rm. A1001-1002, Tower 16
Hengmao Int'l Center
333 S. Guangchang Rd.
Nanchang, Jiangxi Province
China 330003
 (Address of principal executive offices)

011-86-0791-6669099
 (Issuer’s telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o 
Accelerated filer  o 
Non-accelerated filer o  
Smaller reporting company x 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x 
 
As of August 7, 2008 there were 33,295,406 shares of common stock were outstanding.
 


AGFEED INDUSTRIES, INC.
Index

   
Page
   
Number
     
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets as of June 30, 2008 (unaudited)
 
 
and December 31, 2007
2
     
 
Consolidated Statements of Income and Other Comprehensive Income
 
 
for the three and six months ended June 30, 2008 and 2007 (unaudited)
3
     
 
Consolidated Statements of Cash Flows for the
 
 
six months ended June 30, 2008 and 2007 (unaudited)
4
     
 
Notes to Consolidated Financial Statements (unaudited)
5
     
Item 2.
Management’s Discussion and Analysis or Plan of Operations
27
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35
     
Item 4.
Controls and Procedures
35
     
PART II.
OTHER INFORMATION
36
     
Item 1.
Legal Proceedings
36
     
Item 1A.
Risk Factors
36
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
36
     
Item 3.
Defaults Upon Senior Securities
36
     
Item 4.
Submission of Matters to a Vote of Security Holders
36
     
Item 5.
Other Information
36
     
Item 6.
Exhibits
37
     
SIGNATURES
38

1


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2008 AND DECEMBER 31, 2007


   
June 30,
 
December 31,
 
   
2008
 
2007
 
   
(unaudited)
     
ASSETS
             
               
CURRENT ASSETS:
             
Cash and cash equivalents
 
$
31,267,717
 
$
7,696,209
 
Accounts receivable, net of allowance for doubtful accounts
             
of $235,702 and $191,497
   
8,322,615
   
6,107,491
 
Advances to suppliers
   
1,206,924
   
442,851
 
Other receivable
   
688,185
   
459,034
 
Due from former stockholders
   
320,799
   
-
 
Inventory
   
17,834,531
   
2,728,160
 
Prepaid expense
   
818,299
   
644,183
 
Debt issue costs
   
423,808
   
-
 
Other current assets
   
491,144
   
-
 
               
Total current assets
   
61,374,022
   
18,077,928
 
               
PROPERTY AND EQUIPMENT, net
   
17,526,028
   
3,930,715
 
CONSTRUCTION-IN-PROGRESS
   
4,272,102
   
221,819
 
INTANGIBLE ASSETS
   
40,639,331
   
839,802
 
OTHER ASSETS
   
1,629,286
   
-
 
               
TOTAL ASSETS
 
$
125,440,769
 
$
23,070,264
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
             
               
CURRENT LIABILITIES:
             
Accounts payable
 
$
3,644,225
 
$
1,458,010
 
Other payables
   
3,972,003
   
705,150
 
Unearned revenue
   
72,975
   
99,848
 
Accrued expenses
   
438,385
   
18,223
 
Accrued payroll
   
340,877
   
168,560
 
Short term loans
   
-
   
1,110,413
 
Tax and welfare payable
   
135,415
   
9,534
 
Interest payable
   
296,033
   
-
 
Acquisitons payable
   
12,630,425
   
-
 
               
Total current liabilities
   
21,530,338
   
3,569,738
 
               
CONVERTIBLE NOTES, net of debt discount of $997,362 and $0
   
4,302,638
   
-
 
               
TOTAL LIABILITIES
   
25,832,976
   
3,569,738
 
               
MINORITY INTEREST
   
1,354,069
   
-
 
               
STOCKHOLDERS' EQUITY:
             
Common stock, $0.001 per share; 75,000,000 shares authorized;
             
33,143,326 and 27,026,756 shares issued and outstanding
   
33,143
   
27,027
 
Additional paid-in capital
   
81,212,239
   
10,094,095
 
Other comprehensive income
   
3,569,035
   
780,907
 
Statutory reserve
   
1,601,048
   
752,225
 
Retained earnings
   
11,838,259
   
7,846,272
 
Total stockholders' equity
   
98,253,724
   
19,500,526
 
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
125,440,769
 
$
23,070,264
 

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

2

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
2008
 
2007
 
2008
 
2007
 
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
Net Revenue
 
$
35,635,327
 
$
6,891,153
 
$
47,782,411
 
$
11,869,448
 
 
                 
Cost of Revenue
   
24,600,502
   
4,881,227
   
33,314,625
   
8,316,316
 
 
                 
Gross profit
   
11,034,825
   
2,009,926
   
14,467,786
   
3,553,132
 
 
                 
Operating expenses
                 
Selling expenses
   
873,580
   
529,625
   
1,627,202
   
873,016
 
General and administrative expenses
   
1,389,088
   
259,777
   
2,343,309
   
481,701
 
Total operating expenses
   
2,262,668
   
789,402
   
3,970,511
   
1,354,717
 
 
                 
Income from operations
   
8,772,157
   
1,220,524
   
10,497,275
   
2,198,415
 
 
                 
Non-operating income (expense):
                 
Other income (expense)
   
(10,999
)
 
1,652
   
(25,570
)
 
10,722
 
Interest income
   
76,060
   
44,023
   
126,235
   
54,190
 
Interest and financing costs
   
(4,312,559
)
 
(20,956
)
 
(4,639,201
)
 
(63,605
)
Foreign currency transaction loss
   
(319,273
)
 
-
   
(543,746
)
 
-
 
 
                 
Total non-operating income (expense)
   
(4,566,771
)
 
24,719
   
(5,082,282
)
 
1,307
 
 
                 
Income before minority interest and provision for income taxes
   
4,205,386
   
1,245,243
   
5,414,993
   
2,199,722
 
 
                 
Minority Interest in Subsidiaries
   
(167,047
)
 
-
   
(361,094
)
 
-
 
 
                 
Income before provision for income taxes
   
4,038,339
   
1,245,243
   
5,053,899
   
2,199,722
 
 
                 
Provision (benefit) for income taxes
   
116,826
   
(215,759
)
 
213,089
   
(40,461
)
 
                 
Net income
 
$
3,921,513
 
$
1,461,002
 
$
4,840,810
 
$
2,240,183
 
 
                 
Other comprehensive income
                 
Foreign currency translation gain
   
1,776,427
   
92,277
   
2,788,128
   
143,183
 
 
                 
Comprehensive Income
 
$
5,697,940
 
$
1,553,279
 
$
7,628,938
 
$
2,383,366
 
 
                 
Weighted average shares outstanding :
                 
Basic
   
32,054,366
   
25,935,813
   
29,928,503
   
25,144,526
 
Diluted
   
32,404,339
   
25,959,272
   
30,233,681
   
25,144,526
 
 
                 
Earnings per share:
                 
Basic
 
$
0.12
 
$
0.06
 
$
0.16
 
$
0.09
 
Diluted
 
$
0.12
 
$
0.06
 
$
0.16
 
$
0.09
 
 
The accompanying notes are an integral part of these consolidated financial statements.

3


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 
   
Six Months Ended June 30,
 
   
2008
 
2007
 
   
(unaudited)
 
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net income
 
$
4,840,810
 
$
2,240,183
 
Adjustments to reconcile net income to net cash
             
provided in (used in) operating activities:
             
Depreciation
   
548,435
   
77,897
 
Amortization
   
26,297
   
48,981
 
Loss on disposal of assets
   
16,774
   
-
 
Stock based compensation
   
30,882
   
-
 
Amortization of debt issuance costs
   
1,292,858
   
-
 
Amortization of discount on convertible debt
   
3,042,523
   
-
 
Gain attributed to minority interest in subsidiaries
   
361,094
   
-
 
(Increase) / decrease in assets:
             
Accounts receivable
   
(1,181,173
)
 
(3,412,186
)
Other receivable
   
(261,770
)
 
(53,432
)
Inventory
   
(6,734,125
)
 
(118,418
)
Due from related party
   
-
   
100,703
 
Due from former stockholders
   
(320,799
)
 
-
 
Advances to suppliers
   
(716,690
)
 
(40,399
)
Prepaid expense
   
(152,899
)
 
(86,241
)
Other assets
   
(1,714,363
)
 
(666,903
)
Increase / (decrease) in current liabilities:
             
Accounts payable
   
1,752,653
   
476,037
 
Other payables
   
2,754,802
   
(29,166
)
Unearned revenue
   
(32,436
)
 
(24,259
)
Accrued expenses
   
385,186
   
101,000
 
Accrued payroll
   
157,328
   
55,832
 
Tax and welfare payable
   
122,047
   
(59,307
)
Interest payable
   
296,033
   
-
 
               
Net cash provided by (used in) operating activities
   
4,513,467
   
(1,389,678
)
               
CASH FLOWS FROM INVESTING ACTIVITIES
             
Acquisition of property and equipment
   
(3,097,732
)
 
(52,656
)
Acquisition of intangible assets
   
(71,646
)
 
-
 
Cash paid for purchase of hog farms, net
   
(47,798,825
)
 
-
 
           
 
Net cash used in investing activities
   
(50,968,203
)
 
(52,656
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Repayment to shareholders
   
-
   
(746,645
)
Proceeds from loans
   
-
   
1,086,646
 
Proceeds from the sale of common stock
   
57,200,058
   
9,830,259
 
Offering costs
   
(5,908,325
 
(822,756
)
Proceeds from exercise of warrants
   
2,061,760
   
-
 
Payment on note payable
   
(1,110,413
)
 
(1,102,004
)
Collection of subscription receivable
   
-
   
226,083
 
Collection from related parties
   
-
   
935,859
 
Proceeds from the issuance of convertible notes
   
19,000,000
   
-
 
Issuance costs for convertible notes
   
(1,716,666
)
 
-
 
           
 
Net cash provided by financing activities
   
69,526,414
   
9,407,442
 
               
Effect of exchange rate changes on cash and cash equivalents
   
499,830
   
30,779
 
               
NET INCREASE IN CASH & CASH EQUIVALENTS
   
23,571,508
   
7,995,887
 
               
CASH & CASH EQUIVALENTS, BEGINNING BALANCE
   
7,696,209
   
1,204,100
 
               
CASH & CASH EQUIVALENTS, ENDING BALANCE
 
$
31,267,717
 
$
9,199,987
 
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
             
Interest paid
 
$
40,696
 
$
33,602
 
Income taxes paid
 
$
90,878
 
$
53,982
 

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

4

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Note 1 - Organization and Basis of Presentation

The unaudited consolidated financial statements have been prepared by AgFeed Industries, Inc. pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K. The results for the six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.

Organization and Line of Business

AgFeed Industries, Inc. formerly known as Wallace Mountain Resources Corp., (hereinafter referred to as the “Company” or “AgFeed”) was incorporated in the State of Nevada on March 30, 2005.

On October 31, 2006, the Company entered into and closed a share purchase agreement with Nanchang Best Animal Husbandry Co., Ltd., a corporation formed under the laws of the People's Republic of China ("Nanchang Best"), and each of Nanchang Best's shareholders (the "Nanchang Purchase Agreement"). Pursuant to the Nanchang Purchase Agreement, the Company acquired all of the issued and outstanding capital stock of Nanchang Best from the Nanchang Best shareholders in exchange for 16,128,000 shares of common stock.

Contemporaneously, on October 31, 2006, the Company entered into and closed a share purchase agreement with Shanghai Best Animal Husbandry Co., Ltd., a corporation formed under the laws of the People's Republic of China ("Shanghai Best"), and each of Shanghai Best's shareholders (the "Shanghai Purchase Agreement"). Pursuant to the Shanghai Purchase Agreement, the Company acquired all of the issued and outstanding capital stock of Shanghai Best from the Shanghai Best shareholders in exchange for 3,072,000 shares of common stock.

The exchanges of shares with Nanchang Best and Shanghai Best were accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of Nanchang Best and Shanghai Best obtained control of the Company. On November 17, 2006, Wallace Mountain Resources Corp. changed its name to AgFeed Industries, Inc. Accordingly, the merger of Nanchang Best and Shanghai Best into the Company were recorded as a recapitalization of Nanchang Best and Shanghai Best, with Nanchang Best and Shanghai Best being treated as the continuing entities. Nanchang Best and Shanghai Best had common shareholders and common management. The historical financial statements presented are the combined financial statements of both Nanchang Best and Shanghai Best. The share exchange agreements have been treated as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the date of this transaction, the net assets of the legal acquirer were $59,762.

As a result of the reverse merger transactions described above the historical financial statements presented are those of Nanchang Best and Shanghai Best, the operating entities.

On December 20, 2006, the Company entered into and closed a share purchase agreement with Guangxi Huijie Sci. & Tech. Feed Co, Ltd., a company formed pursuant to the laws of the People's Republic of China (“Guangxi Huijie”), and the shareholders of Guangxi Huijie pursuant to which the Company 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.

5


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

The Company obtained the funds for the acquisition of the Guangxi Huijie shares by borrowing 8,600,000 RMB from Sunrise Capital International, Inc. The proceeds of the loan from Sunrise Capital International, Inc. were paid directly to the selling shareholders of Guangxi Huijie as consideration and as provided by the share purchase agreement. The Company's repayment obligation is evidenced by a promissory note bearing interest at the rate of seven percent per annum (7%) and maturing in six months. This loan was repaid in March 2007.

On November 6, 2007, the Company entered into a Stock Purchase Agreement with Lushan Breeder Pig Farm Co., Ltd. (“Lushan”), a Peoples Republic of China company located in HuaLin Town of XingZi County in Jiangxi Province, Peoples Republic of China, Huaping Yang and Hongyun Luo, the holders of ninety percent (90%) of the issued and outstanding capital stock of Lushan.

In 2008, the Company has purchased an additional 24 hog farms and one feed company. The Company’s ownership interest in these hog farms range from 55% to 100%.

The Company is engaged in the research and development, manufacturing, marketing, distribution and sale of pre-mix fodder blended feed and feed additives primarily for use in China's domestic pork husbandry market as well as raising, breeding and sale of pigs. The Company operates production plants in Nanchang City, Shanghai City, Nanning City and Haikou City and has swine farms located in the southern provinces of China. The Company sells to distributors and large-scale swine farms.

Stock Splits
 
On November 17, 2006, the Company declared a stock dividend of two additional shares of common stock for each share of common stock outstanding (effectively a three for one stock split). All share information for common shares has been retroactively restated for this stock split.
 
Basis of Presentation

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

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company’s functional currency is the Chinese Yuan Renminbi (RMB); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (USD).

Foreign Currency Translation

The accounts of the Company were maintained, and their consolidated financial statements were expressed in RMB. Such consolidated financial statements were translated into USD in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," with the RMB as the functional currency. According to the Statement, all assets and liabilities were 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”.

6


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Note 2 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas that require estimates and assumptions include valuation of accounts receivable and inventory, determination of useful lives of property and equipment, estimation of certain liabilities and sales returns.

Reclassification

Certain prior period amounts have been reclassified to conform to the period ended June 30, 2008 presentation.

Cash and Cash Equivalents

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

Accounts Receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.

Advances to Suppliers

The Company makes advances to certain vendors for purchase of its materials. The advances to suppliers are interest free and unsecured.

Inventories


7


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Property & Equipment

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

Office equipment
   
5 years
 
Operating equipment
   
10 years
 
Vehicles
   
5 years
 
Buildings
   
20 years
 
Swine for reproduction
   
3.5 years
 

The following are the details of the property and equipment at June 30, 2008 and December 31, 2007:
 
   
June 30, 2008
 
 December 31, 2007
 
Office equipment
 
$
292,414
 
$
100,072
 
Operating equipment
   
1,550,460
   
547,560
 
Vehicles
   
486,394
   
271,652
 
Buildings
   
5,042,292
   
1,568,816
 
Swines for reproduction
   
11,238,401
   
1,940,784
 
Total
   
18,609,961
   
4,428,884
 
 
             
Less accumulated depreciation
   
(1,083,933
)
 
(498,169
)
 
             
 
 
$
17,526,028
 
$
3,930,715
 

Depreciation expense for the three and six months ended June 30, 2008 and 2007 was $362,682 and $548,435 and $38,052 and $77,897, respectively.

Long-Lived Assets

The Company applies the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of June 30, 2008 there were no significant impairments of its long-lived assets.

8


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Intangible Assets

Intangible assets consist of the right to use land and computer software. Net intangible assets at June 30, 2008 and December 31, 2007 are as follows:

   
June 30, 2008
 
 December 31, 2007
 
             
Right to use land
 
$
759,332
 
$
589,489
 
Customer list
   
291,800
   
274,176
 
Computer software
   
81,137
   
-
 
Intangible related to hog farm acquisitions
   
39,563,961
   
15,366
 
Total
   
40,696,230
   
879,031
 
 
             
Less Accumulated amortization
   
(56,899
)
 
(39,229
)
 
             
Intangibles, net
 
$
40,639,331
 
$
839,802
 

Per the People's Republic of China's (“PRC”) governmental regulations, the Government owns all land. The Company leases land per real estate contracts with the government of the PRC for fifty years. Accordingly, the right to use land for the Company's feed companies is amortized over a period of 50 years and the computer software is amortized over six years. For hog farms, the Company generally signed land leasing contracts with original owners of the farms.

Revenue Recognition
 
The Company's revenue recognition policies are in compliance with SEC 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 of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. The Company is not subject to VAT withholdings.
 
The Company gives volume rebates to certain customers based on volume achieved. The Company accrues sales rebates based on actual sales volume.

Sales returns and rebates included in the Company's revenues were $338,452 and $103,482 for the six month periods ended June 30, 2008 and 2007, respectively. 

Advertising Costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place.  Advertising costs for the three and six months ended June 30, 2008 and 2007, were not significant.
 
Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.” The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. There were 45,000 options outstanding at June 30, 2008.

9


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Income Taxes

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

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48. As a result of the implementation of Interpretation 48, the Company recognized no material adjustments to liabilities or stockholders’ equity. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

Foreign Currency Transactions and Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company is the RMB. Translation gains of $3,569,035 and $780,907 at June 30, 2008 and December 31, 2007, respectively, are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet. During the three and six months ended June 30, 2008 and 2007, other comprehensive income in the consolidated statements of income and other comprehensive income included translation gains of $1,776,427 and $2,788,128, $92,277 and $143,183, respectively.

10


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Basic and Diluted Earnings Per Share

Earnings per share is calculated in accordance with SFAS No. 128, “Earnings Per Share”. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net earnings per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were 22,000 options outstanding at June 30, 2007 and at June 30, 2008, there were 45,000 options outstanding and 531,935 warrants outstanding.

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations for the three and six months ended June 30, 2008 and 2007:


Three Months Ended:
 
June 30, 2008
 
June 30, 2007
 
       
Per Share
     
Per Share
 
   
Shares
 
Amount
 
Shares
 
Amount
 
Basic earnings per share
   
32,054,366
 
$
0.12
   
25,935,813
 
$
0.06
 
Effect of dilutive stock options/warrants
   
344,167
   
-
   
23,459
   
-
 
Diluted earnings per share
   
32,398,533
 
$
0.12
   
25,959,272
 
$
0.06
 

Six Months Ended:
 
June 30, 2008
 
June 30, 2007
 
       
Per Share
     
Per Share
 
   
Shares
 
Amount
 
Shares
 
Amount
 
Basic earnings per share
   
29,928,503
 
$
0.16
   
25,144,526
 
$
0.07
 
Effect of dilutive stock options/warrants
   
298,627
   
-
   
-
   
-
 
Diluted earnings per share
   
30,227,130
 
$
0.16
   
25,144,526
 
$
0.07
 

Statement of Cash Flows

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

Minority Interest

The Company purchased interest in 24 hog farms and one feed company ranging from 55% to 100%. As a result of these purchases, the Company recognized initial minority interest on its consolidated balance sheet in the amount of $917,079. The income (loss) attributed to minority interest has been separately designated in the accompanying statement of operations.

11


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Segment Reporting

SFAS No. 131 (“SFAS 131”), “Disclosure About Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company has determined that it has four reportable segments (See Note 12).

Fair Value of Financial Instruments

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follow:

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

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

 
·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

As of June 30, 2008, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

Recent Pronouncements

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed.  Management is currently evaluating the effect of this pronouncement on financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” SFAS No. 141R changes how a reporting enterprise accounts for the acquisition of a business. SFAS No. 141R requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. SFAS No. 141R is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited.

12

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51.  SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  SFAS 160 changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest.  SFAS 160 is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133.” SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 will not have an impact on the Company’s financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 will not have an impact on the Company’s financial statements.

13


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Note 3 – Short Term Loans

Short term loans at December 31, 2007 are follows:

   
December 31,
2007
 
Short-term bank loan; interest rate of 7.884% and 7.02% payable monthly. The term of the loan is from May 28, 2007 to May 27, 2008 and May 18, 2006 to May 17, 2007. This loan was collateralized by the Company’s office building, workshop, employee dorms and use right of land. This loan was repaid on May 28, 2008.
 
$
822,528
 
         
Short-term bank loan; interest rate of 6.57% and 6.12%.  The term of the loan was from May 25, 2007 to May 24, 2008 and December 5, 2006 to December 4, 2007.  This loan was collateralized by the Company’s right to use land, machinery and equipment. This loan was repaid on May 25, 2008.
   
287,885
 
 
 
$
1,110,413
 

Note 4 – Convertible Notes

On February 25, 2008, the Company entered into a Securities Purchase Agreement with Apollo Asia Opportunity Master Fund, L.P., Jabcap Multi-Strategy Master Fund Limited, J-Invest Ltd., and Deutsche Bank AG London Branch (the “Investors”) in connection with a private placement transaction providing for, among other things, the issuance of senior convertible notes for aggregate gross proceeds of $19 million (the “Notes”)and warrants to purchase up to an aggregate of 380,000 shares (the “Warrants”) of the Company’s $0.001 par value per share common stock. The notes mature on the third anniversary of the issuance date, bear interest at 7% per annum and are convertible into shares of the Company’s common stock at an initial conversion price of $10.00 per share. The conversion price is subject to a “weighted average ratchet” anti-dilution adjustment. The conversion price is also subject to adjustment on a proportional basis, to the extent that the Company’s audited net income for the fiscal years ending 2008 and 2009 is less than $30 million and $40 million, respectively; subject to a per share floor price of $5.00.

The Notes impose penalties on the Company for any failure to timely deliver any shares of its common stock issuable upon conversion.

In connection with the issuance of the Notes and the Warrants issued to the Investor on February 25, 2008, the Company paid $1,716,666 in debt issuance cost which is being amortized over the life of the Notes. For the three and six months ended June 30, 2008, the Company amortized $1,238,037 and $1,292,858, respectively of the aforesaid issuance costs as interest and financing costs in the accompanying consolidated statements of operations.

The Notes contain certain limitations on conversion. For example, they provide that no conversion may be made if, after giving effect to the conversion, the Investor would own in excess of 9.99% of the Company’s outstanding shares of common stock. In addition, the Notes provide that no conversion may be made if the conversion would cause the Company to be in breach of its obligations under the rules and regulations of the Nasdaq Global Market, unless the Company obtains stockholder approval for such issuances as required by such rules and regulations.

14


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

The Warrants are immediately exercisable, expire on the third anniversary of their issuance and entitle their holders, in the aggregate, to purchase up to $3,800,000 worth of shares of common stock at an initial exercise price of $10.00 per share.

The exercise price of the Warrants is subject to a “weighted average ratchet” anti-dilution adjustment. The exercise price is also subject to adjustment, on a proportional basis, to the extent that the Company’s audited net income for the fiscal years ending 2008 and 2009 is less than $30 million and $40 million, respectively; subject to a per share floor price of $5.00.

The Warrants contain certain limitations on exercise. For example, they provide that no exercise may be made if, after giving effect to the exercise, the Investor would own in excess of 9.99% of the Company’s outstanding shares of common stock. In addition, the Warrants provide that no exercise may be made if it would cause the Company to be in breach of its obligations under the rules and regulations of the Nasdaq Global Market, unless the Company obtains stockholder approval for such issuances as required by such rules and regulations.

The Warrants granted to the Investor on February 25, 2008 and conversion feature in the above Notes are not considered derivative instruments that need to be bifurcated from the original security since the Warrants and the Notes since the conversion price of the Notes have a floor of $5.00, which means the Company can determine the maximum shares that could be issued upon conversion. The Company determined the fair value of the detachable warrants issued in connection with the Notes to be $1,269,442, using the Black-Scholes option pricing model and the following assumptions:  expected life of 1 year, a risk free interest rate of 2.10%, a dividend yield of 0% and volatility of 70%. In addition, the Company determined the value of the beneficial conversion feature to be $2,770,442. The combined total discount for the Notes is $4,039,885 and is being amortized over the term of the Notes. For the three and six months ended June 30, 2008, the Company amortized $2,913,512 and $3,042,523, respectively, of the aforesaid discounts as interest and financing costs in the accompanying consolidated statements of operations.

During the three months ended June 30, 2008, $13,700,000 of the Notes were converted into 1,370,000 shares of common stock.

Note 5 – Stockholders’ Equity


The Common Stock for the registered offering was issued pursuant to a prospectus supplement filed with the Commission on February 26, 2008, in connection with a shelf takedown from the Company’s Registration Statement on Form S-3 (File No. 333-144386) which was declared effective by the Commission on January 11, 2008.

On April 16, 2008, the Company entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) with two institutional investors (collectively, the “Investors”) in connection with a registered direct offering of securities providing for the issuance of 625,000 shares of the Company’s Common Stock at price of $16.00 per share for aggregate gross proceeds of $10,000,000.

15


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

The Common Stock for the registered offering was issued pursuant to a prospectus supplement filed with the Commission on April 21, 2008, in connection with a shelf takedown from the Company’s Registration Statement on Form S-3 (File No. 333-144386) which was declared effective by the Commission on January 11, 2008.

The closing under the Securities Purchase Agreement took place on April 21, 2008. The placement agent for this transaction was Rodman & Renshaw, LLC, which received a fee of six percent (6%) of the gross proceeds, or $600,000.

The Securities Purchase Agreement contains representations, warranties, and covenants of the Company and the Investors which are typical for transactions of this type.

On April 22, 2008, the Company entered into Securities Purchase Agreements (collectively, the “Securities Purchase Agreements”) with a group of 14 institutional investors (collectively, the “Investors”) in connection with a registered direct offering of securities providing for the issuance of 1,322,836 shares of the Company’s Common Stock at price of $19.05 per share for aggregate gross proceeds of $25,200,026.

The Common Stock for the registered offering was issued pursuant to a prospectus supplement filed with the Commission on April 24, 2008, in connection with a shelf takedown from the Company’s Registration Statement on Form S-3 (File No. 333-148386) which was declared effective by the Commission on January 11, 2008.

The closing under the Securities Purchase Agreements took place on April 24, 2008. The placement agent for the sale of 797,901 shares of Common Stock at an aggregate purchase price of $15,200,014.05 was Rodman & Renshaw, LLC, which received a fee of $638,401 (4.2% of the gross proceeds). Additionally, the Company paid a finders fee of $350,000 to Advantage Consultants Limited in connection with the offering.

The Securities Purchase Agreements contain representations, warranties, and covenants of the Company and the Investors which are typical for transactions of this type.

During the six months ended June 30, 2008 the Company issued 91,934 shares upon the cashless exercise of 197,500 warrants. In addition, the Company received proceeds of $2,061,760 upon the exercise of 262,352 warrants.

Note 6 – Employee Welfare Plan

The Company had its own employee welfare plan in accordance with Chinese law and regulations before all six subsidiaries in China became Sino-foreign joint ventures. The Company made annual contributions of 14% of all employees’ salaries to the employee welfare plan. The total expense for the above plan was $(2,856) and $35,172, and $24,664 and $29,076 for the three and six months ended June 30, 2008 and 2007, respectively. In accordance with Chinese law, a Sino-foreign joint venture is not required to accrue welfare payable in advance. All six subsidiaries have stopped accruing such payable since each changed into a Sino-foreign company. Instead, welfare expense is recorded as incurred.

16


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Note 7 - Statutory Common Welfare Fund

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

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

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

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

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

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

The Company has appropriated $789,263 and $848,823, and $90,810 and $177,801 as reserve for the statutory surplus reserve and welfare fund for the three and six months ended June 30, 2008 and 2007, respectively.

Note 8 – Stock Options and Warrants

Stock Options

Following is a summary of the stock option activity:

   
Options
outstanding
 
Weighted
Average
Exercise
Price
 
Weighted
average
remaining
contractual life
 
Aggregate
Intrinsic Value
 
Outstanding, December 31, 2007
   
42,000
 
$
7.00
         
-
 
Granted
   
25,000
 
$
9.31
             
Forfeited
   
(22,000
)
$
5.30
             
Exercised
   
-
   
-
             
Outstanding, June 30, 2008
   
45,000
 
$
9.11
   
4.49
 
$
263,900
 
Exercisable, June 30, 2008
   
-
                   

17


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

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

Risk-free interest rate
   
2.5
%
Expected life of the options
   
4 years
 
Expected volatility
   
72
%
Expected dividend yield
   
0
%

Warrants

The following is a summary of the warrant activity:

Outstanding, December 31, 2007
   
611,787
 
Granted
   
380,000
 
Forfeited
   
-
 
Exercised
   
(459,852
)
Outstanding, June 30, 2008
   
531,935
 

Note 9 - Related Party Transactions

Sales to related parties amounted to $0 and $0, and $0 and $77,054 for the three and six months ended June 30, 2008 and 2007, respectively.

Purchases from related parties amounted to $0 and $0, and $0 and $9,284 for the three and six months ended June 30, 2008 and 2007, respectively.

Due from former stockholder of $320,799 as of June 30, 2008 was repaid in full in July 2008.

The parties are related through one common shareholder who is a majority shareholder in all the related entities.
 
Note 10 - Taxes

Local PRC Income Tax

Pursuant to the tax laws of China, general enterprises are subject to income tax at an effective rate of 33%.

In July 2006, as a result of an investment by a foreign investor in one of the Company’s subsidiaries, the Company’s subsidiary became a Sino-Foreign Joint Venture. Pursuant to the Chinese income tax law, the Company’s subsidiary became fully exempt from income tax for a period of two years from July 14, 2006 to July 14, 2008, followed by a reduced tax rate of 15% for the next six years. Concurrent with the exemption, the tax authorities waived approximately RMB 3,400,000 ($425,429) in taxes due.

On June 5, 2007, Shanghai Best received a tax exemption certificate from the local tax bureau and is exempt from income tax from January 1, 2007 to December 31, 2008, followed by a reduced tax rate of 15% for the next six years.

18


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

On April 25, 2007, Guangxi Huijie also received an exemption from income tax for the period from January 1, 2006 to December 31, 2008. The exemption was issued by the local government because Guangxi Huijie is located in a zone where the federal government encourages the establishment of new entities.

The effect of the change of tax status has been accounted for in accordance with SFAS No. 109, par. 28, which states that the effect of a change in tax status is computed as of the date of change and is included in the tax provision for continuing operations. Management believes that the local tax authorities would not have waived past taxes had it not been for the change in the Company’s subsidiary’s tax status.

If the Company’s subsidiary had not been exempt from paying income taxes due to the Sino-Foreign Joint Venture described above, income tax expense for the three and six months ended June 30, 2008 would have been approximately $1,370,000 and $1,700,000 and earnings per share would have been reduced by approximately $0.05 and $0.05 per share, respectively.

Note 11 – Acquisitions

Purchase of Hog Farms

On January 3, 2008, the Company acquired 70% of the issued and outstanding capital stock of Wannian Xiandai Animal Husbandry Limited Liability Co., a PRC company located in Jiangxi Province.  The acquisition was consummated pursuant to a stock purchase agreement, dated January 3, 2008, among the Company and Wannian Xiandai Animal Husbandry Limited Liability Co., the selling party.  The aggregate purchase price was 12,250,000 RMB, equivalent to $1,666,666.  Under the terms of the transaction documents, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement.  The lease agreement calls for semi-annual rent payments totaling 900,000 RMB (approximately $122,450) per year in exchange for use of the facilities.

On January 3, 2008, the Company acquired 70% of the issued and outstanding capital stock of Jiangxi Huyun Livestock Co., Ltd., a PRC company located in Jiangxi Province.  The acquisition was consummated pursuant to a stock purchase agreement, dated January 3, 2008, among the Company and Jiangxi Huyun Livestock Co., Ltd., the selling party.  The aggregate purchase price was 6,482,000 RMB, equivalent to $881,905.  Under the terms of the transaction documents, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement.  The lease agreement calls for semi-annual rent payments totaling 900,000 RMB (approximately $122,450) for the first year and 450,000 RMB (approximately $61,225) for every 10,000 hogs sold beginning in the second year and thereafter in exchange for use of the facilities.

On January 4, 2008, the Company acquired 60% of the issued and outstanding capital stock of Ganzhou Green Animal Husbandry Development Co., Ltd., a PRC company located in Jiangxi Province.  The acquisition was consummated pursuant to a stock purchase agreement, dated January 4, 2008, among the Company and Ganzhou Green Animal Husbandry Development Co., the selling party.  The aggregate purchase price was 6,480,000 RMB, equivalent to $881,633.  Under the terms of the transaction, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement.  The lease agreement calls for semi-annual rent payments totaling 700,000 RMB (approximately $97,000) per year in exchange for use of the facilities.

19


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

On January 7, 2008, the Company acquired 100% of the hogs and stock of Gang Feng Animal Husbandry Co., Ltd., a PRC company located in Jiangxi Province.  The acquisition was consummated pursuant to a stock purchase agreement, dated January 7, 2008, among the Company and Gang Feng Animal Husbandry Co., Ltd., the selling party.  The aggregate purchase price was 4,820,000 RMB, equivalent to $655,782.  Under the terms of the transaction, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 6.5-year lease agreement.  The lease agreement calls for semi-annual rent payments totaling 450,000 RMB (approximately $61,225) per year in exchange for use of the facilities.

On January 9, 2008, the Company acquired 55% of the issued and outstanding capital stock of Yichun Tianpeng Domestic Livestock Farm, Ltd., a PRC company located in Jiangxi Province.  The acquisition was consummated pursuant to a stock purchase agreement, dated January 9, 2008, among the Company and Yichun Tianpeng Domestic Livestock Farm, Ltd., the selling party.  The aggregate purchase price was 8,855,000 RMB, equivalent to $1,204,761.  Under the terms of the transaction, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement.  The lease agreement calls for semi-annual rent payments totaling 800,000 RMB (approximately $108,844) per year in exchange for use of the facilities.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Guangxi Nanning Wanghua Hog Farm, located at Jinhu Road, Nanning City, Guangxi Province, PRC, from Fan Xianfang and Wu Yuhua for a purchase price of RMB26,030,000 (USD$3,722,300). Guangxi Nanning Wanghua Hog Farm has annual hog production capability of 36,000 hogs and has estimated sales of approximately 26,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, together with all of their assets, including existing rights for land use, pig houses, office buildings, power and water supply facilities, existing inventory of hogs, feed and veterinary drugs, in the Guangxi Guigang Gangda Hog Farm, located at No.9 Xijiang Hog Farm, Guigang City, Guangxi Province, PRC, from Su Zhenxue for a purchase price of RMB14,520,000 (USD$2,076,400). Guangxi Guigang Gangda Hog Farm has annual hog production capability of approximately 12,000 hogs and has estimated sales of approximately 8,400 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, together with all of their assets, including existing rights for land use, pig houses, office buildings, power and water supply facilities, existing inventory of hogs, feed and veterinary drugs, in the Guangxi Xingye Guihong Hog Farm, located at Xicun Village, Kuiyang Town, Xingye County, Yulin City, Guangxi Province, PRC, from Lin Weicai for a purchase price of RMB42,500,000 (USD$6,077,500). Guangxi Xinye Guihong Hog Farm has annual hog production capability of approximately 50,000 hogs and has estimated sales of approximately 35,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, together with all of their assets, including existing rights for land use, pig houses, office buildings, power and water supply facilities, existing inventory of hogs, feed and veterinary drugs, in the Hainan Haikou Meilan Hog Farm, located at Xianlai Village, Dazhipo Town, Haikou City, Hainan Province, PRC, from Zeng Niangou for a purchase price of RMB14,700,000 (USD$2,102,100). Hainan Haikou Meilan Hog Farm has annual hog production capability of approximately 21,500 hogs and has estimated sales of approximately 15,000 hogs through the remainder of 2008.

20


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 
In April 2008, the Company acquired all of the equity interest, together with all of their assets, including existing rights for land use, pig houses, office buildings, power and water supply facilities, existing inventory of hogs, feed and veterinary drugs, in the Hainan Haikou Wohao Hog Farm, located at Fuan Village, Shishan Town, Xiuying District, Haikou City, Hainan Province, PRC, from Wang Ruiying and Xu Dongqiong for a purchase price of RMB15,200,000 (USD$2,173,600). Hainan Haikou Wohao Hog Farm has annual hog production capability of approximately 20,000 hogs and has estimated sales of approximately 14,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired sixty percent (60%) of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Guangxi Guilin Fuzhi Hog Farm, located at Sujia Village, Zhalin Town, Yanshan District, Guilin City, Guangxi Province, PRC, from Liu Fuzhi for a purchase price of RMB12,000,000 (USD$1,716,000). Guangxi Guilin Fuzhi Hog Farm has annual hog production capability of approximately 20,000 hogs and has estimated sales of approximately 14,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired eighty percent (80%) of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Guangdong Lianjiang Xinfa Hog Farm, located at Lianjiang City, Guangdong Province, PRC, from Chen Shou for a purchase price of RMB11,000,000 (USD$1,573,000). Guangdong Lianjiang Xinfa Hog Farm has annual hog production capability of approximately 22,000 hogs and has estimated sales of approximately 16,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Zhejiang Pinghu Yongxin Hog Farm, located at Pinghu City, Zhejiang Province, PRC, from Nie Yongqing for a purchase price of RMB10,480,000 (USD$1,498,600). Zhejiang Pinghu Yongxin Hog Farm has annual hog production capability of approximately 11,000 hogs and has estimated hog sales of approximately 7,500 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Shanghai Fengxian Hog Farm, located at Yuantong Village, Qianqiao Town, Fengxian District, Shanghai City, PRC, from Tu Yaoliang andYang Yongan for a purchase price of RMB35,000,000 (USD$5,005,000). Shanghai Fengxian Hog Farm has annual hog production capability of approximately 32,000 hogs and has estimated sales of approximately 21,500 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Shanghai Tuanxi Hog Farm, located at Tuanxi Village, Datuan Town, Nanjiang District, Shanghai, PRC, from Cheng Longde for a purchase price of RMB7,000,000 (USD$1,001,000). Shanghai Tuanxi Hog Farm has annual hog production capability of approximately 8,500 hogs and has estimated sales of approximately 5,600 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Shanghai Senrong Hog Farm, located at Wanglong Village, Xinnong Town, Jinshan District, Shanghai, PRC, from Jin Shunyun, Shen Peitao, Shen Yazhen, Jin Zhigang and Jin Zhixian for a purchase price of RMB30,000,000 (USD$4,290,000). Shanghai Senrong Hog Farm has annual hog production capability of approximately 30,000 hogs and has estimated sales of approximately 20,500 hogs through the remainder of 2008.

21


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Fujian Xiamen Muxin Hog Farm, located at Tongan District, Xiamen City, PRC, from Li Mingxing, Chen Shuilu, Zhang Guohua and Wu Xiaoyan for a purchase price of RMB29,320,000 (USD$4,192,800). Fujian Xiamen Muxin Hog Farm has annual hog production capability of approximately 50,000 hogs and has estimated sales of approximately 35,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Xiamen Yuanshengtai Food Co.,Ltd., a hog farm located at No.55 Binlang Road, Xiamen, Fujian Province, PRC, from Li Mingxing, Wu Xiaoyan and Hong Xiaoling for a purchase price of RMB26,200,000 (USD$3,746,600). Xiamen Yuanshengtai Food Co. has annual hog production capability of approximately 38,000 hogs and has estimated sales of approximately 25,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Fujian Jianhua Hog Farm, located at Xudun Town, Jian’ou City, Fujian Province, PRC, from Fan Dehe and Pan Shengliang for a purchase price of RMB32,000,000 (USD$4,576,000). Fujian Jianhua Hog Farm has annual hog production capability of approximately 34,000 hogs and has estimated sales of approximately 23,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in Fujian Fengxiang Agribusiness Co., Ltd., a hog farm located at Mawei District, Fuzhou City, Fujian Province, PRC, from Zhu Zuzhong for a purchase price of RMB8,100,000 (USD$1,158,300). Fujian Fengxiang Agribusiness has annual hog production capability of approximately 10,000 hogs and has estimated sales of approximately 7,000 hogs through the remainder of 2008.
 
In April 2008, the Company acquired all of the equity interest, as well as the inventory of hogs, feed and veterinary drugs, in the Jiangxi Zhiliang Hog Farm, located at Gancaoqian Village, Dayangzhou, Xingan County, Jiangxi Province, PRC, from Xie Zhiliang, Yang Guoqiang and Zeng Xiaohui for a purchase price of RMB8,000,000 (USD$1,144,000). Jiangxi Zhiliang Hog Farm has annual hog production capability of approximately 10,000 hogs and has estimated sales of approximately of 6,500 hogs through the remainder of 2008.

In May 2008, the Company acquired all of the equity interest in Nanping Kangda Animal Husbandry Co., Ltd., a hog farm located at Yanping District, Nanping City, Fujian Province, PRC, from Chen Qingwen and Chen Jianming for a purchase price of RMB5,821,000 (USD$838,664). Nanping Kangda Animal Husbandry Co., Ltd. has annual hog production capability of approximately 12,000 hogs and has estimated sales of approximately 6,000 hogs through the remainder of 2008.
 
In May 2008, the Company acquired all of the equity interest in Fujian Jianxi Breeder Hog Farm Co., Ltd., a breeder hog farm located at Zhishan District, Jianou City, Fujian Province, PRC, from Weng Lizhu and Zhang Yachui for a purchase price of RMB16,338,166 (USD$2,353,931). Fujian Jianxi Breeder Hog Farm Co., Ltd. has annual hog production capability of approximately 8,000 breeder hogs and 13,000 meat hogs, with estimated sales of approximately 10,500 hogs through the remainder of 2008.

In June 2008, the Company completed the acquisition of all of the equity interest in Shanghai WeiSheng Hog Raising Co., Ltd.(“Shanghai Weisheng”), a hog farm located in the Jinshan District, Shanghai City, PRC, for a negotiated purchase price of RMB12,820,000 (USD$1.87 million). Shanghai Weisheng has annual hog production capability of approximately 15,000 hogs and has estimated sales of approximately 7,500 hogs through the remainder of 2008.

22

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)

Acquisition of Feed Company

In June 2008, the Company completed the acquisition of premix feed company, Hainan HopeJia Feed Co., Ltd. ("HopeJia"), located in the Hainan province of the PRC.  The Company acquired all of the equity interest in HopeJia for a negotiated purchase price of RMB28,600,000 or approximately US$4.16 million.

The hog farms and feed company were purchased as part of the Company’s strategic growth plan.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the exchange rates at the dates of acquisition.

Cash
 
$
95,573
 
Accounts receivable
   
388,384
 
Other receivables
   
20,795
 
Inventory
   
8,640,797
 
Other assets
   
353,753
 
Property and equipment
   
13,117,529
 
Construction in progress
   
1,270,322
 
Intangible assets
   
38,029,108
 
Accounts payable
   
(318,197
)
Other paybles
   
(389,602
)
Minority Interest
   
(917,079
)
   
$
60,291,383
 

The intangible asset related to the purchase of the hog farms is a preliminary allocation that is subject to change upon the completion of a formal appraisal.

The following pro forma financial information presents the consolidated operations of the Company as if the 25 above mentioned acquisitions had occurred on January 1, 2007.
 
For the six months ended June 30, 2008 and 2007:
   
2008
 
2007
 
Net Revenue
 
$
51,993,600
 
$
21,799,848
 
Gross profit
 
$
15,507,912
 
$
5,825,795
 
Income from operations
 
$
11,196,727
 
$
3,893,313
 
Minority Interest in Subsidiaries
 
$
361,094
 
$
73,925
 
Net income
 
$
5,469,584
 
$
3,761,863
 
Basic earnings per share
 
$
0.18
 
$
0.15
 
 
Note 12 – Segment Information

The Company’s predominant businesses are the research and development, manufacture, marketing, distribution, and sale of pre-mix fodder blended feed and feed additives primarily for use in China’s domestic pork husbandry market and the raising, breeding, and selling of pigs.  The Company operates in four segments: Shanghai, Guangxi, Nanchang, and hog farms.
 
23


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 
Shanghai is located in the Nanxiang, Jia Ding district, Shanghai and sells its products to approximately 360 customers, consisting of 170 local distributors and 190 large scale pig farms.  Guangxi is located in Coastal Industrial Park, Liangqin district, Nanning city, Guangxi Province and sells its products to approximately 325 customers, consisting of 140 local distributors and 185 large scale pig farms.  Nanchang is located in Chang Bei District Industrial Park, in Nanchang, Jiangxi province and sells its products to approximately 300 customers, consisting of 90 local distributors and 210 large scale pig farms.  Lushan is located in HuaLin Town of XingZi County in Jiangxi Province and is a mid-scale swine farm engaged mainly in raising, breeding, and sale of pigs all over the country.

The following tables summarize segment information for the three and six months ended June 30, 2008 and 2007:

   
Three
 
Three
 
Six
 
Six
 
   
Months
 
Months
 
Months
 
Months
 
   
Ended
 
Ended
 
Ended
 
Ended
 
   
6/30/2008
 
6/30/2007
 
6/30/2008
 
6/30/2007
 
Revenues from unrelated entities
                         
Shanghai
 
$
5,176,236
 
$
598,220
 
$
8,680,037
 
$
1,982,145
 
Guangxi
   
1,952,261
   
2,099,446
   
3,221,739
   
3,643,339
 
Nanchang
   
5,088,775
   
4,193,487
   
9,327,797
   
6,243,964
 
Hog farms
   
23,418,055
   
-
   
26,552,838
   
-
 
 
 
$
35,635,327
 
$
6,891,153
 
$
47,782,411
 
$
11,869,448
 
                           
Intersegment revenues
                         
Shanghai
 
$
211,246
 
$
851,791
 
$
360,137
 
$
1,348,778
 
Guangxi
   
413,917
   
-
   
413,917
   
-
 
Nanchang
   
624,927
   
5,230
   
1,066,492
   
5,230
 
Hog farms
   
1,490
   
-
   
5,982
   
-
 
   
$
1,251,580
 
$
857,021
 
$
1,846,528
 
$
1,354,008
 
                           
Total Revenues
                         
Shanghai
 
$
5,387,482
 
$
1,450,011
 
$
9,040,174
 
$
3,330,923
 
Guangxi
   
2,366,178
   
2,099,446
   
3,635,656
   
3,643,339
 
Nanchang
   
5,713,702
   
3,701,730
   
10,394,289
   
6,249,194
 
Hog farms
   
23,419,545
   
-
   
26,558,820
   
-
 
Less Intersegment revenues
   
(1,251,580
)
 
(857,021
)
 
(1,846,528
)
 
(1,354,008
)
   
$
35,635,327
 
$
6,394,166
 
$
47,782,411
 
$
11,869,448
 
                           
Income from operations
                         
Shanghai
   
1,020,044
   
341,015
 
$
1,666,733
   
575,402
 
Guangxi
   
397,753
   
386,547
   
585,785
   
779,569
 
Nanchang
   
740,541
   
546,580
   
1,445,445
   
967,063
 
Hog farms
   
6,859,564
   
-
   
7,363,212
   
-
 
                           
Holding Company
   
(245,745
)
 
(54,618
)
 
(563,900
)
 
(123,619
)
   
$
8,772,157
   
1,219,524
 
$
10,497,275
   
2,198,415
 
24


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 
Interest income
                         
Shanghai
 
$
540
 
$
413
 
$
1,270
 
$
627
 
Guangxi
   
1,174
   
673
   
2,212
   
837
 
Nanchang
   
36,384
   
3,083
   
49,670
   
4,021
 
Hog farms
   
6,783
   
-
   
7,400
   
-
 
Holding Company
   
31,179
   
39,854
   
65,683
   
48,705
 
 
 
$
76,060
 
$
44,023
 
$
126,235
   
54,190
 
                           
Interest and financing costs
                         
Shanghai
 
$
-
 
$
-
 
$
-
   
-
 
Guangxi
   
2,950
   
10,324
   
7,785
   
12,209
 
Nanchang
   
(12,566
)
 
10,632
         
20,816
 
Hog farms
   
2
   
30,580
   
2
   
30,580
 
Holding Company
   
4,322,173
   
(30,580
)
 
4,631,414
   
-
 
   
$
4,312,559
 
$
20,956
 
$
4,639,201
 
$
63,605
 
                           
Income tax expense (benefit)
                         
Shanghai
 
$
-
 
$
(78,736
)
$
-
 
$
-
 
Guangxi
   
60,576
   
(137,023
)
 
113,501
   
(40,461
)
Nanchang
   
56,250
   
-
   
99,588
   
-
 
Hog farms
   
-
   
-
   
-
   
-
 
 
 
$
116,826
 
$
(215,759
)
$
213,089
 
$
(40,461
)
                           
Net Income
                         
Shanghai
 
$
1,024,197
 
$
421,176
 
$
1,675,165
 
$
581,032
 
Guangxi
   
179,827
   
514,919
   
310,756
   
808,658
 
Nanchang
   
537,582
   
539,671
   
974,400
   
955,987
 
Hog farms
   
6,717,580
   
-
   
7,012,283
   
-
 
                           
Holding Company
   
(4,537,673
)
 
(14,764
)
 
(5,131,794
)
 
(105,494
)
 
 
$
3,921,513
 
$
1,461,002
 
$
4,840,810
 
$
2,240,183
 
                           
Provision for depreciation
                         
Shanghai
 
$
21,373
 
$
5,215
 
$
42,746
 
$
13,911
 
Guangxi
   
12,991
   
13,329
   
25,982
   
21,989
 
Nanchang
   
6,216
   
19,508
   
12,432
   
41,997
 
Hog farms
   
322,102
   
-
   
467,275
   
-
 
   
$
362,682
 
$
38,052
 
$
548,435
 
$
77,897
 
 
 
             
As of 6/30/08
       
Total Assets
                         
Shanghai
             
$
4,562,519
       
Guangxi
               
7,304,711
       
Nanchang
               
8,464,856
       
Hog farms
               
85,568,653
       
Holding Company
               
19,540,030
       
               
$
125,440,769
       
 
25


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
 
Note 13 - Subsequent Event
 
In July 2008, certain convertible note holders converted $1,500,000 of their principal note balances into 150,000 shares of the Company’s common stock.
 
26

 
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-QSB includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  We have based these forward-looking statements on our current expectations and projections about future events.  These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” anticipate,” believe,” estimate,” continue,” or the negative of such terms or other similar expressions.  Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed  in our other Securities and Exchange Commission filings.  The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. Throughout this Quarterly Report we will refer to AgFeed Industries, Inc. as "AgFeed," the "Company," "we," "us," and "our."

Item 2.  Management’s Discussion and Analysis or Plan of Operations

Overview

We are a leading producer of premix animal feed and commercial hog production in the People’s Republic of China (“China” or the “PRC”). Our premix feed segment consists of the research and development, manufacture, marketing and sale of premix feed for use in the domestic animal husbandry markets, primarily the hog raising markets in the PRC.  Premix is an animal feed additive that is broadly used in commercial animal production worldwide. The use of premix feed can significantly reduce an animal’s growth cycle to market size. We have been in the premix feed business since 1995. As of June 30, 2008, the Company owned 25 operating hog farms located in Jiangxi, Shanghai, Hainan, Guangxi and Fujian province.

As a result of the acquisition of Lushan Breeder Hog Farm on November 9, 2007, we entered the hog breeding and production business. In addition to  premix feed business, we also engage in the business of raising, breeding and selling hogs for use in China’s pork production and hog breeding markets.

According to the China Feed Industry Association, the PRC has the world’s largest and most profitable markets for hog production with approximately 600 million hogs produced annually, compared to approximately 100 million in the US. More than 1.2 billion Chinese consume pork as their primary source of meat. 65% of all meat consumed in China is pork. Chinese consumers consume more pork each year than the rest of the world combined. Due to hog shortages, hog production in China enjoys favorable tax and other benefits from the Chinese government. Hog production is exempt from all taxes and sow owners receive government grants and subsidies.

We operate through five premix feed manufacturing plants and 25 commercial hog farms in the PRC.

Nanchang Best located in Jiangxi Province - Nanchang Best is primarily 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.  As of November 9, 2007, through the acquisition of Lushan, Nanchang Best is also in the business of raising, breeding and selling hogs for use in China’s pork production and hog breeding markets.  Nanchang Best’s hog operations are located in Jiangxi Province and conducted solely through Lushan until early 2008.  
 
27

 
Shanghai Best located in Shanghai - Shanghai Best is also in the business of the manufacture, marketing and sale of fodder and blended feed for use in the PRC’s domestic animal husbandry markets.

Guangxi Huijie located in Guangxi Province - Guangxi Huijie 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.

On June 24, 2008, we completed the acquisition of premix feed company, Hainan HopeJia Feed Co., Ltd. ("HopeJia"), located in the Hainan province of the PRC.  We acquired all of the equity interest in HopeJia for a negotiated purchase price of RMB28,600,000 or approximately US$4.16 million.
 
In our premix feed segment, we operate each subsidiary independently with regard to manufacturing and local 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 Best and Guangxi Huijie and each shares their efforts with the other and Shanghai Best. In addition, many of the administrative duties are performed by Nanchang Best for Shanghai Best.

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

As of June 30, 2008, we had established relationships with over 800 independently owned feed distribution chain stores that sell our products exclusively targeting backyard individual hog farmers to complement our existing more than 600 wholesale premix feed distribution channels that target large size commercial hog farms with average annual hog production of no less than 10,000 hogs each. We will continue to market our products to the operators of large swine farms and large distributors. We rely on the franchisees to market and sell our products to the smaller swine farms.  Approximately 75% of China’s total annual hog production is supplied by backyard individual hog farmers that raise less than 10 hogs per year per family. Even though the number of these small individual swine farms in China is declining due to the country’s rapid urbanization process which causes farmers to leave their land and seek out better paying manufacturing and construction jobs in the cities, we believe it will take at least several decades for China’s vast domestic hog production market to shift to dominance by large commercial hog farm operators. We believe significant revenue potentials currently exist in serving the highly fragmented retail hog farmers markets. 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.

In our premix feed segment, in order to provide excellent customer service and differentiate ourselves from our competition, at our customers’ request, we supply them with customized “AgFeed” brand formulations of our products.  To maintain reasonable profits, we increased our sale price for the three months ended June 30, 2008 in the midst of the rising and uncertain raw material market. The cost of R&D and technical upgrading of premix feed for better competitive in the market may cause our short-term profits to fluctuate.  . However, we believe that in the long-term this cost will help us to increase our customer loyalty and further build the AgFeed brand.  The increase in our revenues during the six months ended June 30, 2008 was mostly due to increases in the volume of products sold as a direct result of new products launched and our expansion into new markets. Due to a stronger AgFeed brand name, we were able to raise our premix feed prices twice in our second quarter and successfully passed along the higher prices to our customers.
 
In the first two quarters of 2008, we acquired a majority interest in 24 hog farms: five located in Jiangxi Province in January 2008; 16 located in several southern provinces of the PRC in April 2008 and 3 located in Fujian province and the Shanghai region in May and June 2008. As of the end of June 30, 2008, we operated a total of 25 hog farms. We sell live hogs in two of China’s wealthiest regions - Shanghai and Guangdong, both of which have China’s highest hog prices as well as deep pork consuming cultures.
 
28

 
In our hog production segment, we grow our business primarily through strategic acquisitions of current producing commercial hog farms. All of our acquisitions are immediately accretive to earnings. We own and operate 25 hog farms with a total of 30,000 sows.
 
Throughout all of our operations, we use centralized systems for raw material purchases, accounting and internal control management, corporate marketing strategies and brand building, and animal disease control response which consists of hog industry veterans. Our increased size and economies of scale through successful strategic acquisitions have benefited us greatly in both raw materials cost savings and administrative efforts.

AgFeed had revenues of $47.78 million for the six months ended June 30, 2008, an increase of 303% over revenues of $11.9 million for the six months ended June 30, 2007.  The increases we experienced in this period were the result of our organic growth at each operating subsidiary.  In addition, the growth reflects the acquisitions of Lushan in late 2007 and the 24 hog farms purchased in 2008.  We have effectively marketed our products through a team-based approach, sharing sales leads and referrals.

Critical Accounting Policies

In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the amounts reported therein. These estimates and assumptions are based on information available as of the date of the financial statements. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the quarter ended June 30, 2008 are not necessarily indicative of results that can be expected for the full year. Please refer to the section entitled “Critical Accounting Estimates and Assumptions” of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2007 for a discussion of our critical accounting estimates and assumptions. 

Recent Accounting Pronouncements

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed.  Management is currently evaluating the effect of this pronouncement on our financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” SFAS  141R changes how a reporting enterprise accounts for the acquisition of a business. SFAS 141R requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. Early adoption and retrospective application is prohibited.
 
29

 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which is an amendment of ARB No. 51.  SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  SFAS 160 changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest.  SFAS 160 is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Based on current conditions, we do not expect the adoption of SFAS 160 to have a significant impact on our results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133.” SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Based on current conditions, we do not expect the adoption of SFAS 161 to have a significant impact on our results of operations or financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. SFAS 162 will not have an impact on our financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 will not have an impact on our financial statements.

Results of Operations

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

   
Three Months Ended June 30,
 
$
 
%
 
   
2008
 
2007
 
Change
 
Change
 
Net revenue
 
$
35,635,327
 
$
6,891,153
   
28,744,174
   
417.1
%
Cost of revenue
   
24,600,502
   
4,881,227
   
19,719,275
   
404.0
%
Gross profit
   
11,034,825
   
2,009,926
   
9,024,899
   
449.0
%
Operating expenses
   
2,262,668
   
789,402
   
1,473,266
   
186.6
%
Interest and financing costs
   
4,312,559
   
20,956
   
4,291,603
   
20,479.1
%
Net income
   
3,921,513
   
1,461,002
   
2,460,511
   
168.4
%
 
30

 
Revenues.  The increase in revenues was due to an increase in the volume of feed products that we sold and the acquisition of 24 hog farms and one feed company.  The increase in feed product sales was a result of the expansion of our distribution channels through the opening of additional exclusive feed outlets.  We experienced favorable market conditions which increased the demand for our feed products.  A stronger “AgFeed” brand name allowed us to successfully pass two price increases on to our premix feed customers. Due to an anticipated rise in hog prices, we have kept our hogs longer than normal which has increased the weight of the hogs that bring a higher sales price.

Cost of Goods Sold. We experienced moderate increases in the unit cost of goods sold for both business segments during the three month period ended June 30, 2008 as compared to the same period in 2007. The cost of goods sold included costs on both premix feed and hog production. The cost of corn stayed relatively flat while soybean meal prices increased approximately 20% from the end of the first quarter of 2008.  These raw materials constitute approximately 70% of our raw material costs.  We are presently experiencing stable pricing in corn and declining prices in soybean meal.

Gross Profit.  Gross margins increased to 31.0% during the three months ended June 30, 2008 as compared to 29.2% for the same period last year.  The increase in gross margin can be attributed to several factors: (i) a stronger “AgFeed” brand name allowed us to increase the sale price of our premix feed; (ii) expanded product distribution channels allowed us to open up new markets and offer products at higher prices; (iii) our increased economies of scale in both feed segment and hog production produced lower overall raw materials input costs; (iv) long term contracts for key product ingredients entered into in early 2008 locked in favorable cost savings; and (v) we experienced higher gross margins from our hog production.

Selling, General and Administrative Expenses.  The increase in our selling, general and administrative expense reflects the addition of our new subsidiaries, which had approximately $950,000 in selling, general and administrative expenses during the three months ended June 30, 2008.  General and administrative expenses include overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting, legal and offices expenses.  Compared to the 2nd quarter in 2007, selling expenses for the period increased by 64.9% due to the 417% increase in revenues and the costs associated with entering markets in neighboring provinces, as well as the addition of our new subsidiaries.  We attempted to control our selling expenses through the use of strict cost controls and efficient use of our distribution channels.

Interest and Financing Costs. We incurred interest and financing costs of $4,312,559 during the three months ended June 30, 2008, principally as a result of the $19 million of convertible debentures issued during March 2008. During the three months ended June 30, 2007, $13.7 million of the convertible notes were converted into shares of common stock that resulted in accelerated amortization of the debt issuance costs and debts discounts amounting to $4,151,550 during the three months ended June 30, 2008. These are non-recurring charges.

Due to continued appreciation in RMB against the US dollar, we incurred a loss on foreign translation of $319,273 during the three months ended June 30, 2008, as we could not timely convert USD deposits into RMB as a result of bank policies and related banking rules in China. This is a one time, non-recurring charge.

As a result of Nanchang Best becoming a Sino Foreign Joint Venture due to an investment by a foreign investor in July 2006, Nanchang Best receives favorable tax status and is exempt from all income tax through July 14, 2008. Thereafter, Nanchang Best will pay a reduced rate of 15% for the next three years. Hog production is an income tax exempt sector in China and sow owners receive government grants and subsidies. Our feed manufacturing companies continue to benefit from government preferential tax policies.
 
31

 
Net Income.   The increase in our net income was due to higher sales and significant benefits from greater economies of scale in our business and increased operating efficiency as described above, offset by one time, non-operational related charges and interest expense associated with the $19 million of convertible note conversion by investors during the three months ended June 30, 2008. Hog production is an income tax exempt sector in China.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

   
Six Months Ended June 30,
 
$
 
%
 
   
2008
 
2007
 
Change
 
Change
 
Net revenue
 
$
47,782,411
 
$
11,869,448
   
35,912,963
   
302.6
%
Cost of revenue
   
33,314,625
   
8,316,316
   
24,998,309
   
300.6
%
Gross profit
   
14,467,786
   
3,553,132
   
10,914,654
   
307.2
%
Operating expenses
   
3,970,511
   
1,354,717
   
2,615,794
   
193.1
%
Interest and financing costs
   
4,639,201
   
63,605
   
4,575,596
   
7,193.8
%
Net income
   
4,840,810
   
2,240,183
   
2,600,627
   
116.1
%
 
Revenues.  The increase in revenues was due to an increase in the volume of feed products that we sold and the acquisition of 24 hog farms and one feed company.  The increase in feed product sales was a result of the expansion of our distribution channels through the opening of additional exclusive outlets.  We experienced favorable market conditions which increased the demand for our feed products.  Due to an anticipated rise in hog prices, we have kept our hogs longer than normal which has increased the weight of the hogs that bring a higher sales price.

While the increase in the average sales price of our blended products also contributed to our increase in revenues, this effect was offset by the decrease in the average sales price of our other products category.  Due to a strong “AgFeed” brand name, we were able to increase prices on premix feed products several times during the first six months.

Cost of Goods Sold. We experienced moderate increases in the unit cost of goods sold for both business segments, during the six month period ended June 30, 2008 compared to the same period in 2007. The cost of goods sold included costs on both premix feed and hog production. During the six month period ended June 30, 2008, the cost of corn increased approximately 15% and soybean meal prices increased approximately 45% compared to the same period in 2007. These raw materials constitute approximately 70% of our raw material costs.  We are presently experiencing flat pricing in corn and declining prices in soybean meal.

Gross Profit.  Gross margins increased to 30.3% during the six months ended June 30, 2008 as compared to 29.9% the same period last year.  The increase in gross margin can be attributed to several factors: (i) a stronger “AgFeed” brand name allowed us to increase the sale price for our premix feed during the second quarter of 2008; (ii) expanded product distribution channels allowed us to open up new markets and offer products at higher prices; (iii) our increased economies of scale in both feed segment and hog production produced lower overall raw materials input costs; (iv) long term contracts for key product ingredients entered into in early 2008 locked in favorable cost savings; and (v) we experienced higher gross margins from our hog production.
 
32

 
Selling, General and Administrative Expenses.   The increase in our selling, general and administrative expense also reflects the addition of our new subsidiaries, which had a total of approximately $1,392,000 in selling, general and administrative expenses during the six months ended June 30, 2008.  General and administrative expense includes overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting, legal and offices expenses.  Selling expenses for the period increased by 86.4% due to the 303% increase in revenues and the costs associated with entering markets in neighboring provinces, as well as the addition of our new subsidiaries. We attempt to control our selling expenses through the use of strict cost controls and efficient use of our distribution channels.

Interest and Financing Costs. We incurred interest and financing costs of $4,639,201 during the six months ended June 30, 2008, principally as a result of the $19 million of convertible debentures issued during February 2008. $13.7 million of the convertible notes were converted into shares of common stock during the second quarter of 2008, resulting in accelerated amortization of the debt issuance costs and debts discounts amounting to $4,335,382 during the six months ended June 30, 2008. These are non-recurring charges.

Due to continued appreciation in RMB against the USD, we incurred a loss on foreign translation of $543,746 during the six months ended June 30, 2008, as we could not timely convert USD deposits into RMB as a result of bank policies and banking rules in China. This was a one time, non-recurring charge.

As a result of Nanchang Best becoming a Sino Foreign Joint Venture due to an investment by a foreign investor in July 2006, Nanchang Best receives favorable tax status and is exempt from all income tax through July 14, 2008. Thereafter, Nanchang Best will pay a reduced rate of 15% for the next three years. Hog production is an income tax exempt sector in China and sow owners receive government grants and subsidies. Our feed manufacturing companies continue to benefit from government preferential tax policies.

Net Income.   The increase in our net income was due to higher sales and significant benefits from greater economies of scale in our business and increased operating efficiency as described above, offset by one time, non-operational charges and interest expense associated with the $19 million of convertible note conversion by investors during the three months ended June 30, 2008. We benefited from tax exempt status for our hog production business.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the six months ended June 30, 2008 that have, or are reasonably likely to have, a current or future affect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.

Liquidity and Capital Resources
 
Recent financing

At June 30, 2008, we had $31,267,717 cash and cash equivalents on hand.

On April 16, 2008, we entered into a Securities Purchase Agreement with institutional investors in connection with a registered direct offering of securities providing for the issuance of 625,000 shares of our common stock at price of $16.00 per share for aggregate gross proceeds of $10,000,000.
 
33

 
On April 22, 2008, we entered into Securities Purchase Agreements with institutional investors in connection with a registered direct offering of securities providing for the issuance of 1,322,836 shares of the Company’s Common Stock at price of $19.05 per share for aggregate gross proceeds of $25,200,026.

During first quarter of 2008, we completed our $41,000,000 financing.  We received aggregate gross proceeds of $22,000,032 through the sale of 2,444,448 shares of common stock at $9 per share.  We received aggregate proceeds of $19,000,000 through the issuance of three year convertible notes bearing interest at 7% per annum and convertible into common stock at $10 per share.  In connection with the convertible notes, we issued 380,000 warrants which are exercisable immediately and have a $10 strike price.  We paid commissions and fees of $3,432,670 related to the sale of shares and $1,716,666 related to the issuance of the convertible notes.

During the year ended December 31, 2007, we completed two private placement offerings of our securities.  Through the final closing of the first private placement offering on April 29, 2007, we received aggregate gross proceeds of $6,830,259 from the sale of an aggregate of 2,276,753 units to 37 accredited investors. Each unit was priced at $3.00 and represented one share of our common stock and a warrant to purchase eight percent of one share of common stock.  Accordingly, we issued an aggregate of 2,276,753 shares of our common stock and warrants to purchase an aggregate of 182,146 shares of our common stock to the 37 accredited investors who participated in this offering.  In connection with the private placement, fees of eight percent of the securities placed were paid in cash and a number of common stock purchase warrants equal to eight percent of the units placed were paid to participating dealers and one finder.  Accordingly, we paid $546,421 and issued warrants to purchase 182,141 shares of our common stock to the participating dealers and finder.  All of the common stock purchase warrants issued have a three-year term and have an initial exercise price of $5.00.  We received net proceeds from the private placement of $6,247,503, after deduction of the costs associated with the financing of $582,756.

On June 22, 2007, we completed a second private placement offering pursuant to which we sold 750,000 units at an offering price of $4.00 per unit for gross proceeds of $3,000,000.  Each unit sold consisted of one share of common stock and one warrant to purchase 25 percent of one share of common stock.  Accordingly, we issued 750,000 shares of our common stock and warrants to purchase 187,500 shares of our common stock to the one accredited investor that participated in this offering.  In connection with this private placement offering, a fee of eight percent of the securities placed was paid in cash and a number of common stock purchase warrants equal to eight percent of the units placed were paid to a finder.  Accordingly, we paid $240,000 in cash and issued warrants to purchase 60,000 shares of our common stock to the finder.  All stock purchase warrants are exercisable for a period of three years at an exercise price of $5.60 per share.  We received net proceeds from the private placement of $2,760,000, after deduction of costs associated with the financing.

As of June 30, 2008, we had no notes payable outstanding. The loans that were outstanding were paid in full during the second quarter of 2008.

During the six months ended June 30, 2008, we generated $4,513,467 of cash from our operating activities. The cash was generated was primarily due to net income of $4,840,810, non-cash expenses of $4,335,381 offset by an increase in operating assets, net of $5,646,206.

We used $50,968,203 in investing activities during the six month period ended June 30, 2008; of which $3,097,732 was for the acquisition of property and equipment, and $47,798,825 for the acquisition of the 24 hog farms and one feed company.

We received $69,526,414 in cash from financing activities.  During the six months ended June 30, 2008, we received $57,200,058 from the sale of our securities and paid $5,908,325 in offering costs. We also received $19,000,000 from the issuance of convertible notes and warrants, of which the Company paid $1,716,666 for the cost of issuing the convertible notes and warrants. In addition, warrants holders exercised 262,352 warrants resulting in gross proceeds to us of $2,061,760.
 
34

 
At June 30, 2008, our accounts receivable balance was approximately $8.3 million. There are no accounts receivable for hog sales as this is generally a cash business.

Our principal demands for liquidity are to increase capacity, raw materials purchase, sales distribution, and the possible acquisition of producing hog farms or joint ventures in our industry as opportunities present themselves, as well as general corporate purposes.  We anticipate that the amount of cash we have on hand as of the date of this report as well as the cash that we will generate from operations will satisfy these requirements.  We may seek additional funds from the capital markets as we identify additional acquisition candidates.

We expect all of our hog farm acquisitions to be immediately accretive to earnings.

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 cash investments.
 
The majority of the Company’s revenues and expenses were denominated primarily in RMB, the currency of the PRC.  There is no assurance that exchange rates between the RMB and the USD will remain stable. We do not engage in currency hedging. Inflation has not had a material impact on our business.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
As of June 30, 2008, we carried out an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) under the supervision and with the participation of our management, including Junhong Xiong, our Chief Executive Officer and Liangfan Yan, our Chief Financial Officer. Based upon that evaluation, Mr. Xiong and Mr. Yan concluded that our disclosure controls and procedures are effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure.
 
During the quarter ended June 30, 2008, there were no changes in our internal control over financial reporting that have materially affected our internal control over financial reporting.
 
35

 
Part II. OTHER INFORMATION

Item 1. Legal Proceedings

We know of no pending legal proceedings to which we are a party which are material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our consolidated financial position, results of operations or liquidity.
 
Item 1A.. Risk Factors

There have been no material changes from the disclosure provided in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.


None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

On June 3, 2008, the Company held its Annual Meeting of Stockholders at The TimesCenter Hall located at 242 West 41st Street, New York, New York 10018.  At the meeting, the following actions were taken:

 
1.
To elect five directors to hold office for a one-year term expiring at the annual meeting in 2009 and until their respective successors are elected and qualified:
 
 
For
 
Withheld
 
Songyan Li
   
14,947,931
   
2,300
 
Junhong Xiong
   
14,947,931
   
2,300
 
Lixiang Zhang
   
14,949,991
   
240
 
Frederic W. Rittereiser
   
14,949,993
   
238
 
Arnold Staloff
   
14,950,231
   
0
 
 
 
2.
To approve the Company's 2008 Long-Term Incentive Plan:
 
For:
   
11,884,295
 
Against:
   
63,738
 
Abstained:
   
7,070
 
Non Votes:
   
3,022,721
 

Item 5. Other Information

None.
 
36

 
Item 6.Exhibits 

Exhibit Number
 
Description of Exhibit
     
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
     
32.2
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).

37


SIGNATURES

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

 
AgFeed Industries, Inc.
 
 
 
 
 
 
August 11, 2008
By:  
/s/ Xiong Junhong
 
 
Xiong Junhong
Chief Executive Officer (Principal Executive Officer)
 
 
 
 
 
August 11, 2008
By:  
/s/ Liangfan Yan  
 
 
Liangfan Yan
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
38