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EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - AMERICAN TELSTAR INCf10q0611ex32i_chinaagri.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - AMERICAN TELSTAR INCf10q0611ex31ii_chinaagri.htm
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EXCEL - IDEA: XBRL DOCUMENT - AMERICAN TELSTAR INCFinancial_Report.xls
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - AMERICAN TELSTAR INCf10q0611ex31i_chinaagri.htm


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011.
 
o
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: 000-52387


China Agricorp, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA
 
84-1052279
(STATE OR OTHER JURISDICTION OF
 
(I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION
   

Fengshou Road West, Jiefang District, Jiaozuo, Henan Province, PRC 454000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:  011-86-0391-3582676 
 
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 Date 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  x  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 o
Non-accelerated filer o
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 o No  x
 
The number of shares of Common Stock of the Registrant, par value $.001 per share, outstanding on August 11, 2011 was 9,004,593.

 
 

 
 
CHINA AGRICORP, INC.

INDEX TO JUNE 30, 2011 FORM 10-Q
 
   
Page
Number
Part I - Financial Information
 
4
     
Item 1 - Financial Statements
 
4
     
Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010
 
4
     
Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2011 and 2010 (unaudited)
 
5
     
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2011 and 2010 (unaudited)
 
6
     
Notes to the Consolidated Financial Statements (unaudited)
 
7
     
Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition
 
21
     
Item 4 - Controls and Procedures
 
36
     
Part II - Other Information
 
36
     
Item 6 - Exhibits
 
36
     
Signature Page
 
37
 
 
2

 
 
PART I - FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

 
The discussions of the business and activities of China Agricorp, Inc. (“we,” “us,” “our” or “the Company”) set forth in this Form 10-Q and in other past and future reports and announcements by the Company may contain forward-looking statements and assumptions regarding future activities and results of operations of the Company.  You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words "may," "will," "should," "anticipate," "estimate," "plans," “potential," "projects," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" or the negative of these words or other variations on these words or comparable terminology. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as in this Form 10-Q generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.
 
Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in the Form 10-K’s filed by the Company. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

 
3

 
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

             
China Agricorp, Inc.
 
Consolidated Balance Sheets
 
             
(Expressed in US dollars)
           
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Assets
 
Unaudited
       
             
Current assets
           
Cash and cash equivalents
  $ 1,913,326     $ 161,327  
Restricted cash
    3,156,428       2,736,861  
Cash in escrow
    36,451       530,392  
Accounts receivable-net
    7,460,796       3,484,234  
Advances to suppliers
    9,146,468       4,099,635  
Inventory
    9,616,993       10,582,053  
Tax receivable
    1,340,400       1,752,148  
Total current assets
    32,670,862       23,346,650  
                 
Deferred financing fees
    155,011       647,241  
Deferred consulting fees
    329,714       1,376,704  
Other receivables
    5,430,369       6,589,798  
Long-term investment
    871,421       851,811  
Deposit
    2,380,318       2,326,752  
Property and equipment-net
    7,392,189       7,578,362  
Construction in progress
    3,448,540       2,614,710  
Land use rights-net
    1,385,352       1,370,254  
Total Assets
  $ 54,063,776     $ 46,702,282  
                 
Liabilities and Stockholders' Equity
               
                 
Current liabilities
               
Accounts payable and accrued liabilities
  $ 2,294     $ 91,454  
Other payables
    269,487       759,760  
Customer's deposit
    174,067       510,451  
Notes payable
    5,013,151       4,537,349  
Short-term loans
    11,589,045       10,239,284  
Convertible notes payable-$2,930,000, net of unamortized discount of $2,006,186
    923,814       46,550  
Derivative instrument liabilities
    4,095,130       3,987,935  
Total current liabilities
    22,066,988       20,172,783  
                 
Long-term loans
    2,580,818       1,187,544  
Total long-term liabilities
    2,580,818       1,187,544  
                 
Total liabilites
    24,647,806       21,360,327  
                 
Commitments and contingencies
    -       -  
                 
Stockholders' equity
               
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
               
   no shares issued and outstanding
    -       -  
Common stock, $0.001 par value, 100,000,000 shares authorized,
               
   9,004,593 and 9,004,593 shares issued and outstanding at
               
June 30, 2011 and December 31, 2010, respectively
    9,005       9,005  
Additional paid-in capital
    8,179,445       8,179,445  
Retained earnings
    17,964,481       14,594,468  
Accumulated other comprehensive income
    3,263,039       2,559,037  
Total stockholders' equity
    29,415,970       25,341,955  
                 
Total Liabilities and Stockholders' Equity
  $ 54,063,776     $ 46,702,282  
                 
See accompanying notes to consolidated financial statements
 
 
 
4

 
 
China Agricorp, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
               
(Expressed in US dollars)
                       
                         
   
For the Three Months Ended
June 30,
   
For The Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Sales
                       
Vegetable oil processing
  $ 7,407,017     $ 2,266,528     $ 17,090,555     $ 8,985,467  
Farming
    7,959,357       7,166,022       7,959,357       7,166,022  
Total sales
    15,366,375       9,432,550       25,049,912       16,151,489  
                                 
Cost of sales
                               
Vegetable oil processing
    6,083,024       1,486,715       13,586,028       6,547,371  
Farming
    5,066,067       4,441,396       5,066,067       4,441,396  
Total cost of sales
    11,149,091       5,928,111       18,652,095       10,988,767  
                                 
Gross profit
    4,217,284       3,504,439       6,397,817       5,162,722  
                                 
Operating expenses:
                               
Selling, general and administrative
    781,300       1,270,694       1,914,099       2,252,325  
Toal operating expenses
    781,300       1,270,694       1,914,099       2,252,325  
      -                          
Operating income
    3,435,984       2,233,745       4,483,718       2,910,397  
                                 
Other income (expenses):
                               
Derivative instruments-change in fair value
    (144,377 )     -       (107,196 )     -  
Interest expense
    (1,407,475 )     (95,480 )     (2,023,615 )     (311,645 )
Interest income
    1,405       74,467       67,244       141,798  
Subsidy income
    40,007       -       721,234       -  
Other income
    202,214       46,491       228,628       46,491  
      (1,308,226 )     25,478       (1,113,705 )     (123,356 )
                                 
Net income before income taxes
    2,127,758       2,259,223       3,370,013       2,787,041  
                                 
Income taxes
    -       -       -       -  
                                 
Net income
  $ 2,127,758     $ 2,259,223     $ 3,370,013     $ 2,787,041  
                                 
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
    435,789       (38,633 )     704,002       18,398  
                                 
Total comprehensive income
  $ 2,563,547     $ 2,220,590     $ 4,074,015     $ 2,805,439  
                                 
Net Income Per Common Share:
                               
Basic
  $ 0.23     $ 0.30     $ 0.37     $ 0.37  
Diluted
  $ 0.23     $ 0.30     $ 0.37     $ 0.37  
                                 
Weighted-Average Shares Outstanding:
                               
Basic
    9,004,593       7,473,808       9,004,593       7,473,808  
Diluted
    10,120,783       7,473,808       10,120,783       7,473,808  
                                 
See accompanying notes to consolidated financial statements
 
 
 
5

 
 
             
China Agricorp, Inc.
 
Consolidated Statements of Cash Flows (Unaudited)
 
   
(Expressed in US dollars)
           
             
   
For The Six Months Ended
June 30,
 
   
2011
   
2010
 
             
Cash flow from operating activities:
           
Net income
  $ 3,370,013     $ 2,787,041  
Adjustments to reconcile net income
               
  to net cash provided by operating activities:
               
Depreciation
    355,949       323,810  
Amortization
    16,234       15,553  
Amortization of discount on convertible notes
    877,264       -  
Amortization of deferred financing fees
    492,230       -  
Amortization of consulting fees
    1,046,990       1,894,766  
Change in fair value of derivative liabilities
    107,195       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (3,845,664 )     (4,371,626 )
Advances to suppliers
    (4,888,029 )     (546,619 )
Inventory
    1,192,955       (1,504,261 )
Taxes receivable
    446,205       411,131  
Accounts payable and accrued liabilities
    (89,447 )     374,467  
Customer's deposit
    (343,607 )     -  
Other payables
    (498,654 )     1,962,649  
Net cash (used in) provided by operating activities
    (1,760,366 )     1,346,911  
                 
Cash flows from investing activities:
               
Related party receivable
    -       193,262  
Construction in progress
    (763,571 )     -  
Deposit
    -       (1,168,150 )
Payments on other receivables
    -       (493,489 )
Proceeds from other receivables
    1,294,083       -  
Net cash provided by (used in) investing activities
    530,512       (1,468,377 )
                 
Cash flows from financing activities:
               
Cash in escrow
    493,940       -  
Restricted cash
    (351,922 )     889,781  
Proceeds from short-term loans
    1,099,542       702,294  
Proceeds from long-term loans, net
    1,348,166       -  
Proceeds from related party payable
    -       126,387  
Proceeds from notes payable
    366,514       -  
Payments on notes payable
    -       (731,557 )
Payment of dividend
    -       (3,657,784 )
Proceeds from dividend rescinded
    -       3,657,784  
Net cash provided by financing activities
    2,956,240       986,905  
                 
Effect of exchange rate changes on cash
    25,613       857  
                 
Net increase (decrease) in cash and cash equivalents
    1,751,999       866,296  
                 
Cash and cash equivalents, beginning of period
    161,327       410,651  
                 
Cash and cash equivalents, end of period
  $ 1,913,326     $ 1,276,947  
                 
Supplemental information of cash flows
               
Cash paid for interest
  $ 654,121     $ 311,645  
Cash paid for income taxes
  $ -     $ -  
                 
See accompanying notes to consolidated financial statements
 
 
 
6

 
 
CHINA AGRICORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
1.   BASIS OF PRESENTATION
 
The financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).  This basis differs from that used in the statutory accounts of our subsidiaries in China, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the People’s Republic of China (“PRC”). All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2010 and notes thereto included in Amendment No. 3 to the Current Report on Form 8-K of China Agricorp, Inc. filed with the Securities and Exchange Commission on July 15, 2011. The Company follows the same accounting policies in the preparation of interim reports.

2.   ORGANIZATION AND PRINCIPAL ACTIVITIES

China Agricorp, Inc. (“China Agricorp” or the “Company”) was incorporated under the laws of the State of Nevada on June 16, 2010.  Until August 26, 2010, when the Company entered into a Share Exchange Agreement, the Company had no operations other than those related to its incorporation.

On February 11, 2011, China Agricorp entered into a Share Exchange Agreement with American Telstar, Inc., a non-operating public shell company incorporated in Nevada. Pursuant to the Share Exchange Agreement, on February 11, 2011, our shareholders transferred 100% of the outstanding shares of our common stock held by them, in exchange for an aggregate of 9,001,903 newly issued shares of Common Stock of American Telstar. The shares of American Telstar Common Stock acquired by our shareholders in the transaction constitute, immediately after the transaction, approximately 99.97% of the issued and outstanding Common Stock of American Telstar. Although American Telstar was deemed to have legally acquired us, in accordance with the applicable accounting guidance for accounting for the transaction as a reverse merger and re-capitalization, we are the surviving entity for accounting purposes and our assets and liabilities will continue to be recorded at their historical carrying amounts with no goodwill or other intangible assets recorded as a result of the accounting merger with American Telstar.  On February 11, 2011, the net liabilities of American Telstar were not material to our consolidated financial statements.

On April 8, 2011, China Agricorp merged with and into with American Telstar, and the name of American Telstar was changed to “China Agricorp, Inc.”.
 
3.   CASH AND CASH EQUIVALENTS
 
Cash and cash equivalents include cash on hand and demand deposits held by banks as follows:
 
   
June 30, 2011
   
December 31, 2010
 
Cash in US
  $ 57,120     $ 56,758  
Cash in PRC
    1,856,206       104,569  
    $ 1,913,326     $ 161,327  
                 
 
 
7

 
 
4.   RESTRICTED CASH
 
Restricted cash at June 30, 2011 and December 31, 2010 of $3,156,428 and $2,736,861, respectively, is cash not available for immediate use because it has been pledged to secure the Company’s notes payable. The amount of restricted cash is a certain percentage of the amount of the notes payable by the bank issuing the notes. The restricted cash is held in banks in China and such amounts are not insured.
 
5.   CASH IN ESCROW
 
The Company was required to deposit money in escrow to provide for payment of future expenses related to investor relations and similar expenses and also an amount equivalent to three quarters’ interest payments on the Convertible Promissory Notes issued on August 26, 2010 and September 30, 2010. This portion of the escrow will be used to make interest payments as they become due. At June 30, 2011 and December 31, 2010, $36,451 and $530,392 were held in escrow, respectively.
 
6.   ACCOUNTS RECEIVABLE
 
As of
 
June 30,
2011
   
December 31,
2010
 
             
Accounts Receivable
  $ 8,773,173     $ 4,767,078  
   Less: Allowance for doubtful accounts
    (1,312,377 )     (1,282,844 )
Accounts Receivable-net
  $ 7,460,796     $ 3,484,234  
 
7.   ADVANCES TO SUPPLIERS
 
Advances to suppliers represent the amount paid to suppliers before the goods or services are received by the Company to ensure delivery of raw material is made in a timely manner. The payments are required by the suppliers as protection against non-payment. On June 30, 2011, the advances to suppliers included $ 9,146,468 in advances to raw material suppliers. On December 31, 2010, the advances to suppliers included $3,717,616 in advances to raw material suppliers and $382,019 for prepayment of rents of farm land. All of the goods or services related to the advances are expected to be received by the Company within one year from the date of advance.
 
8.   INVENTORIES
 
As of
 
June 30,
   
December 31,
 
   
2011
   
2010
 
Raw materials
  $ 1,700,221     $ 3,561,898  
Packing materials
    137,855       131,353  
Work in progress
    1,347,826       2,053,691  
Finished goods
    6,431,091       4,835,111  
    $ 9,616,993     $ 10,582,053  
Rate
    7.3141       6.85419  
 
 
8

 
 
9.  OTHER RECEIVABLES
 
             
As of
 
June 30
   
December 31,
 
   
2011
   
2010
 
Other receivable
  $ 5,430,369     $ 6,589,798  
    $ 5,430,369     $ 6,589,798  
 
As of June 30, 2011 and December 31, 2010, other receivable balances exceeding 10% of the total balances is as follows:
 
                         
   
June 30, 2011
   
December 31, 2010
 
   
Amount
   
Percentage
 
Amount
   
Percentage
 
Jin Canlan Trading Company
  $ 4,409,249       81%     $ 5,409,141       82%  
 
    
The receivable from Jin Canlan Trading Company (“Jin Canlan”) is the result of a collaborative arrangement for the parties doing business together for purchasing wheat for National Food Storage as Jin Canlan has a special license to do so which Jiazuo Yida Vegetable Oil Co., Ltd. (“Yida”)  has not yet been able to obtain because Yida is a vegetable oil processing company, and this license is generally only available to a company, such as Jin Canlan, whose main business is food storage. Under its arrangement with Yida, Jin Canlan shares the profit from this business with Yida. Under the agreement Yida makes a loan to Jin Canlan. The loan is interest free and due on demand. According to the agreement with Jin Canlan, the receivable from Jin Canlan also includes purchasing fees and custodial fees, and Yida receives all interest subsidies from the government. According to the agreement, Jin Canlan bears all price fluctuation risk, spoilage risk, and any other inventory loss risk during storage and Yida only has to provide the places for the storage of the wheat and receives commissions based at an agreed fee rate for each ton of wheat stored in the warehouse provided by Yida. The term of the current agreement is from June 22, 2011 until June 21, 2012.  The Company’s net income from this arrangement for the six months ended June 30, 2011 and 2010 were $24,263 and $46,491, respectively, and such net income is included in the other income in the Consolidated Statements of Income and Comprehensive Income of the Company for the six months ended June 30, 2011 and 2010. Both the Company and Jin Canlan are free to continue or terminate the agreement when the term of the agreement expires. The Company books the income from this loan in other income when the Company receives the money from Jin Canlan. Jin Canlan has paid the Company the income related to the agreement in December of each year and the Company expects that Jin Canlan will continue to pay the income related to the agreement to the Company in December of each year or upon the earlier termination or expiration of the agreement.
 
10.  DEPOSIT
 
Deposits consist of the following:
 
             
   
June 30, 2011
   
December 31, 2010
 
Deposit on land
  $ 1,838,775     $ 1,797,395  
Wen County Keyuan Seeds Research Institute
    541,543       529,357  
    $ 2,380,318     $ 2,326,752  
 
 
Deposits on land are the prepayments made by the Company for purchasing land for future Company expansion when the transaction has not been closed. The deposit to Wen County Keyuan Seeds Research Institute (the “Institute”) represents an interest free loan made by the Company to the Institute. Pursuant to the loan agreement, the Institute is required to use the proceeds of loan for researching new types of wheat seeds and the Company will have the priority to enjoy the result from the research. The loan is required to be repaid in full on December 30, 2012.
 
9

 
 
11. PROPERTY AND EQUIPMENT
 
               
June 30, 2011
 
   
Cost
   
Accumulated Depreciation
   
Net Book Value
 
Building
  $ 3,124,993     $ 989,162     $ 2,135,831  
Equipment
    8,827,372       3,592,457       5,234,915  
Office equipment
    8,615       6,384       2,231  
Vehicles
    46,000       26,788       19,212  
    $ 12,006,980     $ 4,614,791     $ 7,392,189  
 
               
December 31, 2010
 
   
Cost
   
Accumulated Depreciation
   
Net Book Value
 
Building and Plant
  $ 3,805,600     $ 894,762     $ 2,910,837  
Equipment
    7,877,792       3,234,160       4,643,632  
Office equipment and computers
    8,422       5,445       2,977  
Vehicles
    44,965       24,050       20,916  
    $ 11,736,779     $ 4,158,417     $ 7,578,362  
 
For the six months ended June 30, 2011 and 2010, depreciation expense of $225,756 and $178,229, respectively, was included in selling, general and administrative expense and $130,193 and $145,581 respectively, was included in cost of sales, for a total of $355,949 and $323,810, respectively.
 
12.  LAND USE RIGHTS
 
   
June 30, 2011
   
December 31, 2010
 
Cost
  $ 1,624,632     $ 1,588,072  
     Less:accumulated
               
          amortization
    (239,280 )     (217,818 )
    $ 1,385,352     $ 1,370,254  
 
For the six months ended June 30, 2011 and 2010, amortization expense was $16,234 and $15,553, respectively. Amortization expenses have been included in selling, general and administrative expense in the income statements.

13.  LONG-TERM INVESTMENT
 
Long-term investment represents shares of Jiaozuo Commercial Bank, a privately held bank in China, which are carried at purchasing cost. The Company holds approximately 2% of the total outstanding shares of Jiaozuo Commercial Bank.
 
14.  NOTES PAYABLE
 
Banks in China commonly issue letters of credit the form of bank notes to clients’ suppliers for transactional purposes. The bank notes do not have a stated interest rate, but may be redeemed by the holder at a discount before the maturity date. The requirements by the banks vary, but the usual transaction will require the borrowing company deposit 60% to 100% of the reimbursement obligation with the bank as restricted funds. The amount of money required depends on bank policy and the credit rating of the requesting company. The notes are settled at maturity, which is usually between 6 to 12 months. The bank requires that we maintain restricted cash balances which are equal to a specified percentage of the face amount of each bank note to support the subsequent payment of these amounts. There are two reasons why the Company did not pay its suppliers in cash directly. The first reason is some of the bank notes don’t have a requirement for the Company to maintain 100% restricted cash.Therefore, by relying on bank notes the Company is able to maintain more cash until it pays its suppliers. The second reason is that the Company earns interest income on the restricted cash it deposits to secure the repayment of the bank notes. All notes payable are interest free and due on demand.
 
 
10

 
 
The notes payable on June 30, 2011 and December 31, 2010 are as follows:
 
As of
June 30, 2011
 
Amount
 
Due date
Jiaozuo Commercial Bank
$ 3,094,538  
July, 2011
Jiaozuo Commercial Bank
  1,547,269  
July, 2011
    371,344  
December, 2011
  $ 5,013,151    
 
As of
December 31, 2010
 
Amount
 
Due date
Jiaozuo Commercial Bank
$ 3,024,899  
January, 2011
Jiaozuo Commercial Bank
  1,512,450  
January, 2011
  $ 4,537,349    
 
All notes payable are interest free and were repaid on their due date.
 
The restricted cash supporting the notes payable at June 30, 2011 and December 31, 2010 were as follows:
 
   
June 30, 2011
 
   
Amount
   
Cash restricted %
   
Restricted cash
 
Jiaozuo Commercial Bank
  $ 3,094,538       60 %   $ 1,856,723  
Jiaozuo Commercial Bank
    1,547,269       60 %     928,361  
      371,344       100 %     371,344  
    $ 5,013,151             $ 3,156,428  
 
   
June 30, 2011
 
   
Amount
   
Cash restricted %
   
Restricted cash
 
Jiaozuo Commercial Bank
  $ 3,094,538       60 %   $ 1,856,723  
Jiaozuo Commercial Bank
    1,547,269       60 %     928,361  
      371,344       100 %     371,344  
    $ 5,013,151             $ 3,156,428  
 
 
11

 
 
15.  SHORT TERM LOANS
 
The Company’s short-term loans on June 30, 2011 and December 31, 2010 are as follows:
 
 
June 30, 2011
 
Bank
Loan amount
Due date
Interest rate
Jiaozuo Agricultural Development Bank
$3,094,538
October, 2011
5.56%
Jiaozuo Agricultural Development Bank
3,094,538
November, 2011
5.56%
Jiaozuo Commercial Bank
1,160,451
July, 2011
5.35%
Jiaozuo Commercial Bank
603,434
November, 2011
6.02%
Jiaozuo Commercial Bank
464,180
August, 2011
5.75%
Jiaozuo Commercial Bank
464,180
November, 2011
6.49%
Jiaozuo Commercial Bank
464,180
April, 2012
6.84%
Jiaozuo Commercial Bank
464,180
April, 2012
7.89%
Jiaozuo Commercial Bank
402,289
November, 2011
6.02%
Jiaozuo Commercial Bank
371,344
June, 2012
7.89%
Jiaozuo Commercial Bank
309,453
August, 2011
6.64%
Jiaozuo Commercial Bank
293,981
September, 2011
5.75%
Jiaozuo Commercial Bank
247,563
June, 2012
7.89%
Jiaozuo Commercial Bank
154,734
July, 2011
5.75%
 
$11,589,045
   

 
December 31, 2010
 
Bank
Loan amount
Due date
Interest rate
Jiaozuo Agricultural Development Bank
$3,024,908
October, 2011
5.56%
Jiaozuo Agricultural Development Bank
3,024,899
November, 2011
5.56%
Jiaozuo Commercial Bank
589,855
November, 2011
7.23%
Jiaozuo Commercial Bank
453,734
April, 2011
6.90%
Jiaozuo Commercial Bank
453,734
April, 2011
7.96%
Jiaozuo Commercial Bank
453,734
August, 2011
6.90%
Jiaozuo Commercial Bank
453,734
November, 2011
7.78%
Jiaozuo Commercial Bank
393,236
November, 2011
7.22%
Jiaozuo Commercial Bank
362,987
June, 2011
7.97%
Jiaozuo Commercial Bank
302,489
August, 2011
7.97%
Jiaozuo Commercial Bank
287,365
June, 2011
6.90%
Jiaozuo Commercial Bank
287,365
September, 2011
7.97%
Jiaozuo Commercial Bank
151,244
June, 2011
6.90%
 
$10,239,284
   
 
16.  LONG TERM LOANS
 
As of June 30, 2011 and December 31, 2010, the Company had total long-term loans of $2,580,818 and $1,187,544, respectively, from Asia Development Bank. The interest and the principal of such loan is not payable until 2014. The interest rate for this loan is one year LIBOR+0.06%. At June 30, 2011 the one year LIBOR rate was 0.73%.
 
In October 2010 the Company borrowed $1,187,544, and in March 2011 the Company borrowed an additional $1,393,274  under the Sub-loan Agreement. The Company expects to borrow another $1,507,692 from ADB in 2011 and the remaining portion of its $4 million line from ADB in 2012. The interest rate for this loan is one year LIBOR+0.06%, which total equals 0.72% at June 30, 2011. The Company must borrow amounts available under the loan commitment no later than December 31, 2014 and is required to commence repaying the interest and principal on the outstanding ADB loans on May 15, 2014. Thereafter, payments of principal, interest and fees on the loans shall be made semi-annually on November 15 and May 15 of each year until November 15, 2033. The Company is required to pay a fee based on the unused portion of the commitment. All payment of principal, interest and fees are calculated and paid in U.S. dollars. The Company is also required to pay a fee for early repayment of the loans.
 
 
12

 
 
Under the Sub-loan Agreement, the Company is required to pledge all of its assets to secure repayment of the loans made to it under the Sub-loan Agreement.
 
17. CONVERTIBLE PROMISSORY NOTES AND WARRANTS
 
On August 26, 2010, pursuant to Subscription Agreements (the “Subscription Agreements”) with various accredited investors (the “Investors”), the Company sold $2,330,000 10% Convertible Promissory Notes (the “Notes”) and common stock purchase warrants, initially exercisable for 932,000 shares of Common Stock (the “Warrants”). On September 30, 2010 and October 8, 2010, the Company sold additional Notes and Warrants, the terms of which are identical to those sold on August 26, 2010, for aggregate gross proceeds of $600,000.

Placement Agent Fees

In connection with the sale of the Notes and the Warrants, the Company paid its placement agents (i) a cash fee equal to 9% of the gross proceeds from sale of the Notes and Warrants ($263,700), and (ii) a 2% non-accountable expense allowance ($58,600). In addition, the Company paid $263,118 in legal fees and other expense related to the placement. After payment of the placement agent fees and expenses, the Company received net proceeds of $2,344,582.  From the net proceeds, $217,875 was retained in an escrow account to be used to fund, when due, the first three payments of interest on the Notes. The Company also placed $450,000 in escrow to be used to fund investor relations and similar expenses. At June 30, 2011, a total of $36,451 remained in escrow.

Registration Rights Agreement

At June 30, 2011, no demand for registration has been made, the Company does not currently expect to make any Late Registration Payments and no such payments have been accrued.

Convertible Notes

The Warrants were initially recorded at their fair value of $3,847,448. Because the initial fair value exceeded the gross proceeds received of $2,930,000, the Company recognized a day-one derivative loss of $917,448 and the Notes had no initial carrying value. Because none of the proceeds were initially allocated to the carrying value of the Notes, the Company did not recognize any beneficial conversion feature of the Notes. The Notes were initially recorded at a carrying value of zero and are being amortized, together with interest accruing on the Notes, to their maturity value over the period to maturity on August 26, 2011, at an effective interest rate of approximately 1005% per annum. Interest expense for the six months ended June 30, 2011 was $1,022,560. After payment of cash interest due for the six months ended June 30, 2011, the amortized cost carrying value of the Notes at June 30, 2011 was $923,814.

Deferred Financing Fees

The placement agent fees, including the initial fair value of the Placement Agent Warrants, aggregating $970,166, have been deferred and are being amortized on a straight-line basis over the period to maturity of the Notes on August 26, 2011. For the six months ended June 30, 2011, $815,154 of the fees has been amortized and a further $155,012 remains to be amortized in future periods.

Deferred Consulting Fees
 
For the six months ended June 30, 2011 and 2010, a total of $1,046,990 and $1,894,766 has been amortized, and $329,714 remains to be expensed related to the services being provided by Primary Capital, over the period to August 26, 2011.
 
 
13

 
 
The following tables provide the valuation inputs used to value the Warrants issued on August 26, 2010, September 30, 2010 and October 8, 2010.

   
Warrant issued on August 26, 2010-Valuation Inputs
 
                   
   
June 30,
   
December 31,
   
August 26,
 
Attribute
 
2011
   
2010
   
2010
 
                   
Stock Price
  $ 4.15     $ 4.15     $ 4.15  
Risk free rate
    1.82 %     2.24 %     1.68 %
Volatility
    85.00 %     75.00 %     85.00 %
Strike price
  $ 2.37     $ 2.37     $ 2.37  
Dividend yield
    0 %     0 %     0 %
Contractual Life (Years)
    3.33       3.67       5.00  
Fair Market Value
  $ 3,141,725     $ 3,171,653     $ 3,368,848  
                         
                         
   
Warrant issued on September 30, 2010-Valuation Inputs
 
                         
   
June 30,
   
December 31,
   
September 30,
 
Attribute
    2011       2010       2010  
                         
Stock Price
  $ 4.15     $ 4.15     $ 4.15  
Risk free rate
    1.82 %     2.24 %     1.56 %
Volatility
    85.00 %     75.00 %     85.00 %
Strike price
  $ 2.37     $ 2.37     $ 2.37  
Dividend yield
    0 %     0 %     0 %
Contractual Life (Years)
    3.42       3.75       5.00  
Fair Market Value
  $ 753,593     $ 782,270     $ 827,455  
                         
                         
   
Warrant issued on October 8, 2010-Valuation Inputs
 
                         
   
June 30,
   
December 31,
   
October 8,
 
Attribute
    2011       2010       2010  
                         
Stock Price
  $ 4.15     $ 4.15     $ 4.15  
Risk free rate
    1.82 %     2.24 %     1.39 %
Volatility
    85.00 %     75.00 %     85.00 %
Strike price
  $ 2.29     $ 2.37     $ 2.37  
Dividend yield
    0 %     0 %     0 %
Contractual Life (Years)
    3.50       3.75       5.00  
Fair Market Value
  $ 34,941     $ 34,012     $ 35,893  
 
 
14

 
 
The following is a summary of the Company’s stock warrant activity through June 30, 2011, related to the Warrants issued on August 26, 2010, September 30, 2010 and October 8, 2010.
 
         
Weighted
 
   
Stock
   
Average
 
   
Warrants
   
Exercise
 
         
Price
 
Outstanding-December 31, 2010
    1,289,200     $ 2.37  
Exercisable-December 31, 2010
    1,289,200     $ 2.37  
Granted
    -       -  
Exercised
    -       -  
Forfeited/Cancelled
    -       -  
Outstanding-June 30, 2011
    1,289,200     $ 2.37  
Exercisable-June 30, 2011
    1,289,200     $ 2.37  
                 
 
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, valuation techniques are sensitive to changes in the estimated fair value of our common stock and our estimates of its volatility. Because derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

18.  ADVERTISING EXPENSES
 
Advertising costs are expensed as incurred. The Company had no advertising costs for the periods presented.
 
19.  SHIPPING AND HANDLING COSTS
 
All shipping and handling costs are included in cost of sales. The Company had no freight out expense for the periods presented.
 
20.  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
Included in selling, general and administrative expenses for the six months ended June 30, 2011 and 2010 are non-cash consulting fees paid to Primary Capital, LLC and San Elijo Capital, LLC. The amounts were $1,046,989 and $1,894,766, respectively.
 
21.  SUBSIDY INCOME
 
Subsidy income is the refundable Value Added Tax (“VAT”) input tax as a result of internal sales from the Companys farming segment to its vegetable oil processing segment. For the six months ended June 30, 2011 and 2010, the subsidy income from input VAT gained from VAT invoices issued from the Company’s farming segment to its vegetable oil segment was $721,234 and $0, respectively. The input VAT which arose from soy bean and peanuts was recognized in 2009, so there was no subsidy income for the six months ended June 30, 2010.
 
 
15

 
 
22.  BASIC AND DILUTED NET INCOME PER SHARE
 
The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share calculations for each period:
 
   
For the three months ended June 30,
   
For the six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Income available to common shareholders
  $ 2,127,758     $ 2,259,223     $ 3,370,013     $ 2,787,041  
Interest expense related to convertible debt
    639,031       -       830,795       -  
Income available after assumed conversions of debt and exercise of warrants
  $ 2,766,789     $ 2,259,223     $ 4,200,808     $ 2,787,041  
Weighted average shares outstanding:
                               
Basic
    9,004,593       7,473,808       9,004,593       7,473,808  
Convertible notes
    1,116,190       -       1,116,190       -  
Diluted
    10,120,783       7,473,808       10,120,783       7,473,808  
                                 
Earnings per share
                               
Basic
  $ 0.24     $ 0.30     $ 0.37     $ 0.37  
Diluted
  $ 0.24     $ 0.30     $ 0.37     $ 0.37  
                                 
 
 
For the three and six months ended June 30, 2011, 1,289,200 warrants were excluded from the calculation of net income per share because their effect would have been anti-dilutive.
 
23.  INCOME TAXES

United States
The Company was incorporated in the United States of America and is subject to U.S. tax.  No provisions for income taxes have been made as the Company has no taxable income for the years presented.

British Virgin Islands
Sky Harmony and Sky Fortune were incorporated in the British Virgin Islands and are not subject to income taxes under the current laws of the British Virgin Islands.

Hong Kong
Our subsidiary in Hong Kong, Sky River, is subject to Hong Kong tax.  No provisions for income taxes have been made as the Company has no taxable income for the years presented.

PRC
Our subsidiary, Yida, is subject to PRC enterprises income tax at the applicable tax rates on the taxable income as reported in its Chinese statutory accounts in accordance with the relevant enterprises income tax laws applicable to domestic enterprises.  Pursuant to the same enterprises income tax laws, being classified as a agricultural company, Yida is fully exempted from PRC enterprises income tax starting from 2009 due to the change of PRC tax law.

The Company uses the asset and liability method, where deferred tax assets and liabilities are determined  based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting  purposes. There are no material timing differences and therefore no deferred tax asset or liability at June 30, 2011 and December 31, 2010.  There are no net operating loss carry forwards at June 30, 2011 and December 31, 2010.
 
 
16

 

The effective income tax expense for the three and six months ended June 30, 2011 and 2010 is as follows:
 
As of
 
For the three months ended
June 30,
   
For the three months ended
June 30,
 
   
2011
   
2010
 
Tax at statuory rate
  $ 531,940     $ 564,806  
Tax exemption
    (531,940 )     (564,806 )
    $ -     $ -  
 
As of
 
For the six months ended June 30,
   
For the six months ended June 30,
 
   
2011
   
2010
 
Tax at statuory rate
  $ 842,503     $ 696,760  
Tax exemption
    (842,503 )     (696,760 )
    $ -     $ -  
 
Income tax expenses(benefit) consists of the following
           
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Current
  $       $    
Federal
    -       -  
State
    -       -  
      -       -  
Deferred
               
Federal
    -       -  
State
    -       -  
      -       -  
                 
Current and deferred
    -       -  
Valuation allowance
    -       -  
Total
  $ -     $ -  
                 
 
The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provision of FASB ASC 740. The Company has recorded no deferred tax assets or liabilities as of June 30, 2011 and December 31, 2010, because all significant differences in tax basis and financial statement carrying values are permanent differences.
 
 
24.  COMMITMENTS AND CONTINGENCIES
 
The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash equivalents denominated in U.S. Dollars. Any significant revaluation of RMB may materially and adversely affect the cash flows, revenues, earnings and financial position of the Company.
 
 
17

 
 
Operating Leases
 
As of June 30, 2011 we had commitments under certain operating leases, requiring annual minimum rentals as follows:
 
       
2011
  $ 4,369,485  
2012
    4,369,485  
2013
    4,369,485  
2014
    4,369,485  
2015
    4,369,485  
Total
  $ 21,847,425  
 
The Company’s leased properties are principally located in the PRC and are used for farming. The terms of these operating leases vary from ten to fifteen years. Pursuant to the lease terms, when the contracts expire, we have the right to extend them with new negotiated prices. The leases are renewable subject to negotiation.
 
Asia Development Bank loans
 
In October 2009, the Company received a commitment from the Jiaozuo City Finance Bureau to make long-term sub-loans to the Company in the aggregate principal amount of $4 million, which loans are funded by Asia Development Bank (“ADB”) under a program called the “Dry Farming Sustainable Agriculture Projects of Henan Province” The commitment is evidenced by and subject to the terms of a Sub-loan Agreement between Jiaozuo City Finance Bureau and Yida (the “Sub-loan Agreement”).
 
In October 2010 the Company borrowed $1,187,544, and in March 2011 the Company borrowed an additional $1,393,274  under the Sub-loan Agreement. The Company expects to borrow another $1,507,692 from ADB in 2011 and the remaining portion of its $4 million line from ADB in 2012. The interest rate for this loan is one year LIBOR+0.06%, which total equals 0.72% at June 30, 2011. The Company must borrow amounts available under the loan commitment no later than December 31, 2014 and is required to commence repaying the interest and principal on the outstanding ADB loans on May 15, 2014. Thereafter, payments of principal, interest and fees on the loans shall be made semi-annually on November 15 and May 15 of each year until November 15, 2033. The Company is required to pay a fee based on the unused portion of the commitment. All payment of principal, interest and fees are calculated and paid in U.S. dollars. The Company is also required to pay a fee for early repayment of the loans.
 
Under the Sub-loan Agreement, the Company is required to pledge all of its assets to secure repayment of the loans made to it under the Sub-loan Agreement.

25.  CAPITAL STOCK
 
Common Stock
 
We are authorized to issue 100,000,000 shares of Common Stock, $0.001 par value.
 
At June 30, 2011, 9,004,593 shares of Common Stock were issued and outstanding.
 
Preferred Stock
 
We are authorized to issue 10,000,000 shares of Preferred Stock, $0.001 par value, which may be issued in series, with such designations, preferences, stated values, rights, qualifications or limitations as determined solely by the Board of Directors of the Company.  At June 30, 2011, no shares of Preferred Stock have been issued.
 
 
18

 
 
26.  SEGMENT REPORT
 
The Company’s operations are classified into two principal reportable segments (“farming” and “vegetable oil processing”) that provide different products or services. Vegetable oil processing is engaged in the business of processing soybean and peanuts while Farming is engaged in the business of planting and cultivating wheat, soybean and peanuts, most of which products are used internally. Separate management of each segment is required because each business unit is subject to different production and technology strategies. For the first six months of each year, Farming only grows wheat, which is sold externally.
 
The Company’s operations are located in The People’s Republic of China (“PRC”). All revenues are from customers in the PRC and substantially all of the Company’s assets are located in the PRC. Accordingly, no analysis of the Company’s sales and assets by geographical market is presented.
 
The Company does not disaggregate the selling, general and administrative and other expenses for these two segments.
 
   
For the six month ended June 30, 2011
   
For the six month ended June 30, 2010
   
For the six month ended June 30
 
   
Vegetable oil processing
   
Farming
   
Vegetable oil processing
   
Farming
   
2011
   
2010
 
External sales
  $ 17,090,555     $ 7,959,357     $ 8,985,467     $ 7,166,022     $ 25,049,912     $ 16,151,489  
Interest income
  $ 67,244     $ -     $ 141,798     $ -     $ 67,244     $ 141,798  
Interest expense
  $ (2,023,615 )   $ -     $ (311,645 )   $ -     $ (2,023,615 )   $ (311,645 )
Depreciation and amortization
  $ 372,183     $ -     $ 339,363     $ -     $ 372,183     $ 339,363  
Total assets
  $ 41,384,758     $ 12,679,018     $ 32,956,130     $ 9,008,448     $ 54,063,776     $ 41,964,578  
Gross profit
  $ 3,504,527     $ 2,893,290     $ 2,438,096     $ 2,724,626     $ 6,397,817     $ 5,162,722  
 
For its farming segment, the Company recognizes sales only to third parties and the segment’s gross profit is the amount calculated by external sales less the cost of sales and expenses related to the farming segment.
 
For its vegetable oil processing segment, the Company recognizes sales only to third parties plus the input VAT tax received from internal sales from the farming segment to the vegetable oil segment and the segment’s gross profit is the amount calculated by external sales less the cost of sales and expenses related to the vegetable oil processing segment.
 
Customer and Vendor concentrations
 
For the six months ended June 30, 2011 and 2010, the customers whose purchases exceeded 5% of the total sales of the Company were as follows:
 
   
June 30, 2011
 
Customer Name
 
Amount
   
% of
 
   
total
 
Keyuan Seed Company
    4,185,132       17 %
Kaide Seed Company
    2,092,566       8 %
Luoyang Tianliang Vegetable Oil
    1,906,783       8 %
Huaiyuan Seed Company
    1,395,044       6 %
                 
                 
   
June 30, 2010
 
   
Amount
   
% of
 
   
total
 
Keyuan Seed Company
    3,806,011       24 %
Kaide Seed Company
    1,903,006       12 %
Huayu Vegetable Oil
    1,451,617       9 %
                 
 
 
19

 
 
For the six months ended June 30, 2011 and 2010 vendors whose sales to the Company exceeded 5% of the total purchases of the Company were as follows:
 
   
June 30, 2011
 
   
Amount
   
%of
 
   
total
 
Yuhua Vegetable oil
    7,843,802       61 %
Chuanwei Wang
    4,530,931       35 %
                 
   
June 30, 2010
 
   
Amount
   
%of
 
   
total
 
Chuanwei Wang
    2,577,939       49 %
National Food Storage
    1,509,327       29 %
Shandong Xiangchi Vegetable oil
    1,018,742       19 %
 
As of June 30, 2011 and December 31, 2010, customer accounts receivable balances exceeding 10% of the total balance are as follows:
          
             
   
June 30, 2011
 
Customer
 
Amount
   
Percentage
 
Keyuan Seed
  $ 3,159,616       42 %
Kaide Seed
    1,737,444       23 %
Huaiyuan Seed
    1,700,309       23 %
Wushe Seed
    752,669       10 %
 
             
   
December 31, 2010
 
Customer
 
Amount
   
Percentage
 
Keyuan Seed
  $ 1,282,194       27 %
Kaide Seed
    908,695       19 %
Huaiyuan Seed
    833,072       17 %
Yangqin Wen
    565,429       12 %
 
27. RECENT PRONOUNCEMENTS

The following Accounting Standards Codification Updates have been issued since January 1, 2010 or will become effective after the end of the period covered by these financial statements. The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

Pronouncement
Issued
Title
ASU No. 2010-06
January 2010
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
ASU No. 2010-10
February 2010
Consolidation (Topic 810): Amendments for Certain Investment Funds
ASU No.2010-13
April 2010
Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades—a consensus of the FASB Emerging Issues Task Force
ASU No.2010-16
April 2010
Entertainment—Casinos (Topic 924): Accruals for Casino Jackpot Liabilities—a consensus of the FASB Emerging Issues Task Force
ASU No.2010-20
July 2010
Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
ASU No.2010-23 August 2010 Health Care Entities (Topic 954): Measuring Charity Care for Disclosure
ASU No. 2010-24 August 2010 Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries
ASU No.2010-26 October 2010 Financial Services—Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force)
ASU No. 2010-27 December 2010 Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers (a consensus of the FASB Emerging Issues Task Force)
ASU No. 2010-28 December 2010 Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task force)
ASU No. 2011-01 January 2011 Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20
ASU No. 2011-02 April 2011 Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is Troubled Debt Restructuring.
ASU No. 2011-03 April 2011 Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements
ASU No. 2011-04  May 2011 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
ASU No. 2011-05 June 2011 Comprehensive Income (Topic 220): Presentation of Comprehensive Income
ASU No. 2011-06 July 2011 Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force)
ASU No. 2011-07 July 2011 Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (a consensus of the FASB Emerging Issues Task Force)
 
To the extent appropriate, the guidance in the above Accounting Standards Codification Updates is already reflected in our financial statements and management does not anticipate that these accounting pronouncements will have any future effect on our financial statements.

28.  SUBSEQUENT EVENTS
 
The Company has evaluated subsequent events from the balance sheet date through the date that the financial statements were issued or were available to be issued. The management of the Company does not believe any subsequent events have occurred that would require further disclosure or adjustment to the financial statements.
 
 
20

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described herein.
 
Overview
 
We are a company in China’s agricultural industry in Henan Province with our farming and vegetable oil processing enterprise. We are headquartered in Jiaozuo with approximately 80 full-time employees and 11,153 acres of farm land which we lease.  
 
Our current major products are wheat, soya oil and peanut oil. For the three months ended June 30, 2011 and 2010, our total revenue amounted to approximately $15 million and $9 million, respectively, a 63% period-over-period increase. For the six months ended June 30, 2011 and 2010, our total revenues amounted to approximately $25 million and $16 million, respectively, a 55% period-over-period increase. Our revenues are subject to value added tax (“VAT”), urban maintenance and construction tax and additional education fees. We deduct the “VAT” amount from our gross revenues to arrive at our total revenues and include urban maintenance and construction tax and additional education fees in our total cost of sales. Our net income for the three months ended June 30, 2011 and 2010 was $2.1 million and $2.2 million, a quarter-over-quarter decrease of 6%. Our net income for the six months ended June 30, 2011 and 2010 was $3.4 million and $2.8 million, respectively, a period-over-period increase of 21%.
 
We generate revenues from two operating segments: farming and vegetable oil processing.
 
Segment I: Farming
 
In our farming segment, revenues were $8.0 million for both the three months and six months ended June 30, 2011, an increase of 11% over revenues of $7.2 million in this segment in the same periods of 2010. Cost of sales was $5.1 million in the three months and six months ended June 30, 2011, an increase of 14% over the cost of sales of $4.4 million in the same periods of 2010.
 
Segment II: Vegetable oil processing
 
Revenues for this segment were $7.4 million in the quarter ended June 30, 2011, an increase of 227% over revenues of $2.3 million in this segment in the same period of 2010. Cost of sales was $6.1 million in the quarter ended June 30, 2011, an increase of 309% over cost of sales of $1.5 million in the same period of 2010. The vegetable oil processing segment revenue was $17 million for the six months ended June 30, 2011, an increase of 90% over revenues of $9.0 million in this segment in the same period of 2010. Cost of sales was $14 million for the six months ended June 30, 2011, an increase of 108% over cost of sales $6.5 million in this segment in the same period of 2010.
 
Factors Affecting Our Results of Operations – Generally
 
We believe the most significant factors that directly or indirectly affect our sales revenues and net income are:
 
 
 
The changes in China’s macro-economic environment, government strategies and policies, industrial development and planning.
 
 
 
The impact of weather on crop output per acre of the farmland.
 
 
 
The sales price of vegetable oil, which is a commodity and the price of which is not controlled by us.
 
 
 
The purchase price variance on outsourcing soybeans as compared to the cost of self-production. The Company has the capacity to grow approximately 3,600 tons per year, which is about 35% of the total soya beans the Company needs as raw material for its vegetable oil processing.
 
 
 
The availability and required terms of funding for our working capital. Because the vegetable oil processing business requires significant working capital for purchasing raw material, we can increase our sales with more working capital available.
 
 
21

 
 
Three months ended June 30, 2011 Compared to three months ended June 30, 2011
 
Results of Operations
 
                                     
   
Three Months Ended
   
% of
   
Three Months Ended
   
% of
   
Change ($)
   
Change
 
 
June 30, 2011 ($)
   
sales
   
June 30, 2010 ($)
   
sales
   
(%)
 
Revenue
  $ 15,366,375       100   $ 9,432,550       100     5,933,825       62.91
Cost of Sales
    11,149,091       72.56     5,928,111       62.85     5,220,980       88.07
                                                 
Depreciation and Amortization Expenses not included in COGS
    120,995       0.79     266,573       2.83     (145,578 )     (54.61 %) 
Selling and Marketing Expenses
    7,850       0.05     14,425       0.15     (6,575 )     (45.58 %) 
Other General and Administrative Expenses
    652,455       4.25     989,696       10.49     (337,241 )     (34.08 %) 
                                                 
Other Income (Expenses), net
    (1,308,226 )     (8.51 %)      25,478       0.27     (1,333,704 )     (5.235 %) 
Income before provision for income taxes and non-controlling interests income
    2,127,758       13.85     2,259,223       23.95     (131,465 )     (5.82 %) 
Provision for Income Taxes
    0       0     0       0     0       0
                                                 
                                                 
 
 
22

 
 
Revenue
 
Our revenue was $15,366,375 in the three months ended June 30, 2011, an increase of $5,933,825 or 63%, compared to revenue of $9,432,550 in the same period of 2010. The increased revenue was primarily driven by the increase in sales of peanuts and oil trading.
 
                           
Three months ended June 30, 2011
             
Quantities
   
Unit cost (USD)
 
Segment
By Product
 
% of total
   
Amount (USD)
   
Kilogram (kg)
   
per kg
 
Vegetable Oil
Oil trading
    17 %     2,598,281       1,759,150       1.48  
 
Soya meal
    12 %     1,774,477       3,910,870       0.45  
 
Peanut
    10 %     1,543,749       1,378,000       1.12  
 
Soya oil
    8 %     1,160,364       824,643       1.41  
 
Others*
    2 %     330,147                  
         Total, vegetable oil
    48 %     7,407,018                  
Farming
Wheat
    52 %     7,959,357       24,741,000       0.32  
               Total, farming
    52 %     7,959,357                  
Total sales
      100 %     15,366,375                  
                                   
Three month months ended June 30, 2010
                         
Vegetable Oil
Peanut oil
    11 %     1,034,519       908,822       1.14  
 
Raw oil refining
    11 %     1,031,295       968,360       1.06  
 
Oil trading
    2 %     200,714       136,540       1.47  
         Total, vegetable oil
    24 %     2,266,528                  
Farming
Wheat
    76 %     7,166,022       22,280,000       0.32  
               Total, farming
    76 %     7,166,022                  
Total sales
      100 %     9,432,550                  
* None of the product individually exceeds 4% of total revenue
                 
 
The revenue from peanuts increased by $1,543,749 for the three months ended June 30, 2011 compared to the same period of 2010. There was no sales of peanuts for the quarter ended June 30, 2010. The reason for such increase in sales of peanuts is that in 2011 the Company sold more of the peanuts grown by the Company instead of processing them into peanut oil. The increased sales of peanuts was driven by higher demand.
 
Oil trading revenue increased by $2,397,567, or 1,195%, for the three months ended June 30, 2011 compared with the same period of 2010. Oil trading occurs when the Company purchases vegetable oil from vendors and sells it at a higher price to other customers. The oil trading sales increase was mainly caused by increased demand. The Company found more business opportunities for raw oil trading in the quarter ended 2011 compared with the same period of 2010 due to the market conditions.
 
Revenue from soya oil increased by $1,160,365, for the three months ended June 30, 2011 compared with the same period of 2010. There were no sales of soya oil for the three months ended June 30, 2010. The increase in 2011 was caused by increased demand. Revenue from soya meal increased by $1,774,478 for the three months ended June 30, 2011 compared with the same period of 2010. There were no sales of soya meal for the three months ended June 30, 2010. The increased sales of soya meal was caused by increased sales of soya oil. As the market demand for soya oil increased, the Company produced more soya oil, and as a by-product of soya oil, the production of soya meal also increased. Soya meal is used as animal feed. The Company was able to sell all of the soya meal by-product it produced.
 
Cost of Sales
 
Our cost of sales was $11,149,091 in the three months ended June 30, 2011, an increase of $5,220,980, or 88%, compared to cost of sales of $ 5,928,111 for the same period of 2010.
 
The increase in our cost of sales resulted directly from the increased sales during the period. The increase in cost of sales in the quarter ended June 30, 2011 was more than the increase in revenue because the increase in sales for six months ended 2011 compared to the same period of 2010 were primarily the result of increases in oil trading business, which business have a lower gross margin rate compared to other business of the Company.
 
 
23

 
 
Gross Profit
 
Gross profit for the three months ended June 30, 2011 was $4,217,284, a 20% increase from gross profit of $3,504,439 for the same period of 2010. The gross margin rate decreased from 37% to 27% for the three months ended 2011 as compared to the same period of 2010, principally due to the substantial revenue increase and a substantially higher cost of goods sold for the reasons noted above.
 
In USD
                         
     
2011 three months
   
% of total
   
2010 three months
   
% of total
 
Soya oil
Sales
    1,160,364             -        
 
Gross profit
    119,111       3 %     -       0 %
 
Gross profit rate
    10 %             -          
                                   
Soya meal
Sales
    1,774,477               -          
 
Gross profit
    116,149       3 %     -       0 %
 
Gross profit rate
    7 %             -          
                                   
                                   
Peanut
Sales
    1,543,749               -          
 
Gross profit
    886,190       21 %     -       0 %
 
Gross profit rate
    57 %             -          
                                   
Oil trading
Sales
    2,598,281               200,714          
 
Gross profit
    157,962       4 %     12,951       0.4 %
 
Gross profit rate
    6 %             6 %        
                                   
Raw oil refining
Sales
    -               1,031,295          
 
Gross profit
    -       0 %     139,778       4 %
 
Gross profit rate
    -               14 %        
                                   
Peanut oil
Sales
    -               1,034,519          
 
Gross profit
    -       0 %     627,085       18 %
 
Gross profit rate
    -               61 %        
                                   
Others*
Sales
    330,147               -          
 
Gross profit
    44,581       1 %     -       0 %
 
Gross profit rate
    14 %             -          
                                   
Total vegetable oil processing Gross profit
    1,323,993       31 %     766,862       22 %
                                   
Farming
                                 
Wheat
sales
    7,959,357               7,166,022          
 
Gross profit
    2,893,290       69 %     2,724,626       78 %
 
Gross profit rate
    36 %             38 %        
 Total farm gross profit
      2,893,290       69 %     2,724,626       78 %
 Total gross profit
      4,217,284       100 %     3,491,488       100 %
                                   
* None of the product individually exceeds 4% of total gross margin
                         
 
Selling and General and Administrative Expenses
 
Selling and marketing expenses were not material in any of the periods presented. Management believes this is due to the fact that the Company sells a commodity with a ready market that is increasingly in short supply in China and therefore the Company need not incur such expenses in order to market its products.
 
Our general and administrative expenses were $773,450 in the three months ended June 30, 2011, a decrease of $482,818 or 38%, compared to general and administrative expenses of $1,256,269 in the same period of 2010. The difference was mainly attributable to the decrease of $660,381 in amortized consulting fees and increased deferred financing fee $244,755 for the three months ended June 30, 2011 compared to the same period of 2010 when we issued our convertible notes.
 
 
24

 
 
Other Income (Expenses)
 
Our other expenses were $1,308,226 for the three months ended June 30, 2011, an increase of $1,333,704, or 5,235%, compared to other income of $25,478 in the same period of 2010. The difference was mainly caused by an interest expense increase of $436,520 related to the convertible notes and increased interest short-term loan expenses of $413,345 for the three months ended June 30, 2011 compared to the same period of 2010.
 
The derivative instrument gains were calculated using a standard financial model, and utilized certain assumptions including volatility, term and exercise prices.
 
Net income
 
In the three months ended June 30, 2011, our net income before income taxes was $2,127,758, a decrease of $131,456, or 6% compared to net income before income taxes of $ $2,259,223 in the same period of 2010. The main reason for the decrease in 2011 was an increase in interest expenses related to the Company’s outstanding convertible notes and short-term loans which more than offset the increase in gross profit.
 
 
25

 
 
Six months ended June 30, 2011 Compared to six months ended June 30, 2011
 
Results of Operations
 
                                     
   
Six Months Ended
   
% of
   
Six Months Ended
   
% of
   
Change ($)
   
Change
 
 
June 30, 2011 ($)
   
sales
   
June 30, 2010 ($)
   
sales
   
(%)
 
Revenue
  $ 25,049,912       100   $ 16,151,489       100     8,898,423       55.09
Cost of Sales
    18,652,095       74.46     10,988,767       68.04     7,663,328       69.74
                                                 
Depreciation and Amortization Expenses not included in COGS
    225,756       0.90     178,229       1.10     47,527       26.67
Selling and Marketing Expenses
    20,213       0.08     74,425       0.46     (54,212 )     (72.84 %) 
Other General and Administrative Expenses
    1,668,130       6.66     1,999,671       12.38     (331,541 )     (16.58 %)
                                                 
Other Income (Expenses), net
    (1,113,705 )     (4.45 %)      (123,356 )     (0.76 %)      (990,349 )     802.84
Income before provision for income taxes and non-controlling interests income
    3,370,013       13.45     2,787,041       17.26     582,973       20.92
Provision for Income Taxes
    0       0     0       0     0       0
                                                 
 
 
26

 
 
Revenue
 
Our revenue was $25,049,912 in the six months ended June 30, 2011, an increase of $ 8,898,423 or 55%, compared to revenue of $16,151,489 in the same period of 2010. The increased revenue was primarily driven by the increase in sales of peanuts and oil trading.
 
                           
2011 six months ended June 30, 2011
         
Quantities
   
Unit cost (USD)
 
Segment
By Product
 
% of total
   
Amount (USD)
   
Kilogram (kg)
   
per kg
 
Vegetable Oil
Soya Meal
    20 %     4,891,519       10,467,850       0.47  
 
Oil trading
    17 %     4,144,110       2,967,890       1.40  
 
Peanut
    17 %     4,182,004       3,773,720       1.11  
 
Raw oil refining
    5 %     1,314,549       944,900       1.39  
 
Soya Oil
    7 %     1,662,049       1,172,068       1.42  
 
Others*
    4 %     896,324                  
         Total, vegetable oil
    68 %     17,090,555                  
Farming
Wheat
    32 %     7,959,357       24,741,000       0.32  
               Total, farming
    32 %     7,959,357                  
Total sales
      100 %     25,049,912                  
                                   
2010 six month months ended June 30, 2010
                         
Vegetable Oil
Soya Meal
    19 %     3,112,725       7,230,660       0.43  
 
Peanut Oil
    13 %     2,083,478       1,049,175       1.99  
 
Soya Oil
    7 %     1,189,062       1,165,180       1.02  
 
Raw oil refining
    6 %     1,042,520       994,620       1.05  
 
Peanut
    5 %     830,700       856,490       0.97  
 
Others*
    5 %     726,982                  
         Total, vegetable oil
    56 %     8,985,467                  
Farming
Wheat
    44 %     7,166,022       22,280,000       0.32  
               Total, farming
    44 %     7,166,022                  
Total sales
      100 %     16,151,489                  
* None of the product individually exceeds 4% of total revenue
                 
 
Revenue from soya meal increased by $ 1,778,795, or 57%, for the six months ended June 30, 2011 compared with the same period of 2010. The increase was caused by market conditions.
 
Oil trading revenue increased by $3,943,396, or 1,965%, for the six months ended June 30, 2011 compared with the same period of 2010. Oil trading occurs when the Company purchases vegetable oil from vendors and sells it at a higher price to other customers.  The oil trading sales increase was mainly caused by market conditions. The Company found more business opportunities for raw oil trading in the six months ended 2011 compared with the same period of 2010.
 
The revenue from peanuts increased by $3,351,305, or 403%, for the six months ended June 30, 2011 compared to the same period of 2010. The reason for such increase is the Company sold the peanuts it grew directly instead of processing them into peanut oil. Peanut oil sales for the six months ended 2011 was $523,057, a decrease of $1,563,010, or 75%, compared to the same period of 2010. The decrease in peanut oil revenue was caused by decreased local demand.
 
Cost of Sales
 
Our cost of sales was $18,652,095 in the six months ended June 30, 2011, an increase of $7,663,328, or 70%, compared to cost of sales of $10,988,767 for the same period of 2010.
 
The increase in our cost of sales resulted directly from the increased amount of oil trading during the period. The increase in cost of sales in the six months ended June 30, 2011 was more than the increase in revenue because the increase in sales for the six months ended 2011 compared to the same period of 2010 were primarily the result of increases in low gross margin business such as our oil trading business. There was a decrease in sales of relatively higher gross margin products such as peanut oil and soya oil.
 
 
27

 
 
Gross Profit
 
Gross profit for six months ended June 30, 2011 was $6,397,817, a 24% increase from gross profit of $5,162,722 for the same period of 2010. The gross margin rate decreased from 32% to 26% for the six months ended June 30, 2011 as compared to the same period of 2010, principally due to the substantial revenue increase and a substantially higher cost of goods sold for the reasons noted above.
 
In USD
                         
     
2011 six months
   
% of total
   
2010 six months
   
% of total
 
Soya oil
Sales
    1,662,049             1,189,062        
 
Gross profit
    113,011       2 %     23,781       0.5 %
 
Gross profit rate
    7 %             2 %        
                                   
Soya meal
Sales
    4,891,520               3,112,725          
 
Gross profit
    332,599       5 %     62,254       1.2 %
 
Gross profit rate
    7 %             2 %        
                                   
                                   
Peanut
Sales
    4,182,004               830,700          
 
Gross profit
    2,275,222       36 %     523,191       10 %
 
Gross profit rate
    54 %             63 %        
                                   
Oil trading
Sales
    4,144,110               -          
 
Gross profit
    301,842       5 %     -       0 %
 
Gross profit rate
    7 %             -          
                                   
Raw oil refining
Sales
    1,314,549               1,042,520          
 
Gross profit
    131,828       2 %     145,682       3 %
 
Gross profit rate
    10 %             14 %        
                                   
Peanut oil
Sales
    -               2,083,478          
 
Gross profit
    -       0 %     1,547,291       30 %
 
Gross profit rate
    -               74 %        
                                   
Others*
Sales
    896,324                          
 
Gross profit
    350,025       5 %     135,897       3 %
 
Gross profit rate
    39 %                        
Total vegetableoil processing gross profit
    3,504,527       55 %     2,438,096       47 %
                        8,258,485          
Farming
                                 
Wheat
sales
    7,959,357               7,166,022          
 
Gross profit
    2,893,290       45 %     2,724,626       53 %
 
Gross profit rate
    36 %             38 %        
 Total farm gross profit
      2,893,290       45 %     2,724,626       53 %
 Total gross profit
      6,397,817       100 %     5,162,722       100 %
                                   
* None of the product individually exceeds 4% of total gross margin
                         
 
 
Selling and General and Administrative Expenses
 
Selling and marketing expenses were not material in any of the periods presented. Management believes this is due to the fact that the Company sells a commodity with a ready market that is increasingly in short supply in China and therefore the Company need not incur such expenses in order to market its products.
 
Our general and administrative expenses were $1,893,886 in the six months ended June 30, 2011, a decrease of $284,014 or 13%, compared to general and administrative expenses of $2,177,900 in the same period of 2010. The difference was mainly attributable to the decrease of $847,776 in amortized financing fees and increase of $492,230 in amortized financing fees for the six months ended June 30, 2011 compared to the same period of 2010 when we issued our convertible notes.
 
 
28

 
 
Other Income (Expenses)

Our other income (expenses) were $1,113,705 for the six months ended June 30, 2011, an increase of $990,349, or 803%, compared to other expenses of $123,356 in the same period of 2010. The difference was mainly caused by an interest expense increase of $1,711,970 related to convertible loan and short-term loans and an increase of $721,234 for subsidy income for the six months ended June 30, 2011 compared to the same period of 2010. The increased subsidy income was mainly caused by the increased sales for the six months ended June, 30, 2011 compared to the same period of 2010 because as a result of higher sales the Company was able to offset more input VAT for the invoices issued by the farming segment to vegetable oil processing segment.

The derivative instrument gains were calculated using a standard financial model, and utilized certain assumptions including volatility, term and exercise prices.
 
Net income

In the six months ended June 30, 2011, our net income before income taxes was $3,370,013, an increase of $582,973, or 21%, compared to net income before income taxes of $2,787,041 in the same period of 2010. The main reason for the increase in 2011 is the increase in overall gross profit generated from sales.

Liquidity and Capital Resources

As shown in our consolidated statements of cash flows, our liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) financing activities and (iv) investing activities.

The external sources of financing of the Company are mainly short-term bank loans from banks in China. On June 30, 2011, the Company had current lines of credit in the aggregate amount of $11,589,045. The Company had fully borrowed against its bank lines as of June 30, 2011.
 
 
29

 
 
Statement of Consolidated Cash Flows
 
   
For the Six Month ended
   
For the Six Month ended
   
Change
   
%
 
 
June 30, 2011
   
June 30, 2010
   
of change
 
 
($)
   
($)
   
($)
       
Net cash (used in) provided by operating activities
    (1,760,366 )     1,346,911       (3,107,277 )     (231 %)
Net cash provided by (used in) investing activities
    530,512       (1,468,377 )     1,998,889       (136 %)
Net cash provided by financing activities
    2,956,240       986,905       1,969,335       200 %
Effects of exchange rate changes on cash and cash equivalents
    25,613       857       24,756       2888 %
Increase (decrease) in cash and cash equivalents
    1,751,999       866,296       885,703       102 %
Cash and cash equivalents, beginning of period
    161,327       410,651       (249,324 )     (61 )%
Cash and cash equivalents, end of period
    1,913,326       1,276,947       636,379       50 %
 
Cash and cash equivalents

As of June 30, 2011, our cash and cash equivalents were $1,913,326.

Cash and cash equivalents include cash on hand and demand deposits held by banks. As of June 30, 2011 and December 31, 2010, $1,856,206 and $104,569, respectively, of the cash and cash equivalents were placed with banks in China, which are denominated in RMB. The remittance of these funds out of China is subject to exchange control restrictions imposed by the Chinese government. The cash equivalents consist of cash deposits of $57,120 and $56,758 as of June 30, 2011 and December 31, 2010, respectively, in a bank in the United States. Such cash deposits are insured up to $250,000 and are denominated in U.S. dollars. Under the Foreign Currency Administration Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, and trade and service-related foreign exchange transactions. Conversion of Renminbi into foreign currency for capital account items, such as direct investment, loans, investment in securities and repatriation of funds, however, is still subject to the approval of the State Administration of Foreign Exchange (“SAFE”). Under the Administration Rules, foreign-invested enterprises may only buy, sell and remit foreign currencies at banks authorized to conduct foreign exchange transactions after providing valid commercial documents and, in the case of capital account item transactions, only after obtaining approval from SAFE. Under the Foreign Currency Administration Rules, foreign-invested enterprises are required to complete the foreign exchange registration and obtain the registration certificate. The profit repatriated to us from Yida, however, is not subject to the approval of the foreign exchange authority, because it is a current account item transaction.
 
Working capital
 
The working capital of the Company as of June 30, 2011 and December 31, 2010 was $10,603,874 and $3,173,867, respectively.
 
 
30

 

Operating activities
 
Net cash used in operating activities was $1,760,366 for the six months ended June 30, 2011, compared to $1,346,911 provided in the same period of 2010. The $3,107,277 decrease in cash provided by operating activities in the six months ended June 30, 2011 compared to the same period of 2010 was mainly due to: (i) a $4,888,029 increase in changes in advances to suppliers for the six months ended June 30, 2011, as the Company purchased more material for future production due to current market conditions, (ii) a $3,845,664 increase in accounts receivable for the six months ended June 30, 2011, which was primarily caused by sales to seeds companies by the farming segment,  (iii) a $1,192,955 decrease in inventory and (iv) an aggregate of   $2,416,483 in non-cash expenses and increase of liability, including $877,264 amortization of discount on convertible notes, $492,230 of amortization of deferred financing fees and $1,046,990 of amortization of consulting fees.
 
Investing activities

Net cash provided by investing activities was $530,512 for the six months ended June 30, 2011, compared to $1,468,377 used in investing activities in the same period of 2010. The increase of $1,998,889 was primarily due to (i) proceeds from a decrease in other receivable of $1,294,083 in the six months ended June 30, 2011 as a result of collections and (ii) a $763,571 increase of construction in progress in the six months ended June 30, 2011. The construction in progress is the first deep processing line which the Company plans to complete in 2011.

Financing activities

The cash provided by financing activities was $ 2,956,240 in the six months ended June 30, 2011 compared to $986,905 cash provided by financing activities in the same period of 2010. The increase of $1,969,335 was due to (i) $1,348,166 in proceeds from long-term loans and (ii) $1,099,542 in proceeds from a short-term loan for the six months ended June 30, 2011.

In 2010 the Company acquired operating leases to an additional 2,093 acres of farm land bringing the total acreage of land leased by the Company to 11,153 acres. As a result of the expansion, the Company’s aggregate rent expenses for the land it leases will increase from $3,997,480 in 2010 to $4,369,485 in 2011 and 2012. There were no charges or costs in acquiring the additional operating leases. The Company does not currently plan to acquire or seek leases for any additional acreage.

In 2011, as we accelerate our planned expansion, we expect to make continued capital expenditures for adding manufacturing equipment for the new production line in our new facility, which is adjacent to our old facility. We believe that our existing cash, cash equivalents and cash flows from operations and proceeds from the completed bridge financing in 2010, will be sufficient to meet our presently anticipated future cash needs to bring all of our facilities into full production, which include the first deep processing line to be operational in 2011. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. Due to our planned expansion, the Company does not expect to pay any cash dividends for at least the next two years.

It is management's intention to expand our operations as quickly as reasonably practicable to capitalize on the demand for our products.  We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations and available borrowings under bank lines of credit.  We believe that we can continue meeting our cash funding requirements for our current business in this manner over the next twelve months.

Regarding the expansion, the Company plans to complete installation of its first deep processing line in October 2011. The Company also intends to construct a second deep processing line at such time as it can secure financing on reasonable terms for such line. The total amount of the first new production line investment is expected to be $3.9 million, and through December 31, 2010 the Company had already spent $2.5 million for the first deep processing line. The remaining balance of $1.4 million is planned to be paid in August 2011, which amount will be financed by another drawdown by the Company of a portion of the ADB loan discussed under “Asia Development Bank (“ADB”) loans,” below. The total investment for the second deep processing line is expected to be $5.4 million.
 
Effect of change in exchange rate changes on cash and cash equivalents

The net cash gain due to changes in currency exchange rates was $25,613 in the six months ended June 30, 2011 compared to a net cash gain of $857 for the same period of 2010.
 
 
31

 
 
Contractual Obligations and Commercial Commitments

Operating Leases
 
As of June 30, 2011, we had commitments under certain operating leases, requiring annual minimum rentals as follows:
       
2011
    4,369,485  
2012
    4,369,485  
2013
    4,369,485  

2014
    4,369,485  
2015
    4,369,485  
Total
  $ 21,847,425  
 
 
The Company’s leased properties are principally located in the PRC and are used for farming. The terms of these operating leases vary from ten to fifteen years. Pursuant to the lease terms, when the contracts expire, we have the right to extend them with new negotiated prices.
 
Asia Development Bank (“ADB”) loans
 
In October 2009, the Company received a commitment from the Jiaozuo City Finance Bureau to make long-term sub-loans to the Company in the aggregate principal amount of $4 million, which loans are funded by Asia Development Bank (“ADB”) under a program called the “Dry Farming Sustainable Agriculture Projects of Henan Province” The commitment is evidenced by and subject to the terms of a Subloan Agreement between Jiaozuo City Finance Bureau and Yida (the “Sub-loan Agreement”).
 
In October 2010 the Company borrowed $1,187,544, and in March 2011 the Company borrowed an additional $1,261,538 under the Sub-loan Agreement. The Company expects to borrow another $1,507,692 from ADB in 2011and the remaining portion of its $4 million line from ADB in 2012. The interest rate for this loan is one year LIBOR+0.06%, which total equals 0.72% at December 31, 2010. The Company must borrow amounts available under the loan commitment no later than December 31, 2014 and is required to commence repaying the interest and principal on the outstanding ADB loans on May 15, 2014. Thereafter, payments of principal, interest and fees on the loans shall be made semi-annually on November 15 and May 15 of each year until November 15, 2033. The Company is required to pay a fee based on the unused portion of the commitment. All payment of principal, interest and fees are to be calculated and paid in U.S. dollars. The Company is also required to pay a fee for early repayment of the loans.
 
Under the Sub-loan Agreement, the Company is required to pledge all of its assets to secure repayment of the loans made to it under the Sub-loan Agreement.
 
Notes Payable
 
Banks in China commonly issue letters of credit in the form of bank notes to client’s suppliers for transactional purposes. The bank notes do not have a stated interest rate, but may be redeemed by the holder at a discount before the maturity date. The requirements by the banks vary, but the usual transaction will require the borrowing company deposit the remaining 60% to 100% with the bank as restricted funds. The amount of money required depends on bank policy and the credit rating of the requesting company. The notes are settled at maturity, which is usually between 6 to 12 months. The bank requires that we maintain restricted cash balances with it equal to a specified percentage of the face amount of each note to support the subsequent reimbursement of the bank of amounts the bank pays to the Company’s suppliers. There are two reasons why the Company did not pay its suppliers in cash directly. The first reason is some of the notes don’t have a requirement for the Company to maintain 100% restricted cash. Therefore, by relying on bank notes the Company is able to maintain more cash until the bank pays its suppliers and the Company in turn reimburses its bank. The second reason is that the Company earns interest income on the restricted cash it deposits to secure the repayment to the bank. All notes payable are interest free and due on demand.
 
On June 30, 2011, we had notes payable as follows:
 
As of
 
June 30, 2011
 
 
Amount
 
Due date
Jiaozuo Commercial Bank
  $ 3,094,538  
July, 2011
Jiaozuo Commercial Bank
    1,547,269  
July, 2011
      371,344  
December, 2011
    $ 5,013,151    
 
All the notes payable were repaid when due.
 
 
32

 
 
Seasonality
 
Our sales are affected by seasonality. Our products are planted in one season and harvested in another season. From October to June of each year, we plant wheat and we sell all of our wheat harvest in June. All accounts receivable related to our wheat sales are collectible within one year. For the six months ended June 30, 2011 and 2010, our wheat sales were $7,959,357and $7,166,022, respectively. From June to October of each year, the Company mostly plants peanuts and soybeans. We use all of such harvested crops as raw materials for our vegetable oil processing business.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Taxation
 
Under the current PRC tax law, we are not subject to tax on income or capital gain. The Company cannot predict whether or for how long such tax holiday will continue in the future.
 
Sales tax is 10% of VAT payable. Sales tax was included in the cost of sales. Our products are subject to VAT at a rate of 17%.
 
Critical accounting estimates:
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the most significant judgments and estimates in the preparation of financial statements, including the following:
 
 
·
 Accounts Receivable.  Our policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
 
 
· 
Inventories.  Inventories are valued at the lower of cost (determined on a weighted average basis) or net market value. Our management compares the cost of inventories with the net realizable value and an allowance is made for inventories with the net realizable value and an allowance is made for inventories with net realizable value, if lower than the cost.
 
 
· 
Impairment.  We apply the provisions of ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets Subsections” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets’), issued by the Financial Accounting Standards Board (“FASB”).  ASC Impairment or Disposal of Long-Lived Assets Subsections require that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
 
 
·
Fixed Assets. We test long-lived assets, including property, plant and equipment and intangible assets subject to periodic amortization, for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimate results in our evaluation of potential impairment and then compare the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, we measure the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate we utilize to evaluate potential investments. We estimate fair value based on the information available in making whatever estimates, judgments and projections are considered necessary.
 
 
33

 
 
 
·
Revenue Recognition.  Sales revenue is recognized at the date of shipment from the Company’s facilities to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of our company exist and collectibility is reasonably assured. We do not grant any acceptance provisions in sales made to our customers. We consider goods to be accepted upon receipt. As a result, acceptance provisions do not have any impact in the timing of the recognition of revenue. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. Our revenue consists of invoiced value of goods, net of a value-added tax (“VAT”). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discounts are normally not granted after products are delivered.
 
 
· 
Foreign currency translation. We use U.S. dollars for financial reporting purposes. Our subsidiaries maintain their books and records in their functional currency, RMB, being the primary currency of the PRC, the economic environment in which their operations are conducted. In general, for consolidation purposes, we translate our subsidiaries’ assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as a component of comprehensive income. The functional currency of our Company is RMB. Until July 21, 2005, RMB had been pegged to the U.S. dollar at the rate of RMB 8.28:$1.00. On July 21, 2005, the PRC government reformed the exchange rate system into a managed floating exchange rate system based on market supply and demand with reference to a basket of currencies. In addition, the exchange rate of RMB to U.S. dollars was adjusted to RMB 8.11:$1.00 as of July 21, 2005. The People’s Bank of China announces the closing price of a foreign currency such as U.S. dollar traded against RMB in the inter-bank foreign exchange market after the closing of the market on each working day, which will become the unified exchange rate for the trading against RMB on the following working day. The daily trading price of U.S. dollars against RMB in the inter-bank foreign exchange market is allowed to float within a band of 0.3% around the unified exchange rate published by the People’s Bank of China. This quotation of exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions require submitting a payment application form together with invoices, shipping documents and signed contracts.

 
·
Stock-based Compensation.  The Company accounts for stock-based compensation arrangements in accordance with ASC 718-10 (formerly SFAS No. 123R “Share-Based Payment”) and measures the cost of services received as consideration for equity instruments issued or liabilities incurred in share-based compensation transactions based on the grant-date fair value of the equity instruments issued or the liabilities settled, net of any amount that an employee pays for that instrument when it is granted. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the compensation cost recognized for any date must at least equal the portion of the grant-date value of the award that is vested at that date. No compensation cost is recognized for awards that do not vest (i.e. awards for which the requisite service is not rendered). If an award is cancelled, any previously unrecognized compensation cost is recognized immediately at the cancellation date. However, if the cancellation is accompanied by the concurrent grant of a replacement award, an incremental compensation cost is recognized and measured as the excess of the fair value of the replacement award over the fair value of the cancelled award at the cancellation date.
 
 
·
Variable Interest Entity. Our operations are conducted through our variable interest entity, Yida. Our indirect wholly-owned subsidiary, Henan Sky Fortune Ecological Technology Co., Ltd. (“WFOE”), a wholly foreign-owned enterprise incorporated in China, entered into a series of variable interest entity contractual agreements (the “VIE Agreements”) with Yida and its shareholders (the “Yida Shareholders”), as a result of which we are considered to control Yida.  The VIE Agreements are described in Item 2.01 herein under the subheading “Contractual Agreements”. Because we control Yida, it is included in our consolidated financial statements, as if it were a wholly-owned subsidiary, even though we do not legally own Yida. We have no operations apart from those conducted by Yida and all of our revenues are derived from Yida’s operations. Substantially all of our assets, with the exception of deferred financing and consulting fees, and substantially all of our cash inflows are related to, or are derived from, Yida.  Our control over these assets and cash flows is subject to our ability to enforce the VIE Agreements.
 
 
34

 
 
 
·
Derivative Instruments. In connection with the sale of convertible notes, we have sold warrants to purchase our common stock. These warrants are classified as derivative liabilities, rather than as equity. Additionally, the convertible notes may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability. The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For warrants that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using a binomial option pricing model. That model requires assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the instruments. Determining the fair value of our common stock underlying the convertible notes and the warrants and the fair value of our derivative liabilities requires the Company to make complex and subjective judgments.  Because of the lack of a trading history for our common stock, we estimated the fair value of our common stock based on an estimate of our enterprise value, derived from the use of a market valuation approach. That market valuation approach was based on the average of three values: value based on assets value, value based on discounted net income and value based on earnings multiple. The value based on asset value in the December 31, 2010 balance sheet was $25,145,000. The value based on discounted net income was $45,459,241, and it was calculated by using Yida’s estimate net income for 2010 and assuming that the net profit will grow by 10% each year, and then we calculated the total present value of the future income for 15 years discounted at 25%. The value based on earnings multiple was $54,323,700 calculated by using Yida’s estimate net income of 2010 times the price earnings ratio of similar companies. The enterprise value was then allocated to the various interests in the Company using an option-pricing model. The resulting average of $41,642,647 was then divided by  diluted common shares of 10,029,793, resulting  in an estimated value of  $4.15 per share. We estimated the future volatility of our common stock price based on a review of the historical volatility of publicly-traded companies considered by management to be comparable to the Company.  For purposes of this analysis, we used the historical volatility of China Organic Agriculture, Inc., Gansu Dunhuang Seed Co Ltd and Origin Agritech Ltd. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.
 
Recent accounting pronouncements
 
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05,Comprehensive Income (Topic 220):  Presentation of Comprehensive Income. - ASU 2011-05. Current US GAAP allows companies to present the components of comprehensive income as a part of the statement of changes in stockholders' equity.  This ASU eliminates that option. .Current US GAAP does not require an entity to present reclassifications on the financial statements form OCI to NI. This ASU requires this presentation. This ASU will be effective after December 15, 2011 for Public Companies and for Nonpublic Companies this ASU will be effective after December 15, 2012.The adoption of this ASU will not have a material impact on the Company’s Consolidated Financial Statements. 
 
In July 2011, the FASB issued ASU No. 2011-06 Other Expenses (Topic 720): Fees paid to the Federal Government by Health Insurers. The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, imposed an annual fee on health care insurers for each calendar year beginning on or after January 1, 2014. This fee is not tax deductible. The fee becomes payable to the U.S. Treasury once the entity provides health insurance for each calendar year. This ASU specifies that the liability should be estimated and recorded in full and a corresponding deferred cost be amortized on a straight-line basis (generally) over the calendar year that it is payable. In addition, this ASU clarifies this fee is not an "acquisition cost". This ASU will be effective after December 31, 2013. The adoption of this ASU will not have a material impact on the Company’s Consolidated Financial Statements. 
 
In July 2011, the FASB issued ASU No.2011-07 Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities .In the past some entities recognized revenue at the time the service was provided, with no provision for doubtful collection of that revenue. This ASU will require disclosure of revenue, including discounts and information specific to the change in allowance for doubtful accounts (bad debts).  In addition, for those entities with significant revenue recognized at the time service is provided will be required to present bad debts as a deduction from that revenue.  All other entities will continue to present bad debts as an operating expense.  Transitional guidance is also provided. This ASU will be effective in 2012 for Public Companies and December 15, 2012 for Nonpublic Companies. Early application is permitted. The adoption of this ASU will not have a material impact on the Company’s Consolidated Financial Statements. 
 
 
35

 
 
Item 4. Controls and Procedures.
 
Disclosure Controls and Procedures
 
The Company’s management, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by a company in reports, such as this report, that it files, or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, management concluded that, as of June 30, 2011 the Company’s disclosure controls and procedures were effective, at that reasonable assurance level to satisfy the objectives for which they are intended.

Changes in Internal Control over Financial Reporting

 During the preparation of our financial statements for the six months ended June 30, 2011, we determined that there existed   deficiencies in controls as a result of the lack of qualified accounting personnel. In addition, the Company did not make entries promptly and correctly according to adjustments made in connection with the annual audit.

We have further concluded that such deficiencies represented material weaknesses. As a result, we concluded that the Company’s internal controls over financial reporting were not effective at June 30, 2011.  The Company is in the process of enhancing its financial reporting by implementation of stronger internal controls and the establishment of effective checking and reviewing procedures. The Company also plans to recruit high caliber personnel with strong financial reporting backgrounds when the Company has the cash resources to do so.
 


PART II - OTHER INFORMATION
 
 
Item 6. Exhibits

 
(a)
Exhibits
 
31.1 - Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 - Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 - Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 - Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS – XBRL Instance Document

101.SCH – XBRL Taxonomy Extension Schema Document

101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF – XBRL Taxonomy Extension Definition Linkbase Document

101.LAB – XBRL Taxonomy Extension Label Linkbase Document

101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document

 
36

 
 
SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.
 
 
CHINA AGRICORP, INC.
 
 
       
Date: August 22, 2011
BY:
/s/ Hexi Feng
 
   
Hexi Feng
 
   
Chief Executive Officer
 
 
 
37

 
INDEX TO EXHIBITS
 
EXHIBIT
NUMBER
 
DESCRIPTION
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS
 
XBRL Instance Document
     
101.SCH
 
XBRL Taxonomy Extension Schema Document
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
38