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EX-32.1 - AgFeed Industries, Inc.v192937_ex32-1.htm
EX-32.2 - AgFeed Industries, Inc.v192937_ex32-2.htm
EX-31.1 - AgFeed Industries, Inc.v192937_ex31-1.htm
EX-31.2 - AgFeed Industries, Inc.v192937_ex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2010
 
o
Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ___________ to ___________
 
001-33674
(Commission file number)
 
AGFEED INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
20-2597168
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer 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)
 
(Zip Code)

(86) 0791-6669093
(Registrant’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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o
 
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  o
Accelerated filer x
Non-accelerated filer  o
Smaller reporting company o
(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
 
On August 9, 2010, 50,046,759 shares of the registrant's common stock were outstanding.
 



 
TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION
    3  
Item 1.
Financial Statements
    3  
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    20  
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    31  
Item 4.
Controls and Procedures
    32  
Part II.
OTHER INFORMATION
    32  
Item 1.
Legal Proceedings
    32  
Item 1A.
Risk Factors
    33  
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    33  
Item 3.
Defaults Upon Senior Securities
    33  
Item 4.
(Removed and Reserved)
    33  
Item 5.
Other Information
    33  
Item 6.
Exhibits
    33  
SIGNATURES
 
    34  

 
2

 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 24,027,490     $ 37,580,154  
Accounts receivable, net of allowance for doubtful accounts of $609,980 and $415,765
    17,415,553       14,397,793  
Advances to suppliers
    289,829       1,173,941  
Other receivables
    1,820,684       2,186,643  
Inventory
    27,287,750       23,835,412  
Prepaid expenses
    1,388,865       1,325,150  
Debt issue costs
    19,785       34,706  
 
               
Total current assets
    72,249,956       80,533,799  
                 
PROPERTY AND EQUIPMENT, net
    33,913,168       26,991,851  
CONSTRUCTION-IN-PROCESS
    5,595,137       7,615,132  
INTANGIBLE ASSETS, net
    43,944,086       43,808,499  
OTHER ASSETS
    7,149,532       3,998,739  
 
               
TOTAL ASSETS
  $ 162,851,879     $ 162,948,020  
 
               
LIABILITIES AND EQUITY
               
 
               
CURRENT LIABILITIES:
               
Short-term loan
  $ 4,419,000     $ 4,401,000  
Accounts payable
    6,800,705       6,162,385  
Other payables
    2,282,587       1,892,858  
Unearned revenue
    328,855       582,266  
Accrued expenses
    144,092       83,649  
Accrued payroll
    734,515       975,485  
Tax and welfare payable
    472,577       396,370  
Interest payable
    155,614       120,419  
Convertible notes, net of discount of $46,561
    953,439       -  
 
               
Total current liabilities
    16,291,384       14,614,432  
 
               
CONVERTIBLE NOTES, net of debt discount of $81,675
    -       918,325  
 
               
TOTAL LIABILITIES
    16,291,384       15,532,757  
 
               
COMMITMENTS AND CONTINGENCIES (Note 10)
    -       -  
 
               
EQUITY:
               
AgFeed stockholders' equity:
               
               
Common stock, $0.001 per share; 75,000,000 shares authorized; 45,420,558 issued and 45,053,263 outstanding at June 30, 2010  44,510,558 issued and 44,143,263 outstanding at December 31, 2009
    45,421       44,511  
Additional paid-in capital
    112,903,436       109,281,086  
Deferred compensation
    (3,086,560 )     -  
Other comprehensive income
    4,475,896       4,176,450  
Statutory reserve
    5,207,997       4,685,115  
Treasury stock (367,295 shares)
    (1,811,746 )     (1,811,746 )
Retained earnings
    28,800,347       31,210,563  
Total AgFeed stockholders' equity
    146,534,791       147,585,979  
Noncontrolling interest (deficit)
    25,704       (170,716 )
Total equity
    146,560,495       147,415,263  
 
               
TOTAL LIABILITIES AND EQUITY
  $ 162,851,879     $ 162,948,020  

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

 
3

 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
                         
Revenues
  $ 37,661,955     $ 38,527,770     $ 90,521,022     $ 71,957,044  
                                 
Cost of goods sold
    35,102,677       33,306,111       81,642,462       60,931,980  
                                 
Gross profit
    2,559,278       5,221,659       8,878,560       11,025,064  
                                 
Operating expenses
                               
Selling expenses
    983,317       999,342       2,013,940       1,863,209  
General and administrative expenses
    3,508,696       1,960,520       7,173,081       3,717,692  
Total operating expenses
    4,492,013       2,959,862       9,187,021       5,580,901  
                                 
Income (loss) from operations
    (1,932,735 )     2,261,797       (308,461 )     5,444,163  
                                 
Non-operating income (expense):
                               
Other expense
    (354,534 )     (189,205 )     (450,907 )     3,476  
Interest income
    38,062       52,554       86,073       113,116  
Interest and financing costs
    (139,930 )     (624,514 )     (264,841 )     (777,428 )
Foreign currency transaction gain (loss)
    (34,437 )     5,133       (20,634 )     3,302  
                                 
Total non-operating expense
    (490,839 )     (756,032 )     (650,309 )     (657,534 )
                                 
Income (loss) before provision for income taxes
    (2,423,574 )     1,505,765       (958,770 )     4,786,629  
                                 
Provision for income taxes
    641,139       285,958       1,094,719       501,508  
                                 
Net income (loss) including noncontrolling interest
    (3,064,713 )     1,219,807       (2,053,489 )     4,285,121  
                                 
Less: Net income (loss) attributed to noncontrolling interest
    (109,961 )     (6,445 )     (166,155 )     40,029  
                                 
Net income (loss) attributed to AgFeed
    (2,954,752 )     1,226,252       (1,887,334 )     4,245,092  
                                 
Other comprehensive income (loss)
                               
Foreign currency translation gain (loss)
    298,682       5,953       299,446       (147,901 )
                                 
Comprehensive Income (loss)
  $ (2,656,070 )   $ 1,232,205     $ (1,587,888 )   $ 4,097,191  
                                 
Weighted average shares outstanding :
                               
Basic
    45,015,351       39,549,944       44,942,821       38,746,009  
Diluted
    45,015,351       41,446,344       44,942,821       39,581,891  
                                 
Earnings (loss) per share attributed to AgFeed common stockholders:
                               
Basic
  $ (0.07 )   $ 0.03     $ (0.04 )   $ 0.11  
Diluted
  $ (0.07 )   $ 0.03     $ (0.04 )   $ 0.11  

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

 
4

 

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended June 30,
 
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss) including noncontrolling interest
  $ (2,053,489 )   $ 4,285,121  
Adjustments to reconcile net income (loss) including noncontrolling interest to net cash provided by (used in) operating activities:
               
Depreciation
    1,575,933       1,282,959  
Amortization
    43,410       38,779  
Loss on disposal of assets
    1,321,838       524,409  
Stock based compensation
    150,562       282,497  
Issuance of common stock for services
    751,440       -  
Amortization of debt issuance costs
    14,921       196,348  
Amortization of discount on convertible debt
    35,114       462,073  
(Increase) / decrease in assets:
               
Accounts receivable
    (2,945,382 )     (5,163,082 )
Other receivables
    618,255       1,530,631  
Inventory
    (3,340,955 )     (1,932,432 )
Advances to suppliers
    885,238       (171,112 )
Prepaid expenses
    (59,691 )     (186,209 )
Other assets
    -       139,541  
Increase / (decrease) in current liabilities:
               
Accounts payable
    610,581       1,150,362  
Other payables
    (137,439 )     (2,011,532 )
Unearned revenue
    (254,731 )     (57,926 )
Accrued expenses
    58,106       138,378  
Accrued payroll
    (243,862 )     (155,514 )
Tax and welfare payable
    74,277       (182,459 )
Interest payable
    35,195       (36,497 )
 
               
Net cash provided by (used in) operating activities
    (2,860,679 )     134,335  
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases/deposits for property and equipment
    (10,759,297 )     (6,336,942 )
Purchase of intangible assets
    -       (35,309 )
Cash paid for purchase of subsidiaries
    -       (1,266,374 )
Cash from the sale of subsidiary
    -       307,650  
 
               
Net cash used in investing activities
    (10,759,297 )     (7,330,975 )
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from the sale of common stock
    -       10,000,000  
Offering costs paid
    -       (1,380,720 )
Proceeds from short-term loans
    -       4,541,500  
Capital contributed by noncontrolling interest holders
    401,282       118,664  
Purchase of noncontrolling interest in majority owed hog farms
    (406,103 )     -  
 
               
Net cash provided by (used in) financing activities
    (4,821 )     13,279,444  
 
               
Effect of exchange rate changes on cash and cash equivalents
    72,133       (10,101 )
 
               
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
    (13,552,664 )     6,072,703  
 
               
CASH & CASH EQUIVALENTS, BEGINNING BALANCE
    37,580,154       24,839,378  
 
               
CASH & CASH EQUIVALENTS, ENDING BALANCE
  $ 24,027,490     $ 30,912,081  
 
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Interest paid
  $ 204,969     $ 147,982  
Income taxes paid
  $ 492,843     $ 416,012  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5


AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
Note 1 - Organization and Basis of Presentation
 
The unaudited consolidated financial statements were prepared by AgFeed Industries, Inc. pursuant to the rules and regulations of the Securities and 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 (“US GAAP”) were 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 for the year ended December 31, 2009.  The results for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.
 
Organization and Lines 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.
 
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. The Company operates production plants in Nanchang, Shanghai, Nanning, Shandong, and Hainan provinces.  The Company sells to distributors and large-scale swine farms.  The Company is also engaged in the business of raising, breeding and selling hogs for use in China's pork production and hog breeding markets through two breeder farms and 29 meat hog producing farms located in Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces.
 
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 US GAAP. 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").
 
Noncontrolling Interest
 
In 2008, the Company purchased interests in 29 producing hog farms and one feed company ranging from 55% to 100% (The Company subsequently purchased the noncontrolling interest in certain of these hog farms).  
 
Certain amounts presented for prior periods previously designated as minority interest have been reclassified to conform to the current year presentation. Effective January 1, 2009, the Company adopted Financial Accounting Standards (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which established new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability (as was previously the case), that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements. The provisions of the standard were applied to all NCIs prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented.
 
6

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
The net income (loss) attributed to the NCI was been separately designated in the accompanying statements of income and other comprehensive income. Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
 
Foreign Currency Translation
 
The accounts of the Company’s Chinese subsidiaries are maintained in RMB and the accounts of the U.S. parent company are maintained in USD. The accounts of the Chinese subsidiaries were translated into USD in accordance with Accounting Standards Codification (“ASC”) Topic 830 “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiaries. According to Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income.
 
Note 2 – Summary of Significant Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with US GAAP 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.
 
Reclassification
 
Certain prior period amounts were reclassified to conform to the current 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 three 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 purchases of material. The advances are interest free and unsecured.
 
7

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
Inventory
 
Inventory is stated at the lower of cost, as determined by weighted-average method, or market. Management compares the cost of inventories with their market value, and an allowance is made for writing down the inventories to their market value, if lower. Costs of raised animals include proportionate costs of breeding, including depreciation of the breeding herd, plus the costs of maintenance through the balance sheet date. Purchased pigs are carried at purchase cost plus costs of maintenance through the balance sheet date.
 
Inventory consisted of the following at June 30, 2010 and December 31, 2009:

   
June 30,
   
December 31,
 
   
2010
   
2009
 
         
(audited)
 
Raw material
  $ 7,754,572     $ 7,638,999  
Work in Process
    143,833       84,494  
Finished Goods - feed
    922,754       460,349  
Finished Goods - hogs
    18,771,927       15,703,127  
      27,593,086       23,886,969  
Less: reserve for obsolescence
    (305,336 )     (51,557 )
    $ 27,287,750     $ 23,835,412  

Property & Equipment
 
Property and equipment are stated at cost. Expenditures for maintenance and repairs are expensed 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
Swine for reproduction
 
3.5 years
Buildings
 
20 years

The following are the details of property and equipment at June 30, 2010 and December 31, 2009:

   
June 30,
   
December 31,
 
   
2010
   
2009
 
         
(audited)
 
Office equipment
  $ 550,125     $ 525,991  
Operating equipment
    8,164,330       4,655,298  
Vehicles
    950,845       871,058  
Swines for reproduction
    13,410,505       13,432,353  
Buildings
    16,129,584       11,659,693  
Total
    39,205,389       31,144,393  
                 
Less accumulated depreciation
    (5,292,221 )     (4,152,542 )
                 
    $ 33,913,168     $ 26,991,851  

Construction-in-Process
 
Construction-in-process consists of amounts expended for building construction. Once building construction is completed, the cost accumulated in construction-in-process is transferred to property and equipment.
 
Long-Lived Assets
 
The Company applies the provisions of ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 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 value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of June 30, 2010 and December 31, 2009, there was no significant impairment of its long-lived assets.
 
Intangible Assets
 
The following are the details of intangible assets at June 30, 2010 and December 31, 2009:

   
June 30,
   
December 31,
 
   
2010
   
2009
 
         
(audited)
 
Right to use land
  $ 771,092     $ 825,007  
Customer list
    294,600       293,400  
Computer software
    222,732       159,894  
Intangible related to hog farm acquisitions
    42,919,071       42,744,247  
Total
    44,207,495       44,022,548  
                 
Less Accumulated amortization
    (263,409 )     (214,049 )
                 
Intangibles, net
  $ 43,944,086     $ 43,808,499  

Per the People's Republic of China's (“PRC”) governmental regulations, the PRC Government owns all Chinese land. The Company leases land per real estate contracts with the government of the PRC for periods of 30 to 50 years. Accordingly, the right to use land for these feed companies is amortized over 50 years or the lease term, if shorter, and the computer software is amortized over three to nine years. For hog farms, the Company generally signed land leases 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 collectability 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.
 
9

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
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, 2010 and 2009 were not significant.
 
Research and Development
 
The Company expenses its research and development costs as incurred. Research and development costs for the three and six months ended June 30, 2010 and 2009 were not significant.
 
Stock-Based Compensation
 
The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. 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 210,000 options outstanding as of June 30, 2010.
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.
 
Foreign Currency Transactions and Comprehensive Income
 
US GAAP requires 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’s Chinese subsidiaries is the RMB. The unit of Renminbi is in Yuan. Translation gains are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.
 
Basic and Diluted Earnings (Loss) Per Share
 
Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.” 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 warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, 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.
 
10

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings (loss) per share computations for the three and six months ended June 30, 2010 and 2009:

Three months ended June 30,
 
2010
   
2009
 
         
Per Share
         
Per Share
 
   
Shares
   
Amount
   
Shares
   
Amount
 
Basic earnings (loss) per share
    45,015,351     $ (0.07 )     39,549,994     $ 0.03  
Effect of dilutive stock options and warrants
    -       -       1,896,400       -  
Diluted earnings (loss) per share
    45,015,351     $ (0.07 )     41,446,344     $ 0.03  


Six months ended June 30,
 
2010
   
2009
 
         
Per Share
         
Per Share
 
   
Shares
   
Amount
   
Shares
   
Amount
 
Basic earnings (loss) per share
    44,942,821     $ (0.04 )     38,746,009     $ 0.11  
Effect of dilutive stock options and warrants
    -       -       835,882       -  
Diluted earnings (loss) per share
    44,942,821     $ (0.04 )     39,581,891     $ 0.11  

Statement of Cash Flows
 
In accordance ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
 
Segment Reporting
 
ASC Topic 280, “Segment Report,” 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 determined it has two reportable segments (See Note 9).  The Company had previously reported its feed operations as three separate segments since the three operations were located in different Provinces.  The Company determined its feed operations should be reported as one segment.
 
11

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
Fair Value of Financial Instruments
 
For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, advances to suppliers, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. In addition, the Company has long-term debt with financial institutions. The carrying amounts of the line of credit and other long-term liabilities approximate their fair values based on current rates of interest for instruments with similar characteristics.
 
 
 
·
Level 1 inputs to the valuation methodology are quoted prices 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.
 
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.
 
As of June 30, 2010 and December 31, 2009, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.
 
 
On July 1, 2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC registrants, guidance issued by the SEC. The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC. The Codification is amended to effect non-SEC changes to authoritative GAAP. Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Consolidated Financial Statements.
 
On February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of US GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
 
12

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010-17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update on January 1, 2011.
 
Note 3 – Convertible Notes and Warrants
 
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 (collectively the “Investors”) in connection with a private placement providing for, among other things, the issuance of senior convertible notes (the “Notes”) for $19 million and warrants (the “Warrants”) to purchase up to 380,000 shares of the Company’s common stock $0.001 par value per share. The Notes mature on February 25, 2011, bear interest at 7% 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.  Due to the Company not generating $30 million net income for the year ended December 31, 2008, the conversion price on the Notes was reduced to $5.00. Due to the re-pricing of the conversion price, the Company recorded financing cost of $267,748 during the year ended December 31, 2008 which represented the difference between the fair value of the conversion feature at a $5.00 conversion price and the original $10.00 conversion price. The fair value was determined by using the Black-Scholes pricing model with the following assumptions: expected life of 2.2 years, a risk free interest rate of 2.0%, a dividend yield of 0% and volatility of 102%.
 
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 Investors on February 25, 2008, the Company paid $1,716,666 in debt issuance cost which is amortized over the life of the Notes. For the three and six months ended June 30, 2010 and 2009, the Company amortized $7,502 and $14,921 and $168,155 and $196,348, 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 no conversion may be made if, after giving effect to the conversion, an Investor would own over 9.99% of the Company’s outstanding shares of common stock. In addition, the Notes provide no conversion may be made if the conversion would cause the Company to 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 are immediately exercisable, expire on February 25, 2011 and entitle their holders to purchase up to $3,800,000 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. Due to the Company not generating $30 million net income for the year ended December 31, 2008, the exercise price on the Warrants was reduced to $5.00. Due to the re-pricing of the exercise price, the Company recorded financing cost of $22,782 in 2008 which represented the difference between the fair value of the $5.00 exercise price and the original $10.00 exercise price. The fair value was determined by using the Black-Scholes pricing model with the following assumptions: expected life of 2.2 years, a risk free interest rate of 2.0%, a dividend yield of 0% and volatility of 102%.
 
13

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
The Warrants contain certain limitations on exercise. For example, they provide that no exercise may be made if, after giving effect to the exercise, an Investor would own over 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 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, 2010 and 2009, the Company amortized $17,654 and $34,114 and $395,724 and $462,072, respectively, of the aforesaid discounts as interest and financing costs in the accompanying consolidated statements of operations.
 
During the years ended December 31, 2009 and 2008, $2,800,000 and $15,200,000, respectively, of the Notes were converted into 560,000 and 1,520,000, respectively, shares of common stock.
 
Note 4 – Short-Term Loans
 
Short term loans at June 30, 2010 and December 31, 2009 are follows:

   
June 30,
   
December 31,
 
   
2010
   
2009
 
         
(audited)
 
Short term bank loan payable to Shanghai Pudong Development Bank.  The loan accrues interest at 5.84%.  The note was renewed in May 2010 and is due May 4, 2011.  The loan is collateralized by buildings and land use
  $ 4,419,000     $ 4,401,000  
 
Note 5 – Stockholders’ Equity
 
Common Stock
 
On January 4, 2010, the Company approved grants of 760,000 shares of restricted stock to certain officers, directors and key employees.  The restricted stock awards have vesting schedules ranging from 1 to 3 years.  The value of the awards granted was $3,838,000 which was calculated using the fair market value of the Company’s stock price at the date of grant.  This amount is being expensed over the vesting period as the restrictions lapse.  The expense recognized during the three and six months ended June 30, 2010 was $375,720 and $751,440, respectively.  The amount that has not been expensed is shown as deferred compensation as a contra-equity account in the accompanying consolidated balance sheet.
 
On April 23, 2010, the Company issued 150,000 shares of its common stock to Southridge for Southridge’s surrender of its existing warrant to purchase 400,000 shares of the Company’s common stock.  The warrant was subsequently cancelled by the Company.  The warrant and common stock issued to Southridge were related to equity financing; therefore the charge related to the value of these equity instruments was recorded to additional paid-in capital.
 
14

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
Equity Credit Agreement
 
On September 9, 2009, the Company entered into an Equity Credit Agreement with Southridge Partners II, LP (“Southridge”), which was amended and restated as of November 9, 2009, providing for, among other things, the issuance of shares of its common stock at any time and from time to time during the next two years for gross proceeds of up to $50,000,000. In connection with the closing of the transaction, the Company also issued Southridge a warrant to purchase an additional 400,000 shares of its common stock during a five year period at an exercise price of $5.75 per share.  The fair value of the warrant was charged to additional paid in capital as it was issued in connection with an equity instrument.  As described above, Southridge surrendered the warrant to the Company in April 2010.
 
Note 6 – Employee Common Welfare
 
 
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”, 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% of income after tax, not to exceed 50% of registered capital.
 
The Company appropriated $522,882 and $602,388 as reserve for the statutory surplus reserve and welfare fund for the six months ended June 30, 2010 and 2009, respectively.

15

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
Note 8 – Stock Options and Warrants
 
Stock Options
 
Following is a summary of stock option activity:

   
 
Options outstanding
   
Weighted Average Exercise Price
   
Weighted average remaining contractual life
   
Aggregate Intrinsic Value
 
Outstanding, December 31, 2009
    210,000     $ 8.42       3.74     $ 51,000  
Granted
    -       -                  
Forfeited
    -       -                  
Exercised
    -       -                  
Outstanding, June 30, 2010
    210,000     $ 8.42       3.24     $ -  
                                 
Exercisable, June 30, 2010
    53,332     $ 9.20       3.04     $ -  


Number of
Options
   
Exercise
 Price
 
  30,000     $ 3.30  
  20,000     $ 8.85  
  160,000     $ 9.32  
  210,000          

Warrants
 
Following is a summary of the warrant activity:

   
Warrants outstanding
   
Weighted Average Exercise Price
   
Weighted average remaining contractual life
   
Aggregate Intrinsic Value
 
Outstanding, December 31, 2009
    2,607,635     $ 4.72       3.61     $ 2,142,218  
Granted
    -       -                  
Forfeited/canceled
    (403,200 )   $ 5.74                  
Exercised
    -       -                  
Outstanding, June 30, 2010
    2,204,435     $ 4.53       2.92     $ 247,250  
                                 
Exercisable, June 30, 2010
    2,204,435     $ 4.53       2.92     $ 247,250  
 
16

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
The exercise price for warrants outstanding at June 30, 2010 is as follows:

Number of
Warrants
   
Exercise
 Price
 
  575,000     $ 2.50  
  1,409,435     $ 4.50  
  220,000     $ 10.00  
  2,204,435          
 
 
The Company’s predominant businesses are the research and development, manufacture, marketing, distribution, and sale of pre-mix, concentrates and complete feeds 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 two segments:  animal feed nutrition and hog production.
 
The Company’s feed company in Shanghai is located in the Qingcun town, Fengxian district, Shanghai and sells its products to 658 customers, consisting of 433 distributors and 225 large scale pig farms. Its feed company in Guangxi is located in Coastal Industrial Park, Liangqin district, Nanning city, Guangxi Province and sells its products to 713 customers, consisting of 485 distributors and 228 large scale pig farms. Its feed company in Nanchang is located in Chang Bei District Industrial Park, in Nanchang, Jiangxi province and sells its products to 710 customers, consisting of 490 distributors and 220 large scale pig farms. The hog farms are engaged mainly in raising, breeding, and sale of pigs all over the country and are located in the PRC provinces of Jiangxi, Shanghai, Hainan, Guangxi and Fujian.
 
17

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenues from unrelated entities
                       
Animal feed nutrition
  $ 26,369,201     $ 11,136,517     $ 50,658,950     $ 21,249,773  
Hog production
    11,292,754       27,391,253       39,862,072       50,707,271  
    $ 37,661,955     $ 38,527,770     $ 90,521,022     $ 71,957,044  
                                 
Intersegment revenues
                               
Animal feed nutrition
  $ 1,721,014     $ 3,775,765     $ 5,490,936     $ 6,446,171  
Hog production
    1,267,008       230,593       1,784,139       318,855  
    $ 2,988,022     $ 4,006,358     $ 7,275,075     $ 6,765,026  
                                 
Total revenues
                               
Animal feed nutrition
  $ 28,090,215     $ 14,912,282     $ 56,149,886     $ 27,695,944  
Hog production
    12,559,762       27,621,846       41,646,211       51,026,126  
Less Intersegment revenues
    (2,988,022 )     (4,006,358 )     (7,275,075 )     (6,765,026 )
    $ 37,661,955     $ 38,527,770     $ 90,521,022     $ 71,957,044  
                                 
Gross profit
                               
Animal feed nutrition
  $ 4,768,663     $ 3,102,415     $ 9,232,737     $ 5,687,358  
Hog production
    (2,209,385 )     2,119,244       (354,177 )     5,337,706  
Holding company
    -       -       -       -  
    $ 2,559,278     $ 5,221,659     $ 8,878,560     $ 11,025,064  
                                 
Income (loss) from operations
                               
Animal feed nutrition
  $ 2,962,810     $ 1,738,516     $ 5,630,163     $ 3,126,147  
Hog production
    (3,921,133 )     1,026,823       (3,695,323 )     3,186,452  
Holding company
    (974,412 )     (503,542 )     (2,243,301 )     (868,436 )
    $ (1,932,735 )   $ 2,261,797     $ (308,461 )   $ 5,444,163  
                                 
Interest income
                               
Animal feed nutrition
  $ 22,738     $ 17,111     $ 56,181     $ 48,859  
Hog production
    10,680       5,277       17,270       10,313  
Holding company
    4,644       30,166       12,622       53,944  
    $ 38,062     $ 52,554     $ 86,073     $ 113,116  
                                 
Interest and financing costs
                               
Animal feed nutrition
  $ 97,079     $ 15,359     $ 179,611     $ 15,359  
Hog production
    -       7,145       -       7,145  
Holding company
    42,851       602,010       85,230       754,924  
    $ 139,930     $ 624,514     $ 264,841     $ 777,428  
                                 
Income tax expense
                               
Animal feed nutrition
  $ 641,139     $ 285,958     $ 1,094,719     $ 501,508  
Hog production
    -       -       -       -  
Holding Company
    -       -       -       -  
    $ 641,139     $ 285,958     $ 1,094,719     $ 501,508  
                                 
Net income (loss)
                               
Animal feed nutrition
  $ 2,264,097     $ 1,450,299     $ 4,437,740     $ 2,932,699  
Hog production
    (4,206,230 )     844,788       (4,009,165 )     2,875,117  
Holding company
    (1,012,619 )     (1,068,835 )     (2,315,909 )     (1,562,724 )
    $ (2,954,752 )   $ 1,226,252     $ (1,887,334 )   $ 4,245,092  
                                 
Provision for depreciation
                               
Animal feed nutrition
  $ 112,394     $ 132,798     $ 219,436     $ 169,059  
Hog production
    651,640       539,455       1,356,497       1,113,900  
    $ 764,034     $ 672,253     $ 1,575,933     $ 1,282,959  
 
18

 
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
 
   
As of
   
As of
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
Total assets
               
Animal feed nutrition
  $ 39,715,595     $ 38,142,821  
Hog production
    115,296,223       110,718,199  
Holding company
    7,840,061       14,087,000  
    $ 162,851,879     $ 162,948,020  
                 
Intangible assets
               
Animal feed nutrition
  $ 3,357,120     $ 3,419,141  
Hog production
    40,586,966       40,389,358  
Holding company
    -       -  
    $ 43,944,086     $ 43,808,499  
 
Note 10 – Commitments
 
At June 30, 2010, the Company had commitments to expend approximately $1,254,000 for construction in process.
 
Note 11 – Acquisition and Dispositions
 
During the six months ended June 30, 2010, the Company purchased the non-controlling interest of 10% and 20% in two hog farms for $230,063 and $176,040, respectively.  As a result of the purchase of the non-controlling interest, the excess of the purchase price over the carrying value of the non-controlling interest of $219,158 and $146,144, respectively, was recorded against additional paid in capital.
 
Note 12 – Subsequent Events
 
During July and August 2010, the Company issued 4,993,496 shares of its common stock to Southridge pursuant to the Equity Credit Agreement.  The Company received aggregate gross proceeds of $13,000,000 which will be used for general corporate purposes, including to finance a portion of the purchase price for the potential acquisition of M2P2, LLC.  Following these transactions, the Company may from time to time sell to Southridge shares of its common stock for aggregate proceeds of $37,000,000.
 
 
19

 

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We have based these forward-looking statements on our current expectations and projections about future events, and they are applicable on as of the dates of such statement.  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 SEC filings. You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.  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 on Form 10-Q we will refer to AgFeed Industries, Inc., together with its subsidiaries, as “AgFeed,” the “Company,” “we,” “us,” and “our.”
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
We are engaged in the animal nutrition premix, concentrate and complete feeds business and commercial hog production business in China through our operating subsidiaries.
 
Our animal nutrition business consists of the research and development, manufacture, marketing and sale of premix, concentrate and complete feed for use in the domestic animal husbandry markets almost exclusively for hog production in China. Premix is an animal feed additive that is used in commercial animal production worldwide. We have been almost exclusively in the premix feed business since 1995 and now operate five premix, concentrate and complete feed manufacturing facilities located in the cities of Nanchang, Shandong, Shanghai, Nanning, and Hainan. We are expanding our concentrate and complete feed lines to meet the growing demand of commercial producers as they modernize their production technology and focus on the requirements of the food safety laws.
 
We entered the hog breeding and production business in November 2007. In this business, we mainly produce hogs for processing and sell breeding stock. We currently have two breeder farms and 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces.
 
We developed a system of centralized raw material purchases, accounting and internal control management, corporate marketing strategies and brand building. We created, and centrally manage, an animal disease control response team. This team consists of experienced Chinese and international hog industry professionals that are used by each of our subsidiaries across both of our lines of business.
 
We had revenues of $90.52 million for the six months ended June 30, 2010 compared to revenues of $71.96 million for the six months ended June 30, 2009. The increase (25.8%) was the result of expanding market share in our feed business.
 
The hog to corn ratio is a measurement that describes the market price of a hog in relation to the price of corn indicating the relative profitability of hog farming.  During the second quarter of 2009 the hog to corn ratio was 5.83 while during the second quarter of 2010 the hog to corn ratio had deteriorated to 5.08 and dropped as low as 4.98 in mid-April 2010.  These ratios illustrate the high cost of hog feed relative to the market prices of hogs during the period.
 
20

 
This resulted in the margins of both the Company and our customers being reduced.  While we have supported our customers with extended payment terms from time to time, in light of the industry wide operating pressures faced during the second quarter of 2010 we limited this practice thereby reducing accounts receivable approximately $5.6 million from March 31, 2010.
 
 
Animal Nutrition Business
 
We manufacture, distribute, market and sell three main product lines - premix, concentrate and complete feeds for use in all stages of a pig’s life. We conduct these operations through our subsidiaries Nanchang Best, Shanghai Best, Guangxi Huijie, Shandong Feed, and HopeJia. We also provide educational, technical and veterinary support to our customer base
 
Our feed operating companies operate manufacturing facilities in Nanchang, Shanghai, Nanning, Shandong, and Hainan provinces, primarily serving the hog industry. Each subsidiary independently conducts local marketing and sales efforts under the direction of a central executive management team. Nanchang Best and Guangxi Huijie are primarily responsible for our ongoing research and development efforts and share their expertise in this area with all of our manufacturing operations.
 
During the first six months of 2010, we added 12 independent owned feed distribution chain stores now totaling 1,314 that sell our products exclusively. During the same period, we added 14 commercial farms now totaling 795. Backyard and small farms that raise less than 100 hogs per year per family supply 75% of China’s total annual hog production. Through our network of distributors and direct sales, we are able to market our premix feed to the producers of more than 65% of China’s annual hog production.

We are one of a handful of companies that received “Green Certification” from the Minister of Agriculture of PRC for our premix products under the brand label “BEST.” This means that these products are safe, environmentally friendly, and can effectively promote the healthy growth of pigs. According to current government regulations, pork cannot be certified by the government as “green” unless it is produced using government certified green feed. Having our feed certified as green requires us to adhere to strict operational controls and procedures. This green certification laid the foundation for our hog farms to produce hogs providing high quality “Green” pork products. It is also an incentive for other commercial hog farms to enter into sales contracts with our feed operations.
  
During the second quarter of 2010, revenue in the feed division increased to $26.37 million from $11.14 million in the second quarter of 2009, an increase of 137%. During the second quarter of 2010, revenue continued in line with the results achieved for the previous calendar quarter.  However, during the second quarter of 2010, revenue in our hog production division decreased to $11.29 million from $27.39 million in the second quarter of 2009, a decrease of 59%
 
The Chinese hog feed market is a 50 million metric ton market where the average producer’s annual production is less than 10,000 metric tons, according to China Research and Intelligence’s research report on the Chinese feed industry 2009-2010.  During the first six months of 2010, we sold a total of 83,657 metric tons as compared to the first six months of 2009 when we sold 43,542 metric tons, representing an increase of 92%.  Our plans for 2010 call for us sell 180,000 metric tons without considering the impact of any acquisitions. 
 
During 2010, we intend to introduce a bulk delivery system for hog feed to the market, a value solution for large commercial farms.

 
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Hog Production Business
 
In our hog production business, we have grown our business through strategic acquisitions of current producing commercial hog farms and organic growth. We own two breeder hog farms and 29 meat producing hog farms located in Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces, which are strategically located in or near the largest pork consumption areas in the PRC.
 
We entered the hog farming business on November 9, 2007 as a result of our acquisition of ninety percent (90%) of the capital stock of Lushan Breeder Pig Farm Co., Ltd. and acquired the remaining 10% in the first quarter of 2010 for $230,063. Lushan owns and operates a breeder hog farm in Jiangxi Province. Lushan is a mid-scale hog farm engaged in the business of raising, breeding and selling hogs in the PRC for use in the pork production market in the PRC. In 2008, we acquired at least a majority interest in 29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces through our subsidiaries - Nanchang Best, Shanghai Best, Guangxi Huijie and Best Swine. Our meat hog producing farms generate revenue primarily from the sale of meat hogs to processors. Our meat hogs are sold primarily in Jiangxi, Shanghai, Hainan, Guangxi, Fujian, Guangdong and other neighboring provinces. In November 2009, we broke ground on our first "Western-model" farm in the city of Da Hua, Guangxi Province. We also completed the construction of a nucleus farm in the city of Wuning, Jiangxi Province in November 2009. This farm will be operated by Hypor AgFeed Breeding Company.
 
In February 2010, we entered into negotiations to participate in a hog production project in conjunction with Xinyu City in Jiangxi Province.  The proposed project is a plan to build 5 western model hog farms with the initial phase of the project to encompass an investment of $18 million for the construction of  two 5,000 head sow farms, one 200 head boar stud farm and one 2,600 head multiplier facility.  Upon completion the initial phase, the project is expected to have an annual production capacity of 230,000 hogs.  In April of 2010 these negotiations were successfully completed and construction will begin in May 2010.
 
Our breeder farms generate revenue primarily from the sale of breeder hogs to commercial hog farms and, to a lesser extent, the sale of meat hogs to hog slaughterhouses. Our customers include large-scale hog farms, mid-scale hog farms and small-scale farms. Our breeder hogs are sold throughout the PRC, primarily in southeastern China.
 
During the first six months of 2010 our capital spending consisted of $7.6 million for property, plant and equipment purchases, environmental and other expenditures.
 
During the first six months of 2010 we sold 270,000 head with an average selling price of $154 per head at an average weight of 88.8kg (196 lbs.)  as compared to the first six months  of 2009 when we sold 318,000 head with an average selling price of $161 per head at an average weight of 90.7kg (200 lbs.).
 
As a result of our strategic direction to introduce modern western hog production technologies to our existing farm base, we have begun to realize improved operating efficiencies.  We have reduced our operating costs by $8 per head.  During the first six months of 2010, the benefit of these operating efficiencies helped to offset the high cost of corn and soy and weak market prices for hogs.  These efficiencies were achieved in large part as a direct result of our alliances with Hypor and M2P2.
 
Our strategic alliance with Hypor, announced in April of 2009, has four phases: (1) upgrading the genetic base of our existing herds; (2) creating a sow farrow-to-finish nucleus facility (Wuning Farms) to supply superior breeding stock to be utilized in our production systems and for sale to outside commercial hog farms; (3) establishing high health, top quality genetics to the farms being developed by AgFeed International Protein; and (4) developing gene transfer centers to maximize the use of the top performing boars in China across AgFeed's production system. On December 17, 2009, we formed Hypor AgFeed Breeding Company with Hypor to develop, operate and market a genetic nucleus farm in Wuning, China. Hypor AgFeed Breeding Company is owned 85% by us and 15% by Hypor.
 
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On July 13, 2009, together with M2P2, we formed AgFeed International Protein, a joint venture focused on enhancing hog production systems for Chinese and other Pan Asian clients based on modern western standards to increase productivity and ensure the highest bio-security health standards in the Pan Asian hog industry. The joint venture was formed to take advantage of the commercialization and consolidation of the hog industry being fostered by the Chinese central and local governments. We are AgFeed International Protein's first client. We own 65% of AgFeed International Protein, certain affiliates own an additional 15.1% and M2P2 owns the remaining 19.9%. On November 9, 2009, construction began on of our first large western model farm in Da Hua, China (Jiangxi Province). This is the first of seven farms that will be constructed in South China that will house an additional 35,000 genetically superior sows and 400 boars. When fully operational, we anticipate that these farms will produce 750,000 – 850,000 pigs per year. It is anticipated that the cost to build the seven farms will be approximately $50 million over the next two years. AgFeed International Protein has completed all phases of design and blueprints for these farms and has been working with international and local construction firms to ensure success.
 
Our current strategic plan calls for us to develop, during 2009 -2012, a production platform capable of producing 2 million hogs per year by 2015. The key element to this future growth is modern hog production technologies and science based genetics, which is underscored by our joint ventures with Hypor and M2P2.  Our Lushan and Ganda Breeding Farm are now fully stocked with the Hypor Large White Pureline Sows, the Hypor Landrace Pureline Boars and the Duroc Terminal Sire.  
 
The demand for safe food is the key driver in our strategy “AgFeed, Government and Farmer”. The local governments have partnered with AgFeed in the cities of Dahua and Xinyu to build agricultural industrial parks that will produce top health and safe pork meat for the Chinese consumer.
 
Chinese Vice Premier Li Keqiang said, "Food is essential, and safety should be a top priority. Food safety is closely related to people's lives and health and economic development and social harmony," at a State Council meeting in Beijing. In June 2009, food safety laws were passed in China and passed down to the local governments for implementation.
 
According to the China Feed Industry Association, China has the world's largest and most profitable market for hog production, which processed 625 million hogs in 2009, compared to approximately 100 million in the U.S. More than 1.2 billion Chinese consume pork as their primary source of meat. 62% of all meat consumed in China is pork. Chinese consumers consume more pork each year than the rest of the world combined. China’s pork consumption is forecast to increase to 47.0 million metric tons in 2010 up from 44.9 million metric tons in 2008, an increase of about 5%. Projected pork demand by 2015 is estimated to approach 68.0 million metric tons, an increase of 51%
 
The Chinese government supports hog producers with favorable tax status and subsidies, insurance, vaccines, caps on feed costs and land use grants. Hog production is exempt from all taxes and sow owners receive government grants and subsidies.
 
Critical Accounting Policies
 
In presenting our financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”), we are required to make certain estimates and assumptions that affect the amounts reported therein.  Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events.  However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions.  If there is a significant unfavorable change to current conditions, it will likely result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time.  Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.
 
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Use of Estimates.   Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which were prepared in accordance with US GAAP.  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to impairment of long-lived assets and allowance for doubtful accounts.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
 
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.
 
Allowance For Doubtful Accounts.   We continually monitor customer payments and maintain a reserve for estimated losses resulting from our customers’ inability to make required payments. In determining the reserve, we evaluate the collectability of our accounts receivable based upon a variety of factors. In cases where we become aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due. For all other customers, we recognize allowances for doubtful accounts based on our historical write-off experience in conjunction with the length of time the receivables are past due, customer credit worthiness, geographic risk and the current business environment. Actual future losses from uncollectible accounts may differ from our estimates.
 
Inventories.  Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. We evaluate our ending inventories for estimated excess quantities and obsolescence. Our evaluation includes the analysis of future sales demand by product, within specific time horizons. Inventories in excess of projected future demand are written down to net realizable value. In addition, we assess the impact of changing technology on inventory balances and writes-down inventories that are considered obsolete. Inventory obsolescence and excess quantities have historically been minimal.
 
Long-Lived Assets. We periodically assess potential impairments to our long-lived assets  We perform an impairment review whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Factors we considered include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends. When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, we recognize an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair market value of the asset, based on the fair market value if available, or discounted cash flows. To date, there has been no impairment of long-lived assets.
 
Property and Equipment. Useful lives of property and equipment is based on historical experience and industry norms. Changes in useful lives due to changes in technology or other factors can affect future depreciation estimates.
 
Revenue Recognition. Our 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 AgFeed exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. We are not subject to VAT withholdings. We give volume rebates to certain customers based on volume achieved.
 
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We make estimates and judgments when determining whether the collectability of revenue from customers is reasonably assured. Management estimates regarding collectability impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectability could differ from actual events, thus materially impacting our financial position and results of operations.
 
Sales returns and allowances have historically been insignificant.  Accordingly, estimating returns is not critical.  However, if circumstances change, returns and allowance may impact the company’s earnings. There are no differences in our arrangements with our different types of customers.  Accordingly, we do not have different revenue recognition policies for different types of customers.   We offer credit terms ranging from 30 to 90 days for most customers.  From some large customers, we may extend these terms beyond 90 days.
 
Recent Accounting Pronouncements
 
On July 1, 2009, we adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”).  ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC registrants, guidance issued by the SEC.  The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC.  The Codification is amended to effect non-SEC changes to authoritative GAAP.  Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Consolidated Financial Statements.
 
On February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of US GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on our consolidated financial statements.
 
On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU will not have a material impact on our consolidated financial statements.
 
In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010-17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. We do not expect this ASU will have a material impact on our financial position or results of operations when we adopt this update on January 1, 2011.
 
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Results of Operations
 
Comparison of three months ended June 30, 2010 and June 30, 2009

   
 Three Months Ended June 30,
   
   
2010
   
2009
   
$ Change
   
% Change
   
   
(in thousands)
         
Revenues
  $ 37,662     $ 38,528     $ (866 )     -2.2 %  
Cost of goods sold
  $ 35,103     $ 33,306     $ 1,797       5.4 %  
Gross profit
  $ 2,559     $ 5,222     $ (2,662 )     -51.0 %  
Operating expenses
  $ 4,492     $ 2,960     $ 1,532       51.8 %  
Interest and financing costs
  $ 140     $ 625     $ (485 )     -77.6 %  
Net income
  $ (2,955 )   $ 1,226     $ (4,181 )     -341.0 %  
 
   
2010
   
2009
   
Change
   
Price
   
Volume
 
Business segment:
                                     
Animal feed nutrition
                                     
Volume (metric tons)
    41,315       23,300       18,015                
    Revenue (in 000s)
  $ 28,090     $ 14,912     $ 13,178     $ 890     $ 12,288  
    Cost of goods sold (in 000s)
  $ 23,321     $ 11,810     $ 11,511     $ 1,305     $ 10,206  
    Gross profit (in 000s)
  $ 4,769     $ 3,102     $ 1,667     $ (415 )   $ 2,082  
    Gross profit margin
    18.1 %     27.9 %                        
    Revenue/MT
  $ 680     $ 640     $ 40                  
    Cost of goods sold/MT
  $ 560     $ 510     $ 50                  
    Gross profit/MT
  $ 120     $ 130     $ (10 )                
                                         
Hog production
                                       
    Volume (hogs)
    95,000       184,000       (89,000 )                
    Revenue (in 000s)
  $ 12,560     $ 27,622     $ (15,062 )   $ (3,420 )   $ (11,642 )
    Cost of goods sold (in 000s)
  $ 14,769     $ 25,503     $ (10,734 )   $ 2,890     $ (13,624 )
    Gross profit (in 000s)
  $ (2,209 )   $ 2,119     $ (4,328 )   $ (6,310 )   $ 1,982  
    Gross profit margin
    -19.6 %     7.7 %                        
    Revenue/hog
  $ 131     $ 150     $ (19 )                
    Cost of goods sold/hog
  $ 154     $ 138     $ 16                  
    Gross profit/hog
  $ (23 )   $ 12     $ (35 )                

Revenues. The decrease was due to a 58.8% decrease in hog production revenue offset by a 136.8% increase in animal feed. Hog sales of 95,000 for three months ended June 30, 2010 which was a decrease from total hog sales of 184,000 hogs for the three months ended June 30, 2009.  Animal feed sales volume for three months ended June 30, 2010 exceeded 41,315 metric tons representing a 77% increase in volume over the comparative period of 2009. However, the increase in revenue described above was offset by lower hog sales prices and increases in ingredient costs.
 
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Driving the increase in animal nutrition revenues is the continuing market shift of our customers to complete feeds.  This feed category contributed 14,000 metric tons of the 18,000 combined metric tons of growth.  Condensed feeds contributed additional tonnage of 4,000 with declines of 300 metric tons in our fine feeds category offset by an increase of 300 metric tons in our premix feed type.
 
The challenges of the market are evident in the results produced by our hog segment.  Hog production shows a revenue decline of $15 million reflecting a decline of $3.4 million due to the rapid decline of market prices for hogs and $11.6 million due to our marketing 89,000 less hogs in 2010 versus 2009.  The price component is indicative of the bringing to market an excessive number of hogs as a carryover from the Chinese New Year’s festival, response to increased costs and the impact of flooding in the regions we conduct business, including Jiangxi province and Guangxi province.  The result is the revenue per hog declined to $131 versus $150 in 2009.  In terms of volume, during the three months ended June 30, 2009, we followed a program of purchasing hogs from outside our system for finishing to market weights to take advantage of profitable market prices.  In 2010, we did not purchase hogs under this program and in combination with vastly reduced revenue per hog and the reduction of our herd of over 19,000 animals due to flooding and its effects (over 16,000) and planned culling of 3,000 sows. Our hog volumes were 89,000 lower in the three months ended June 30, 2010 compared to the same period in 2009.
 
Cost of Goods Sold. We experienced increases in cost of goods sold for our two business lines during the three months ended June 30, 2010 driven primarily by a 20.0% increase in corn prices over the same period in 2009.   For our feed nutrition segment, the increased tonnage produced an increase in our costs of $10.2 million while ingredient costs reflecting increased costs of corn in the comparative periods, produced cost increases of $1.3 million.  As a result, gross profit reflects a net increase of $1.7 million driven by the aforesaid volumes but reflecting a challenging market in which to pass along all of our cost increases.
 
Gross Profit. Gross margins decreased to 6.8% from 13.6% during the three months ended June 30, 2010 as compared to the same period in 2009. Our gross profit (loss) margin for the feed and hog segments were 18.1% and (19.6%), respectively for the three months ended June 30, 2010 as compared to 27.9% and 7.7% for three months ended June 30 2009.  The decrease in gross margin is attributed to the 20.0% increase in corn cost and a reduction in the selling price for our hogs over the same period in 2009. The increase in the cost of corn was offset somewhat by actions taken in the first quarter of 2010 including our entry into long-term contracts for key product ingredients which locked in favorable pricing.
 
Selling, General and Administrative Expenses. Selling, general and administrative expense includes overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting, legal and offices expenses. Our selling expenses for the three months ended June 30, 2010 decreased by approximately $16,000 compared to the corresponding period in 2009. General and administrative expenses for our feed segment increased by approximately $443,000 or 113% from the corresponding period in 2009 principally due to the overall expansion of the feed segment that included increased salary and utility costs. Our corporate expenses also increased by approximately $471,000 or 94% due to higher professional fees, stock incentive compensation, and officer and director compensation.  General and administrative expenses for our hog farms for the three months ended June 30, 2010 increased by approximately $635,000 or 59% over the corresponding period in 2009 to due to an overall increase in expenses associated with expansion of our hog segment and consulting fees paid in connection with establishing our first large western model hog farm.
 
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Interest and Financing Costs. We incurred interest and financing costs of approximately $140,000 and $624,000 during the three months ended June 30, 2010 and 2009, respectively.  The decrease is due to the amortization of debt discounts during the three months ended June 30, 2009 as a result of debt conversion during that period.
 
Income Taxes. Hog production is an income tax exempt sector in China and sow owners receive government grants and subsidies. Some of our feed manufacturing companies benefit from exemption from value-added tax.
 
Net Loss. The decrease in our net income was due to the increase in cost of goods sold and higher operating expenses. We continued to benefit from the tax-exempt status for our hog production business. The higher sales and the benefits from economies of scale in our business resulting in a modest increase in operating efficiency was offset by higher cost of sales. We continued to benefit from the tax-exempt status for our hog production business.
 
Comparison of six months ended June 30, 2010 and June 30, 2009
   
 Six Months Ended June 30,
   
   
2010
   
2009
   
$ Change
   
% Change
   
   
(in thousands)
         
Revenues
  $ 90,521     $ 71,957     $ 18,564       25.8 %  
Cost of goods sold
  $ 81,642     $ 60,932     $ 20,710       34.0 %  
Gross profit
  $ 8,879     $ 11,025     $ (2,147 )     -19.5 %  
Operating expenses
  $ 9,187     $ 5,581     $ 3,606       64.6 %  
Interest and financing costs
  $ 265     $ 777     $ (513 )     -65.9 %  
Net income
  $ (1,887 )   $ 4,245     $ (6,132 )     -144.5 %  
 
   
2010
   
2009
   
Change
   
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