CHINA ORGANIC AGRICULTURE, INC. - FORM 10-Q/A

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EX-32.1 - CERTIFICATION - CHINA ORGANIC AGRICULTURE, INC.	ex32-1.htm
EX-31.2 - CERTIFICATION - CHINA ORGANIC AGRICULTURE, INC.	ex31-2.htm
EX-32.2 - CERTIFICATION - CHINA ORGANIC AGRICULTURE, INC.	ex32-2.htm
EX-31.1 - CERTIFICATION - CHINA ORGANIC AGRICULTURE, INC.	ex31-1.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Amendment No. 3

|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008

|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to ________________

Commission file number 000-52430

CHINA ORGANIC AGRICULTURE, INC.

(Exact name of small business as specified in its charter)

Florida	20-3505071
(State or other jurisdiction of	(IRS Employer Identification Number)
incorporation or organization)

Dalian City, Zhongshan District, Youhao Road

Manhattan Building #1, Suite # 1511

Dalian City, Liaoning Province, P.R. China

(Address of principal executive offices)

707-709-2321

(Issuer's telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer (Do not check if a smaller reporting company) |_| Smaller reporting company |X|

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

Number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

73,157,232 shares of Common Stock, no par value per share, as of December 31, 2008.

EXPLANATORY NOTE

This amendment No. 3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2008 is being filed to include, in Part I, Item 1 (“Financial Statements”) further information regarding the Company's 2008 sale of its subsidiary Jilin Songyuan City ErMaPao Green Rice Ltd. ("ErMaPao"), and to amend Part I, Items 2 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and 4 (“Controls and Procedures”) and Part II, Item 6 (“Exhibits”).

                              TABLE OF CONTENTS

                                                                       Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Financial Statements.............................  6

Consolidated Balance Sheet as of September 30, 2008 and December 31, 2007 7
(unaudited)

Consolidated Statement of Operations for the three and nine month periods 
ended September 30, 2008 (unaudited) and September 30, 2007 (unaudited)   8

Consolidated Statement of Cash Flow for the nine month periods ended
September 30, 2008 (unaudited) and September 30, 2007 (unaudited)        9-10

Consolidated Statement of Stockholder Equity for the nine months ended
September 30, 2008 and the year ended December 31, 2007                   11

Notes to Condensed Consolidated Financial Statements .................  12-25

Item 2.   Management's Discussion and Analysis of Financial Condition
and Results of Operations ..............................................  26

Item 4T.  Controls and Procedures ......................................  33

PART II.  OTHER INFORMATION

Item 6.   Exhibits .....................................................  34

SIGNATURES .............................................................  35

Forward Looking Statements

The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. This report contains a number of forward-looking statements that reflect management's current views and expectations with respect to our business, strategies, future results and events and financial performance. All statements made in this Report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward looking statements. In particular, the words "believe," "expect," "intend," " anticipate," "estimate," "may," "will," variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking.

Readers should not place undue reliance on these forward-looking statements, which are based on management's current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below) and apply only as of the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

MORGENSTERN, SVOBODA, & BAER, CPA's, P.C.

CERTIFIED PUBLIC ACCOUNTANTS

40 Exchange Place, Suite 1820

New York, NY 10005

TEL: (212) 925-9490

FAX: (212) 226-9134

E-MAIL: MSBCPAS@GMAIL.COM

Board of Directors and Stockholders of

China Organic Agriculture, Inc.

We have reviewed the accompanying consolidated balance sheets of China Organic Agriculture, Inc. as of September 30, 2008 and the consolidated statements of operations for the three and nine months ended September 30, 2008 & 2007 and consolidated statements of cash flows and shareholders' equity for the nine months then ended. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of China Organic Agriculture, Inc. as of December 31, 2007 and the related consolidated statements of income, retained earnings and comprehensive income, and consolidated statements of cash flows for the year then ended; and in our report dated March 26, 2008, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Morgenstern, Svoboda & Baer, CPAs, P.C.

Certified Public Accountants

New York, NY

November 4, 2008

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

Item 1. Consolidated Balance Sheets

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED BALANCE SHEETS

Assets	9/30/2008 (Unaudited)		12/31/2007 (Audited)
Current Assets
Cash and cash equivalents	$	1,562,144	$	9,697,793
Accounts receivable, net		46,080,401		1,924,080
Inventory		-		3,176,034
Acquisition deposits		13,260,561		-
Consideration receivable		8,700,000		-
Other receivables and prepayments		2,163,317		355,010
Total Current Assets		71,766,423		15,152,917
Property, plant & equipment, net		14,453,360		1,505,783
Mortgage costs – net		145,663		-
Intangibles, net		-		3,304,776
Total Assets	$	86,365,446	$	19,963,476

Liabilities and Stockholders’ Equity
Current Liabilities
Mortgages payable – current	$	195,075	$	-
Accounts payable and accrued expenses		33,652,592		431,388
Due to related party		3,359,505		364,865
Taxes payable		3,335,751		114,807
Total Current Liabilities		40,542,923		911,060
Long term debt
Mortgages payable – net of current		8,212,858		-
Total Long-term debt		8,212,858		-

Total Liabilities	$	48,755,781	$	911,060

Stockholders' Equity
Preferred stock, no par value, $0.001 per share 20,000,000 shares authorized, none outstanding		-		-
Common stock, no par value, 1,000,000,000 shares authorized,73,157,232 and 51,548,776 issued and outstanding as at September 30, 2008 and December 31, 2007, respectively		7,648,410		733,704
Additional paid in capital		545,932		420,525
Statutory reserves		-		824,168
Other comprehensive income		2,589,753		602,498
Retained earnings		26,825,570		16,471,521
Total Stockholders' Equity		37,609,665		19,052,416
Total Liabilities and Stockholders' Equity	$	86,365,446	$	19,963,476

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

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	THREE MONTHS ENDED SEPTEMBER 30,					NINE MONTHS ENDED SEPTEMBER 30,
	2008			2007 (Restated)		2008			2007 (Restated)

Sales	$	46,454,286		$	-	$	53,913,511		$	-
Cost of sales		(35,326,386	)		-		(40,946,593	)		-
Gross profit		11,127,900			-		12,966,918			-

Selling, general and administrative expenses		(416,651	)		-		(1,579,854	)		-
Income from operations		10,711,249			-		11,387,064			-

Gain on debt conversion		432,169			-		432,169			-
Other income		180,964			-		269,014			-
Interest expense		(79,570	)		-		(380,422	)		-
Income from Continuing operations before income taxes		11,244,812			-		11,707,825			-

Provision for income taxes		(2,773,251	)		-		(3,222,007	)		-
Net income from Continuing operations		8,471,561			-		8,485,818			-
Discontinued operations
Income from ErMaPao, net of tax		93,880			7,228,015		934,037			9,627,675
Income due to disposal of ErMaPao, net of tax		934,194			-		934,194			-
Net income from Discontinued operations		1,028,074			7,228,015		1,868,231			9,627,675
Net Income	$	9,499,635		$	7,228,015	$	10,354,049		$	9,627,675
Basic and Diluted weighted average shares		57,655,514			51,548,776		53,599,214			45,083,771
Basic and Diluted Earnings per share of common stock:
Income from Continuing Operations	$	0.15		$	-	$	0.16		$	-
Income from Discontinued Operations		0.02			0.14		0.03			0.21
Total Basic and Diluted Earnings Per Share	$	0.17		$	0.14	$	0.19		$	0.21
Other Comprehensive Income:
Net Income	$	9,499,635		$	7,228,015	$	10,354,049		$	9,627,675
Foreign Currency
Translation Adjustment		1,128,843			7,551		1,987,255			51,094
Net Comprehensive Income	$	10,628,478		$	7,235,566	$	12,341,304		$	9,678,769

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

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	NINE MONTHS ENDED SEPTEMBER 30,
	2008			2007
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES
Net income from Continuing operations	$	8,485,818		$	9,627,675
Adjustments to reconcile net income to net cash provided by operating activities:
Net income from Discontinued operations		1,868,231			-
Gain on sale of ErMaPao		(934,194	)		-
Gain on debt conversion		(432,169	)		-
Stock based compensation		250,988			-
Depreciation and amortization		290,664			137,836
Effect of changes in assets and liabilities:
Accounts receivables		(43,307,234	)		(3,552,555	)
Inventory		2,088,045			(3,895,766	)
Trade deposits		(9,624	)		-
Acquisition deposit		(13,260,561	)		-
Other receivable and prepayment		(1,808,307	)		(673,972	)
Accounts payable and accrued expenses		32,178,847			(653,786	)
Taxes payable		3,137,334			(47,379	)
Net cash from (used by) Operating Activities		(11,452,162	)		942,053

CASH FLOWS USED BY INVESTING ACTIVITIES
Proceeds of sales, net of cash sold		(1,057,877	)		-
Purchase of property & equipment		(15,178,052	)		(344,845	)
Net cash used by Investing Activities		(16,235,929	)		(344,845	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of short term loans		-			2,056,529
Proceeds from mortgage payable, net of costs		8,515,000			-
Proceeds from related parties		10,341,515			-
Repayment of mortgage payable		(252,730	)		-
Net cash from Financing Activities		18,603,785			2,056,529
Effect of exchange rate changes on cash and cash equivalents		948,627			26,529
Net change in cash and cash equivalents		(8,135,679	)		2,680,432
Cash and cash equivalents, beginning balance		9,697,793			316,061
Cash and cash equivalents, ending balance	$	1,562,114		$	2,996,493

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	NINE MONTHS ENDED SEPTEMBER 30,
	2008		2007
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income tax payments	$	279,588		-
Interest payments	$	380,422		-

Non Cash Transaction
Debt converted to equity	$	7,346,875


Sale of ErMaPao:
Selling price	$	8,700,000		-
Book Value of ErMaPao’s Assets:
Cash		1,057,877		-
Other Assets		6,707,929		-
Total	$	7,765,806		-

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

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2007, AND THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (Unaudited)

	Common Stock				Additional Paid					Other
	Number of Shares		Amount		In Capital-contribution		Statutory Reserves			Comprehensive Income		Retained Earnings		Total Equity
Balance December 31, 2006		27,448,776	$	733,304	$	-	$	824,168		$	65,137	$	2,978,931	$	4,601,540
Issuance of Shares at merger		24,100,000		400		-		-			-		-		400
Foreign currency Translation adjustments		-		-		-		-			537,361		-		537,361
Net income for the year		-		-		-		-			-		13,492,590		13,492,590
Stock based compensation		-		-		420,525		-			-		-		420,525
Balance December 31, 2007		51,548,776	$	733,704	$	420,525	$	824,168		$	602,498	$	16,471,521	$	19,052,416

Foreign currency Translation adjustments		-		-		-		-			1,987,255		-		1,987,255
Debt conversion		21,608,456		6,914,706		-		-			-		-		6,914,706
Net income for the period ended 9/30/08		-		-		-		(824,168	)		-		10,354,049		9,529,881
Stock based compensation		-		-		125,407		-			-		-		125,407
Balance September 30, 2008		73,157,232	$	7,648,410	$	545,932	$	-		$	2,589,753	$	26,825,570	$	37,609,665

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

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

Note 1 – ORGANIZATION

China Organic Agriculture, Inc. (“CNOA” or “Company”) (formerly Industrial Electric Services, Inc. or “IESI”) was incorporated in August 2005, in the state of Florida. China Organic Agriculture, Ltd. (“COA”) was incorporated in August 2006 under the laws of the British Virgin Islands. Far East Wine Holding Group Ltd. (“FEW”) was incorporated in September 2008 under the laws of the British Virgin Islands. CNOA owns 100% of COA and FEW. Ankang Agriculture (Dalian) Co., Ltd. (“Ankang Dalian”) was founded in January 2008 under the laws of the People’s Republic of China (“PRC”). It is owned 100% by Hong Kong On Glory Investments Co., Ltd (“HK Ankang”). COA owns 100% of HK Ankang.

In November 2008, Xinbin Manchu Autonomous County Bellisimo Ice Wine Co., Ltd (“Ice Wine”) was incorporated under the laws of the PRC. Ankang Dalian holds 60% of the outstanding shares of Ice Wine.

On October 31, 2008, the Company completed the acquisition of 100% of the shares of Princeton International Investment Ltd. (“Princeton”), which owned 60% of the outstanding shares of Dalian Huiming Industry Ltd. (“Dalian Huiming”). Dalian Huiming was incorporated in July 2001 under the laws of the PRC and Princeton was incorporated in April 2008 under the laws of Hong Kong.

On September 25, 2008, the Company entered into an agreement with Bothven Investments Ltd. whereby the Company sold its subsidiary, Jilin Songyuan City ErMaPao Green Rice Ltd. (“ErMaPao”), to Bothven for $8.7 million. The sale was completed on October 7, 2008 with an effective date of September 30, 2008.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of CNOA and its wholly-owned subsidiaries, except that the financials do not include the activities of IESI that occurred prior to the reverse merger as discussed below. These have been prepared in conformity with accounting principles generally accepted in the United States of America and all material intercompany transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect the adjustments considered necessary for a fair presentation of the Company’s results as of September 30, 2008 and 2007, and for the period then ended.

On March 15, 2007, CNOA, through a reverse merger, issued 27,448,776 shares of stock in exchange for all the outstanding shares of COA. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination. Thus the share exchange is equivalent to the issuance of stock by COA for the net monetary assets of CNOA, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange was identical to that resulting from a reverse acquisition, except no goodwill was recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, CNOA, are those of the legal acquiree, COA, which is considered to be the accounting acquirer, and thus represent a continuation of the financial statements of COA. Share and per share amounts stated have been retroactively adjusted to reflect the merger.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Translation Adjustment

As of September 30, 2008 and December 31, 2007, the accounts of China Organic Agriculture, Inc. were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi. Such financial statements were translated into U.S. Dollars in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation” (“SFAS 52”), with the Chinese Yuan Renminbi as the functional currency. According to SFAS 52, all assets and liabilities were translated at the current exchange rate, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income,” as a component of shareholders’ equity. Transaction gains and losses are reflected in the income statement.

Use of Estimates

The preparation of financial statements in conformity with 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.

Risks and Uncertainties

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, disease and other natural events that could impact rice cultivation, limited operating history, foreign currency exchange rates and the volatility of public markets.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of CNOA and its subsidiaries, collectively referred to herein as the “Company”. These financial statements have been prepared in conformity with Generally Accepted Accounting Principles (“GAAP”) and all material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect the adjustments considered necessary for a fair presentation of the Company’s results as of September 30, 2008 and September 30, 2007, and for the periods then ended.

Reclassification

The Company determined that its unaudited consolidated statements of income for the three month and nine month periods ended September 30, 2008, included in its September 30, 2008 Quarterly Report on Form 10-Q (“2008 Third Quarter Form 10-Q”) failed to report the results of its Jilin Songyuan City ErMaPao Green Rice Ltd. subsidiary (“ErMaPao”) as a separate line item despite the fact that the subsidiary and its operations were disposed of as of the end of that quarter. The results of operations of ErMaPao were included in

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

the financial results of the Company generally, when they should have been disclosed as Discontinued operations on a separate line item. As a consequence, certain amounts in the consolidated cash flow statements included in the 2008 Third Quarter Form 10-Q related to the foregoing line item were misstated.

On April 29, 2009, the Company filed an amendment to the 2008 Third Quarter Form 10-Q in which it correctly accounted for the Discontinued operations.

Contingencies

Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

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 three months or less.

Accounts Receivable

The Company maintains reserves it judges are required 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. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis. There were no doubtful accounts as of September 30, 2008 and December 31, 2007.

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowances are made to reduce the inventories to market value, if lower. As of September 30, 2008 and December 31, 2007 inventory consisted of finished goods valued at zero and $1,212,104 respectively. Raw material inventories as of September 30, 2008 and December 31, 2007 are valued at zero and $1,963,930, respectively. Expenses that are included in inventory and in cost of sales include the cost of purchased product, fees paid to the

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

contractors, and any processing fees and packaging costs that may have been incurred in the preparation of the raw rice into the finished product.

Property, Plant & Equipment

Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred while additions, renewals and betterments are capitalized. When property, plant 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, plant and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

Real property	20-40 years
Machinery & equipment	5-10 years
Transportation equipment	5 years

Intangible Assets

In October 2005, the Company purchased land rights which expire in 2032. These intangible assets are amortized using the straight-line method over the term of the land rights. These land rights were sold effective as of September 30, 2008 as a component of ErMaPao’s operations. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented.

Long-Lived Assets

Effective January 1, 2002, the Company adopted 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. 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 September 30, 2008, there were no significant impairments of its long-lived assets.

Fair Value of Financial Instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities that qualify as financial instruments are a reasonable estimate of fair value.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin No. 104, "Revenue Recognition." Sales revenue is recognized at the date that our customers take delivery and title has passed of the product, when a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. The Company's products are not returnable.

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. As of September 30, 2008 and December 31, 2007, there were no differences between the tax bases of the Company’s assets and liabilities and their financial reported amounts.

Advertising Costs

The Company expenses advertising costs as incurred. For the three months and nine months ending September 30, 2008, advertising costs were $0 and $4,189, respectively.

Basic and Diluted Earnings per Share

Earnings per share are calculated in accordance with the SFAS No. 128, “Earnings per Share” (“SFAS 128”). The basic earnings per share are based upon the weighted average number of common shares outstanding. Dilutive earnings per share are based on the weighted average shares of the common stock outstanding adjusted for the impact of potentially dilutive securities outstanding. The warrants outstanding for the three and nine month periods ended September 30, 2008 were anti-dilutive and thus were not included in the computation of earnings per share for those periods.

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the Company’s operations are based upon the local currency. 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.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

institutions. The Company has a diversified base of customers in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts. As a consequence, the Company believes that its accounts receivable credit risk exposure beyond such allowance is limited.

Interim Financial Statements

It is suggested that these interim financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2007 audited financial statements. The results of operations for the periods ended September 30, 2008 and 2007 are not necessarily indicative of the operating results for the full year.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It 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 is effective for the Company's fiscal year beginning October 1, 2009. Management is currently evaluating the effect of this pronouncement on financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company has evaluated the effect of this pronouncement on financial statements and expects that it will not have an impact upon the Company’s financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009. SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. SFAS 161 is not currently applicable to the Company since the Company does not have derivative instruments or hedging activity.

On May 8, 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”), which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. With the issuance of SFAS 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature. The Company is currently assessing the impact of SFAS 162 on its financial position and results of operations.

Note 3 – ACQUISITION DEPOSITS

The Company has made a deposit of $10,642,609 to a bank account jointly controlled by it and the shareholders of Dalian Huiming Industry Ltd ("Dalian Huiming") in anticipation of closing the Company's previously announced acquisition of 60% of the shares of Dalian Huiming, as discussed in Note 11. In addition the Company has deposited approximately $2,617,952 with the Huanyatong Investment Co., Ltd. in anticipation of possible further investment and acquisition activity.

Note 4 – PROPERTY, PLANT & EQUIPMENT

As of September 30, 2008 and December 31, 2007, Property, plant & equipment consisted of the following:

	9/30/2008			12/31/2007

Construction in progress	$	-		$	793,557
Land		7,040,992			-
Real property		7,489,233			579,989
Machinery & equipment		36,827			285,959
Transportation equipment		-			61,302

Total		14,567,052			1,720,807
Accumulated depreciation		(113,692	)		(215,024	)
Net book value	$	14,453,360		$	1,505,783

During the nine month periods ending September 30, 2008 and September 30, 2007, depreciation expenses were $113,692 and $34,148, respectively. These periods include expenses of $55,864 and $34,148, respectively, of costs which pertain to Discontinued Operations.

On February 29, 2008, the Company purchased the assets of the Bellisimo Vineyard, a 153-acre operating vineyard located in Sonoma County, California, for $14,750,000. This purchase price was allocated to the following asset categories:

Real property	$	7,489,233
Land		7,040,992
Machinery, equipment & others		32,595
Sub-total	$	14,562,820
Agency expenses		187,180
Total	$	14,750,000

Pursuant to the criteria as set forth in EITF 98-3, Paragraph 6 and Article 11-01 of Regulation S-X, Paragraph (d)(1) & (d)(2), the Company has determined that this purchase was an acquisition of real estate.

Note 5 – INTANGIBLE ASSETS

As of September 30, 2008 and December 31, 2007, Intangible assets consisted of the following:

	9/30/2008		12/31/2007

Purchased land rights	$	-	$	3,613,293
Accumulated amortization		-		(308,517	)

Intangible assets	$	-	$	3,304,776

The Land use right was included in the assets sold as part of the sale of ErMaPao, and thus is not contained in the Company’s balance sheet as of September 30, 2008. The expenses for the nine month periods of 2008 and 2007 included $114,906 and $103,687, respectively, of costs which pertain to Discontinued Operations.

Note 6 - COMPENSATED ABSENCES

Regulation 45 of local labor law entitles employees to annual vacation leave after one year of service. In general, all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.

Note 7 – DUE TO RELATED PARTIES

The Company has become indebted to a shareholder, First Capital Limited, for advances made to third parties by First Capital Limited on behalf of the Company. As of September 30, 2008 and December 31, 2007, the Company owed $559,505 and $364,865 respectively to such shareholder. The amount is evidenced by a non-interest bearing promissory note payable upon demand.

The Company also owes $2,800,000 to a related party, Shenzhen Kaibite Network Technology Co., Ltd., a subsidiary of First Capital Limited. The amount is evidenced by a non-interest bearing promissory note payable upon demand.

Note 8 – MORTGAGES PAYABLE

As discussed in Note 4, in February 2008 the Company purchased the assets of the Bellisimo Vineyard. This acquisition was in part financed by a mortgage funded by Trans America Life insurance Company in the amount of $8,515,000. This mortgage is amortized monthly over a 20 year term, with an interest rate initially set at 7.70%, with rate adjustments every four years. The long-term and short-term amounts pertaining to this mortgage as of September 30, 2008 were $8,212,858 and $195,075, respectively.

Projected future payable is as follows:


2009	$195,075
2010	$210,636
2011	227,441
2012	245,585
2013	265,176
Thereafter	$7,264,020

Note 9 – NOTE PAYABLES – RELATED PARTY

On February 25, 2008, the Company obtained funding from Mr. Xirong Xu, shareholder and related party in the amount of $6,216,000 to assist in the financing of the purchase of the Bellisimo Vineyard.

On September 4, 2008, the Company issued 18,282,353 shares, representing approximately 25% of its outstanding common stock, to Mr. Xirong Xu in exchange for the surrender and cancellation of his promissory note in the principal amount of $6,216,000.

The conversion rate for the transaction, $0.32 per share, represents a slight premium to the 30 day average share price of the common stock, and thus resulted in a gain as follows:

	Shares and rate
Carrying value of the note			$	6,216,000
Common stock-shares issued		18,282,353
Common stock-conversion rate	$	0.32		5,850,353
Gain on debt conversion			$	365,647

On September 4, 2008, the Company issued 3,326,103 shares, representing approximately 4.5%, of its outstanding common stock, to a shareholder of the Company (First Capital Limited) in exchange for the surrender and cancellation of its promissory note in the principal amount of $1,130,875. The indebtedness evidenced by this note represents amounts advanced to pay accounts payable. The conversion rate for the transaction, $0.32 per share, represents a slight premium to the 30 day average share price of the common stock, and thus resulted in a gain as follows:

	Shares and rate
Carrying value of the note			$	1,130,875
Common stock-shares issued		3,326,103
Common stock-conversion rate	$	0.32		1,064,353
Gain on debt conversion			$	66,522

Mr. Xirong Xu and First Capital Limited are accredited investors within the meaning of Rule 501 (a) of Regulation D under the Securities Act. The shares were issued pursuant to exemptions from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, and in the case of Mr. Xirong Xu, Regulation S under the Securities Act.

Note 10 - INCOME TAXES

The Company is subject to the Income Tax Laws of the People's Republic of China ("PRC"). Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (EIT) is now at a statutory rate of 25%. Until December 31, 2007, the Company enjoyed an exemption from this tax because of its involvement, through ErMaPao’s operations, in agricultural production and in the PRC Urban Labor and Employment Services Program. As of January 1, 2008, a new tax policy became generally applicable to Chinese enterprises, and hence the Company, whereby the Company became liable for income taxes at the 25% rate. The Company thus accrued current taxes of $3,222,007 pertaining to the PRC taxes for the nine month period ending September 30, 2008.

	THREE MONTHS ENDED SEPTEMBER 30,					NINE MONTHS ENDED SEPTEMBER 30,
	2008			2007 (Restated)		2008			2007 (Restated)

Income from Continuing operations before income taxes		11,244,812			-		11,707,825			-

Provision for income taxes		(2,773,251	)		-		(3,222,007	)		-
Net income from Continuing operations		8,471,561			-		8,485,818			-

Note 11 - COMMITMENTS

The Company leases facilities and equipment under operating leases that have expired, but continue on a month to month basis. Rental expenses were $17,094 for the nine months ended September 30, 2008. The Company has no future minimum obligations as of September 30, 2008.

On September 29, 2008, the Company entered into a Share Purchase Agreement (the "Agreement") with Peng Huang, Xinbo Huang, and the Reilong Group (each a “Shareholder” and collectively the “Shareholders”), the Shareholders of all of the outstanding capital stock of Princeton International Investment Ltd. (“Princeton”), which owns 60% of Dalian Huiming Industry Ltd. ("Dalian Huiming") The Company had previously announced its intent to acquire 60% of the outstanding shares of Dalian Huiming and has been working to complete its due diligence and obtain the necessary governmental consents. Pursuant to the Agreement, in consideration of an aggregate of $10,642,609, each of the Shareholders will assign to the Company his or its shares of Princeton, which in the aggregate will represent 60% of the shares then outstanding in Dalian Huiming. See Note 17 for further discussion regarding this transaction.

Note 12 - STATUTORY RESERVE

In accordance with the laws and regulations of the PRC, 10% of the Company’s after-tax income is to be allocated to the statutory reserve fund until the balance reaches 50% of registered capital. The Statutory reserve fund is restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. The reserve is not transferable in the form of cash dividends, loans or advances. The reserve is therefore not commonly available for distribution except in liquidation. As of December 31, 2007, the Company had allocated $824,168 to these non-distributable reserve funds. As of December 31, 2007, the statutory reserve fund had exceeded 50% of registered capital and thus no further allocation was required. As this reserve pertained to ErMaPao, it was removed from the Company’s accounts as a result of the sale of ErMaPao.

Note 13 – PRODUCT MIX AND MAJOR CUSTOMERS

	NINE MONTHS ENDED SEPTEMBER 30,
Product Sold	2008		2007
Resale of Rice	$	46,432,729	$	-
Resale of Green Rice		7,480,782		-
Green Rice		-		23,469,386
Organic Rice		-		4,124,918
Rice Byproducts		-		1,209,906
Total	$	53,913,511	$	28,804,210

Green rice is rice that has been cultivated under certain standards established by the agricultural agencies of the PRC, including limits and restrictions on the use of synthetic fertilizers. Organic rice is rice produced to the highest of the "green food production environment quality standards." Plantation of such rice will have to occur on primitive land and should have no chemicals or any other non-natural additives in order to preserve the land for future farming.

The Company had two customers who accounted for more than 92% of revenues during the nine months ended September 30, 2008. Two customers accounted for more than 98% of the Company’s accounts receivable at September 30, 2008. Three vendors accounted almost 100% of accounts payable at September 30, 2008. Three vendors accounted for almost 100% of purchases for the period ending September 30, 2008.

Note 13 – PRODUCT MIX AND MAJOR CUSTOMERS (CONTINUED)

The Company had no customers who individually accounted for more than 10% of revenues during the nine months ended September 30, 2007. No customer accounted for more than 10% of the Company's accounts receivable at September 30, 2007.

Note 14 – STOCK WARRANTS, OPTIONS AND COMPENSATION

On February 6, 2008, the Company committed to issue warrants to its investor relations firm as part of a consulting agreement to purchase 1,000,000 shares of the Company's stock at a price of $1.39. The warrants were valued using the Black-Scholes option-pricing model which assumed 135% volatility, a term of the warrant of three years, a risk free rate of 3% and a dividend yield of 0%. These warrants can be exercised through the third anniversary of the date of the Agreement, and vest in 12 quarterly installments in equal amounts beginning in the second quarter of 2008. Based on the EITF 96-18, the consulting expense for these services pertaining to the issuance of these warrants is recognized on a straight line basis over the one year period of the related consulting contract, and the related expense for the nine months ended September 30, 2008 is $250,988.

Warrants Outstanding as of September 30, 2008:

	Total Warrants		Exercise Price
Outstanding, December 31, 2007		350,000	$	1.50
Granted on February 6, 2008		1,000,000	$	1.39
Exercised in 2007		-		-
Outstanding, September 2008		1,350,000	$	1.39-$1.50

The 350,000 warrants that were outstanding as of December 31, 2007 expire in April, 2009.

Note 15 – DISCONTINUED OPERATIONS

Effective as of September 30, 2008, the Company entered into a Stock Transfer Agreement with Bothven Investments Limited ("Bothven"), pursuant to which the Company agreed to sell to Bothven all of the shares of its subsidiary, Jilin Songyuan City ErMaPao Green Rice Limited ("ErMaPao"), for consideration of US $8,700,000.The shares are to be transferred to Bothven no later than October 30, 2008, and payment for the shares was to be made no later than December 29, 2008. Documentation of sale was completed on October 7, 2008, with the parties agreeing Bothven would have the economic burden or benefit of the business from the effective date of September 30, 2008. On March 18, 2009, Bothven and the Company signed the Extension Payment Agreement wherein it was agreed that Bothven would pay the Company the $8,700,000 in three installments of 30% by July 31, 2009, 30% by September 30, 2009 and 40% by October 31, 2009. The Company received all the payments on schedule.

Per FASB 144, the operations of ErMaPao are now presented as a Discontinued operation in the Statements of Operations and Cash Flows.

The gain on the sale of ErMaPao was as follows:

Consideration	$	8,700,000
Net book value of ErMaPao		(7,765,806)
Gain on disposal	$	934,194

The following table summarizes the operating results of the Discontinued Operations for the three and nine months ended September 30, 2008 and for the year ended December 31, 2007 respectively:

	Three Months Ended September 30,	Nine Months Ended September 30,	Twelve Months Ended December 31,
	2008	2008	2007
Sales	$771,481	$4,536,142	$44,500,003
Cost of sales	($559,737)	(2,977,670)	($29,452,694)
Gross profit	$211,744	$1,558,472	$15,047,309
Operating expenses	($86,925)	($314,713)	($1,554,719)
Income from discontinued operations before income tax	$124,819	$1,243,759	$13,492,590
Income tax	($30,938)	($309,722)	-
Net Income	$93,881	$934,037	$13,492,590

Note 16 – SEGMENT REPORTING

GAAP requires use of the management approach model for segment reporting. The management approach model is based on how a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

We operate in two business segments, agricultural products, which we acquire, trade and supply to users; and the wine production, for which we grow grapes and intend to act as an importer into Asia where we may also distribute wines and ice wines. As ErMaPao was the Company’s only operating segment in 2007, and as it is now classified as Discontinued operations, no segment table in the 2007 period is presented.

Three Months Ended September 30, 2008
		Agricultural products	Wine production (1)	Others (2)		Total
Sales, net	$	46,454,286	-	-	$	46,454,286
Cost of sales		(35,291,262)	-	-		(35,291,262)
Gross profit		11,163,024	-	-		11,163,024
Depreciation and amortization		(343)	(117,397)	-		(117,740)
Other income		-	180,964			180,964
Segment profit (loss)		10,559,443	(44,842)	196,648		10,711,249
Total assets		71,769,985	14,595,461	-		86,365,446
Expenditures for long term assets		278	-	-		278

Nine Months Ended September 30, 2008
		Agricultural products	Wine production (1)	Others (2)		Total
Sales, net	$	53,913,511	-	-	$	53,913,511
Cost of sales		(40,946,593)	-	-		(40,946,593)
Gross profit		12,966,918	-	-		12,966,918
Depreciation and amortization		(670)	(117,397)	-		(118,067)
Other income		-	(269,014)	-		(269,014)
Segment profit (loss)		12,298,254	(491,137)	(420,053)		11,387,064
Total assets		71,769,985	14,595,461	-		86,365,446
Expenditures for long term assets		4,232	15,173,820	-		15,178,052

(1) Other income and Segment profit (loss) of our wine segment pertain mainly to the Bellisimo Vineyard’s rental activities.

(2) Others included the warrant expenses, option expenses and CNOA corporate expenses.

Note 17 – SUBSEQUENT EVENTS

On October 7, 2008, the Company entered into a Stock Transfer Agreement with Bothven Investments Limited, pursuant to which the Company sold to Bothven all of the shares of its subsidiary, Jilin Songyuan City ErMaPao Green Rice Limited for US $8,700,000.

On October 15, 2008, the Company accepted the resignation of Huizhi Xiao as Chairman and Director of the Company, and appointed as his successor in both capacities the Company's Chief Executive Officer, Jinsong Li. There are no arrangements or understandings with any person pursuant to which Mr. Li was selected as a director of the Company.

On October 31, 2008, the Company closed its acquisition of Princeton, enabling the Company acquired 60% of the shares of Dalian Huiming, for the amount of $10,642,609.

On March 18, 2009, Bothven signed the Extension Payment Agreement with the Company wherein it was agreed that Bothven will pay the $8,700,000 due resulting from its purchase of ErMaPao in three installments of 30% in July 2009, 30% in September 2009 and 40% in October 2009. As of November 30, 2009, the Company received entire amount due of $8,700,000 on the sale of ErMaPao.

On December 21, 2009, China Organic Agriculture, Inc. (the “Company”), through Ankang Agriculture Co., Ltd., an indirect wholly owned subsidiary, entered into a stock purchase agreement to acquire 1,800,000 shares, representing approximately 60% of the capital stock, of Changbai Eco-Beverage Co., Ltd. (“Changbai”) from Mr. Hongjun Ma for $10,250,403 (70 Million RMB).

I tem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-Q. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that may cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Form 10-Q.

Overview

On March 15, 2007, China Organic Agriculture Inc. ("CNOA" or the "Company"), through a reverse merger, issued 27,448,776 shares of stock in exchange for all the outstanding shares of China Organic Agriculture Limited ("COA") which then owned Jilin Songyuan City ErMaPao Green Rice Ltd. (“ErMaPao”), an operating company engaged in growing, processing and distributing rice in China. Under accounting principles generally accepted in the United States, the share exchange was considered to be a capital transaction in substance, rather than a business combination. Thus the share exchange was equivalent to the issuance of stock by COA for the net monetary assets of CNOA, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange was identical to that resulting from a reverse acquisition, except no goodwill was recorded. Under reverse takeover accounting, the comparative historical financial statements issued after the acquisition of the legal acquirer, CNOA, are those of the legal acquiree, COA, which is considered to be the accounting acquirer, and thus represent a continuation of the financial statements of COA. Share and per share amounts stated have been retroactively adjusted to reflect the merger.

Until the sale of ErMaPao, which was effective as of September 30, 2008, the Company was mainly engaged in the business of the production, processing, sale, trading and distribution of agricultural products. Our products have been sold only within the People's Republic of China. As a result of the sale of ErMaPao, the Company no longer grows or produces rice. Rather, it is primarily engaged in the trading and wholesale distribution of rice and other agricultural products.

The Company now reports its operations under two segments. The first of these is agricultural products, which acquires trades and supplies these products to customers. The second segment is wine production, which grows grapes and intends to act as an importer to Asia. This segment consists of the operations of the Bellisimo Vineyards, a 153-acre vineyard located in Sonoma County, California, which we acquired on February 29, 2008. Bellisimo Vineyard has provided small quantities of Merlot, Chardonnay, and Cabernet Sauvignon grapes to wineries each year for both red and white wines.

The Company entered into a Share Purchase Agreement (the "Agreement") dated as of September 29, 2008, with Peng Huang, Xinbo Huang, and the Reilong Group (each a “Shareholder” and collectively the “Shareholders”), the Shareholders of all of the outstanding capital stock of Princeton International Investment Ltd. (“Princeton”), which owns 60% of Dalian Huiming Industry Ltd. ("Dalian Huiming"). The Company had previously announced its intent to acquire 60% of the outstanding shares of Dalian Huiming and has been working to complete its due diligence and obtain the necessary governmental consents. Pursuant to the Agreement, in consideration of an aggregate of US$10,642,609, each of the Shareholders will assign to the Company his or its shares of Princeton, which in the aggregate will represent 60% of the shares then outstanding in Dalian Huiming. See Note 11 in the attached Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-Q for further discussion regarding this transaction.

On June 10, 2008, the Company established a new subsidiary, Far East Wine Holding Group Limited. This subsidiary will represent the Company's initiative to import and distribute California wines within China. The formation of this subsidiary may assist the Company in its efforts to distribute wines in China.

On October 7, 2008, CNOA entered into a Stock Transfer Agreement with Bothven Investments Limited, pursuant to which, effective as of September 30, 2008, the Company sold to Bothven all of the shares of its subsidiary, Jilin Songyuan City ErMaPao Green Rice Limited for consideration of $8,700,000. The Stock Transfer Agreement is described in detail in the Report on Form 8-K filed by the Company on October 2, 2008, and incorporated herein by reference.

Result of Operations

The following tables present certain information from the consolidated statement of operations of China Organic Agriculture, Inc. for three month and nine month periods ended September 30, 2008 and 2007.

	THREE MONTHS ENDED			THREE MONTHS ENDED
	SEPTEMBER 30 2008			SEPTEMBER 30 2007 (Restated)		% of CHANGE
Net Sales		46,454,286			-		n/m*
Cost of Net Sales		(35,326,386	)		-		n/m*
Gross Profit		11,127,900			-		n/m*
General and Administrative Expenses		(416,651	)		-		n/m*
Income from operations		10,711,429					n/m*
Interest expenses		(79,570	)		-		n/m*
Other income		613,133			-		n/m*
Provision for income taxes		(2,773,251	)		-		n/m*
Net income from Continuing operations		8,471,561			-		n/m*
Net income from Discontinued operations		1,028,074			7,228,015		-86%
Net Income		9,499,635			7,228,015		31%
Basic and Diluted weighted
average shares		57,655,514			51,548,776		12%
Basic and Diluted Earnings per share of common stock:
Income from Continuing operations	$	0.15		$	-	$	n/m*
Income from Discontinued operations		0.02			0.14		n/m*
Total Basic and Diluted Earnings Per Share	$	0.17		$	0.14	$	21%

	NINE MONTHS ENDED			NINE MONTHS ENDED
	SEPTEMBER 30 2008			SEPTEMBER 30 2007 (Restated)		% of CHANGE
Net Sales	$	53,913,511		$	-		n/m*
Cost of Net Sales		(40,946,593	)		-		n/m*
Gross Profit		12,966,918			-		n/m*
General and Administrative Expenses		(1,579,854	)		-		n/m*
Income from operations		11,387,064			-		n/m*
Interest expenses		(380,422	)		-		n/m*
Other income		701,183			-		n/m*
Provision for income taxes		(3,222,007	)		-		n/m*
Net income from Continuing operations		8,485,818			-		n/m*
Net income from Discontinued operations		1,868,231			9,627,675		-81%
Net Income	$	10,354,049		$	9,627,675		8%
Basic and Diluted weighted
average shares		53,599,214			45,083,771		19%
Basic and Diluted Earnings per
share of common stock:
Income from Continuing
Operations	$	0.16		$	-		n/m*
Income from Discontinued
operations	$	0.03		$	0.21		n/m*
Total Basic and Diluted Earnings
Per Share	$	0.19		$	0.21		-10%

* Non-meaningful

Business Segment Information

We operate in two business segments, agricultural commodities, which we acquire, trade and supply to users; and the wine industry, for which we grow grapes and intend to act as an importer into Asia where we may also distribute wines and ice wines. ErMaPao has been sold and thus is treated as a Discontinued Operation and is no longer reported as a separate segment.

Three Months Ended September 30, 2008
		Agricultural products	Wine production(1)	Others (2)		Total
Sales, net	$	46,454,286	-	-	$	46,454,286
Cost of sales		(35,326,386)	-	-		(35,326,386)
Gross profit		11,127,900	-	-		11,127,900
Depreciation and amortization		(343)	(117,397)	-		(117,740)
Other income		-	180,964			180,964
Segment profit (loss)		10,559,443	(44,842)	196,648		10,711,249
Total assets		71,769,985	14,595,461	-		86,365,446
Expenditures for long term assets		278	-	-		278
Nine Months Ended September 30, 2008
		Agricultural products	Wine production (1)	Others(2)		Total
Sales, net	$	53,913,511	-	-	$	53,913,511
Cost of sales		(40,946,593)	-	-		(40,946,593)
Gross profit		12,966,918	-	-		12,966,918
Depreciation and amortization		(670)	(117,397)	-		(118,067)
Other income		-	(269,014)	-		(269,014)
Segment profit (loss)		12,298,254	(491,137)	(420,053)		11,387,064
Total assets		71,769,985	14,595,461	-		86,365,446
Expenditures for long term assets		4,232	15,173,820	-		15,178,052

(1) Other income and Segment profit (loss) of our wine segment pertain mainly to the Bellisimo Vineyard’s rental activities.

(2) Others included the warrant expenses, option expenses and CNOA corporate expenses.

Sales

Sales for the three months ending September 30, 2008 totaled $46,454,286. This is attributable mainly to the Company's change of its operational strategy. During the third quarter of 2008, most of the sales were generated by the Company's Agricultural products segment, reflecting the new initiative of purchasing rice from other rice producers and then reselling this rice to retailers and wholesalers. As the Agricultural products segment was established in 2008, there were no comparable sales in 2007.

There were no sales of grapes or wine during the first three quarters of this year as grapes will not be harvestable until after the end of the third quarter 2008. As the Bellisimo Vineyard was acquired in February of 2008, there are no comparable figures for 2007.

Gross Profit

The Company's gross profit for the three months ending September 30, 2008 was $11,127,900 (or 24% of revenue). The gross profit for the nine months ending September 30, 2008 was $12,966,918 (or 24% of revenue).

Selling, General and Administrative Expense

Selling, general and administrative expenses for the three months ending September 30, 2008 totaled $416,651 or approximately 0.90% of sales. Selling, general and administrative expenses for the nine months ending September 30, 2008 totaled $1,579,854 or approximately 2.93% of sales.

Interest Expense

Interest expenses were $79,570 and $380,422, respectively, for the three and nine month periods ending September 30, 2008. These expenses result from the debt incurred to finance the February 2008 acquisition of the Bellisimo Vineyard, which totals about $14.7 million.

Other Income

Other Income for the three and nine month periods ending September 30, 2008 represents gain on debt conversion in 2008 of $432,169, and the net benefit of the rental income pertaining to the Bellisimo vineyard.

Provision for Income Taxes

The Company's operations in the People's Republic of China (the "PRC") are governed by the income tax laws of the PRC. The Enterprise Income Tax to which it is subject to is now at a statutory rate of 25%. Until December 31, 2007, the Company enjoyed an exemption from this tax because of its participation in both agricultural production and in the PRC Urban Labor and Employment Services Program designed to encourage companies to increase their employment of target groups. Thus it did not record an expense for income taxes nor did it pay income taxes in 2007.

According to China's new tax policy, the Company no longer benefits from this tax exemption. For the three month and nine month periods ending September 30, 2008, the Company accrued $2,773,251 and $3,222,007 respectively in income taxes. The effective tax rates represented by these accruals are significantly higher than the statutory rate as expenses incurred in the US, including those pertaining to the Bellisimo Vineyard, are not deductible for PRC tax purposes.

Discontinued Operations

The Company discontinued reporting the operating results of ErMaPao as of September 30, 2008, the effective date of the sale of ErMaPao. The following table summarizes the operating results of the discontinued operations for the three month and nine month periods ended September 30, 2008 and 2007 respectively:

		Three Months		Three Months
		Ending September 30, 2008		Ending September 30, 2007
Sales	$	771,481	$	22,370,228
Cost of sales		(559,737)		(14,825,974)
Gross profit		211,744		7,544,254
Operating expenses		(86,925)		(318,441)
Income from Discontinued
operations before income tax		124,819		7,225,813
Other Income (Expense)				2,305
Interest income (Expense)				(103)
Income tax		(30,938)		-
Net Income from Discontinued
operations, net of tax	$	93,881	$	7,228,015

		Nine Months		Nine Months
		Ending September 30, 2008		Ending September 30, 2007
Sales	$	4,536,142	$	28,804,210
Cost of sales		(2,977,670		(18,676,637
Gross profit		1,558,472		10,127,573
Operating expenses		(314,713		(499,898
Income from Discontinued operation before income tax		1,243,759		9,627,675
Income tax		(309,722		-
Net Income	$	934,037	$	9,627,675

The ErMaPao segment had a significant decrease in sales of both green and organic rice this quarter, which together declined to $771,800 as compared to $22,370,228 in the third quarter of 2007. ErMaPao sales for the nine months ending September 30, 2008 totaled $4,536,142 compared to $28,804,210 for the nine months ending September 30, 2007. This decrease of $24,268,068, or approximately 84.4%, is due to the following reasons:

As the government was no longer providing a tax exemption to ErMaPao, certain orders were not accepted because of the reduced margin.

Heavy snows in early 2008 impacted rice sales in Northern China. Some suppliers of ErMaPao could not deliver the goods per sales orders.

The increasing shipping cost due to the location of ErMaPao made many long-term sales orders not worth to pursue.

Increased competition from other rice producers.

Net Income

Net income from continuing operations was $8,471,561 for the three months ending September 30, 2008 and $8,485,818 for the nine months ending September 30, 2008. Total Net income of the Company for the three months ended September 30 2008 was $9,499,635 compared to $7,228,015 for the same period of 2007. Total Net income was $10,354,049 for the nine months ended September 30, 2008, compared to Net income of $9,627,675 for the comparable 2007 period. The increase in total net income during the nine month period was largely due to the third quarter profit in agriculture products trading business.

Liquidity and Capital Resources

As of September 30, 2008, Cash and cash equivalents were $1,562,144, current assets totaled $71,766,423, and current liabilities were $40,542,923. Working capital at September 30, 2008 was $31,223,500, as compared to $9,898,496 as of September 30, 2007.

The components of the $8,135,679 decrease in cash and cash equivalents from $9,697,793 as of December 31, 2007 to $1,562,114 as of September 30, 2008 are reflected below.

Cash Flow

NINE MONTHS ENDED SEPTEMBER 30,

                                                         2008            2007
-------------------------------------------------------------------------------
Net cash provided (used) by operating activities    ($11,452,162)      $942,053
Net cash used by investing activities               ($16,235,929)     ($344,845)
Net cash provided by financing activities            $18,603,785     $2,056,529
Effects of exchange rates on cash                       $948,627        $26,529
===============================================================================
Net change in cash and cash equivalents              ($8,135,679)    $2,680,432

Net Cash Used by Operating Activities

During the nine months ended September 30, 2008, we had negative cash flow from operating activities of $11,452,162, primarily attributable to the increase in purchase deposits of approximately $13,260,561 relating to $10,642,609 deposited to a commonly controlled bank account with the Reilong Company for the acquisition of Dalian Huiming, with the remaining amount held by the Huanyatong Investment Company Ltd. for possible future acquisition activities. The higher account receivables of $43,307,234 were generated from the increase in the Company's revenues. These negative cash flow factors were partially offset by higher accounts payable and accrued expenses of $32,178,847 which resulted from higher levels of purchases, and higher taxes payable of $3,137,334.

Net Cash Used in Investing Activities

The Company used $16,235,929 in investing activities largely to purchase the property and equipment of the Bellisimo Vineyard during the first quarter of 2008 as discussed in Note 4 to the Consolidated Financial Statements.

Net Cash Provided by Financing Activities

During the first nine months of 2008, the Company obtained $18,603,785 from financing activities. In connection with the acquisition of the assets of Bellisimo Vineyard we incurred two debt obligations, the first being a mortgage in the amount of $8,515,000 for which we granted the lender a first lien on the Vineyard's assets. This debt bears interest at an initial rate of 7.7% per annum and a 20 year term. The second obligation is a note payable from a related party (a shareholder) of $6,216,000, which bore 4% annual interest over its five year term, with both principal and interest payable in February, 2013. This note was converted into 18,282,353 shares of our common stock on September 4, 2008. The Company also obtained $2,800,000 from a promissory note payable on demand from a related party,

We anticipate that our available funds and cash flows generated from operations will be sufficient to meet our anticipated on-going operating needs for the next twelve months. However, we may need to raise additional capital in order to fund any acquisitions and any large construction projects. We would expect to raise those funds through credit facilities obtained from lending institutions, the issuance of equity, or a combination of both. However, there can be no guarantee that we will be able to obtain such funding, whether through the issuance of debt or equity, on terms satisfactory to management and our board of directors.

Recent Accounting Pronouncements

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009. SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. SFAS 161 is not currently applicable to the Company since the Company does not have derivative instruments or hedging activity.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the "Evaluation"), under the supervision and with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls") as of September 30, 2008 pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls were not effective as of September 30, 2008. The primary deficiency in our disclosure controls and procedures is our failure to adopt written policies and procedures to direct our personnel to advise our management of events and information to enable them to make timely decisions regarding required disclosure. This deficiency is due, in part, to the lack of experience of our management personnel in China with the rules and regulations of the Securities and Exchange Commission and, more generally, western business procedures, and the failure of our personnel in China to timely communicate with the Company's representatives in the United States. This absence of procedures has resulted in a number of late filings and in the receipt by the Company of a number of requests for amendments and additional information from the Staff of the Securities and Exchange Commission.

During 2008, the Company engaged within the US an individual familiar with the requirements of US securities laws and accounting regulations. This individual was engaged as a consultant, and coordinated between the Company's Chinese representatives and its counsel and accountants in the United States. He also provided us with procedures intended to heighten management's awareness of the need to comply with US securities laws and thereby improve our disclosure controls and procedures. In addition, we have engaged an individual in the US familiar with public accounting and the controls and procedures needed by a public company to advise us as we upgrade our internal controls. In December 2009 we engaged an individual to help establish a systematic approach we can follow to establish appropriate controls and procedures throughout our company. The Company is in the early stages of preparing an internal control matrix to document its controls and procedures which it plans to utilize to test the effectiveness of its controls and procedures. We have not completed all steps necessary to insure that our disclosure controls and procedures are effective. Our efforts to adopt and implement appropriate disclosure controls and procedures are ongoing and are intended to ensure that we have appropriate disclosure controls and procedures by the end of 2010.

As a result of the deficiencies in certain of its filings under the Exchange Act which we are in the process of rectifying, the Company is not considered to be current in its Exchange Act reporting.

As a result of its not being timely in its Exchange Act reporting, the Company will not be permitted to register its securities on certain Forms of registration statements until the Company is deemed timely in its Exchange Act reporting and satisfies all other criteria necessary for such registration statements. Until such time, the Company's shareholders will also be prevented from utilizing the provisions of Rule 144 to facilitate the sale of the Company's restricted stock.

Changes in Internal Controls Over Financial Reporting

During the fiscal quarter ended September 30, 2008, there were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II--OTHER INFORMATION

Item 6. Exhibits

The following exhibits are filed as part of this report:

Exhibit No. Description of Exhibit

10.1 -- Share Purchase Agreement, Dalian Huiming Industry Limited*

10.2 -- Stock Transfer Agreement, Bothven Investments Limited*

31.1 -- Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2 -- Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1 -- Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2 -- Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

* Incorporated by reference to Registrants' Current Report on Form 8-K filed October 2, 2008.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA ORGANIC AGRICULTURE, INC.

Dated: January 27, 2010	By:	/s/ Jinsong Li
		Jinsong Li
		Chief Executive Officer (principal executive officer)

EXHIBIT INDEX

Exhibit No. Description of Exhibit

10.1 -- Share Purchase Agreement, Dalian Huiming Industry Limited*

10.2 -- Stock Transfer Agreement, Bothven Investments Limited*

31.1 -- Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2 -- Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1 -- Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2 -- Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

* Incorporated by reference to Registrants' Current Report on Form 8-K filed October 2, 2008.

Attached files

CHINA ORGANIC AGRICULTURE, INC. Reports

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