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Article by DailyStocks_admin    (06-02-08 10:10 AM)

The Daily China Business Stock for 06/02/2008 is FEED

BUSINESS OVERVIEW

Overview
We were incorporated as Wallace Mountain Resources Corp. on March 30, 2005 in Nevada. Since October 31, 2006, our principal place of business has been based in the People's Republic of China (the “PRC”). As the result of a merger into a wholly owned subsidiary, we changed our name to AgFeed Industries, Inc. on November 17, 2006. Our headquarters are located at Room 1602 & 1603, Block A, Fortune Plaza, 357 Bayi Avenue, Nanchang City, Jiangxi Province, PRC 330006, Telephone: +86-791-2189636. Our primary business consists of the research and development, manufacture, marketing and sale of fodder and blended feed for use in the domestic animal husbandry markets in the PRC. As a result of the acquisition of Lushan Breeder Pig Farm Co., Ltd. (“Lushan”) on November 9, 2007, we are also engaged in the business of raising, breeding and selling hogs for use in China’s pork production and hog breeding markets.

We operate through nine direct and indirect subsidiaries in the PRC.

Nanchang Best Animal Husbandry Co., Ltd. (“Nanchang Best”) was incorporated under the laws of the PRC on May 15, 1995, in Jiangxi Province. It is headquartered at 1095 Qinglan Avenue, Nanchang City, Jiangxi Province, PRC 330013. Nanchang Best is in the business of the research and development, manufacture, marketing and sale of fodder and blended feed for use in China’s domestic animal husbandry markets. As of November 9, 2007, through the acquisition of a majority ownership in a hog farm, Nanchang Best is also in the business of raising, breeding and selling hogs for use in China’s pork production and hog breeding markets. Nanchang Best’s hog operations are all located in Jiangxi Province. Nanchang Best is the parent of the following subsidiaries:

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Lushan, a majority-owned subsidiary headquartered in Gongtong Village, Town of Hualin, Xingzi County, Jiangxi Province, PRC 332804

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Wannian Xiandai Animal Husbandry Limited Liability Co. (“Wannian”), a majority-owned subsidiary located in Nanyan, Town of Peimei, Wannian County, Jiangxi Province, PRC 335500

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Jiangxi Huyun Livestock Co., Ltd. (“Huyun”), a majority-owned subsidiary located in the Town of Huyun, Wannian County, Jiangxi Province, PRC 335505

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Ganzhou Green Animal Husbandry Develop. Co., Ltd. (“Ganzhou”), a majority-owned subsidiary located in Yuliang Village, Town of Hengshui, Chingyi County, Ganzhou City, Jiangxi Province, PRC 341300

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Gang Feng Animal Husbandry Co., Ltd. (“Gang Feng”), a wholly-owned subsidiary headquartered in the Town of Fenglin, Dean County, Jiangxi Province, PRC 330402

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Yichun Tianpeng Domestic Livestock Farm, Ltd. ("Yichun"), a majority-owned subsidiary located in Nanmiao Township, Yichun City, Jiangxi Province, PRC 336000.

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

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

History

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

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

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

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

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

Nanchang Best and Shanghai Best share a common founder and Chief Executive Officer, Junhong Xiong. Nanchang Best shares the results of its research and development efforts with Shanghai Best. In addition, Nanchang Best provides general management and administrative services to Shanghai Best as well as human resources services at no expense. There are no written enforceable agreements documenting the provision of these services as Nanchang Best and Shanghai Best are each our wholly owned subsidiaries.

On December 20, 2006, we entered into and closed a share purchase agreement with Guangxi Huijie, and the shareholders of Guangxi Huijie, pursuant to which we acquired all the outstanding shares of Guangxi Huijie for a total purchase price of 8,600,000 Chinese yuan renminbi (RMB), equivalent to approximately US$1,100,420 at a conversion rate of RMB 7.815 = US$1.00. We obtained the funds needed to complete this acquisition by borrowing 8,600,000 RMB from Sunrise Capital International, Inc. This loan accrued interest at the rate of seven percent per annum and all accrued interest and the principal amount of this loan was due and payable on June 20, 2007. We were permitted to prepay this note without penalty and did so in March 2007. Mr. Sheng Zhou, the brother of our corporate secretary and treasurer, Feng Zhou, is a director of Sunrise Capital, which is owned by his sister-in-law, Ms. Chun Mei Chang.

On November 9, 2007, we acquired 90% of the issued and outstanding capital stock of Lushan, a hog breeding operation. The acquisition was consummated pursuant to a stock purchase agreement, dated November 6, 2007, between our company and Huaping Yang and Hongyun Luo. The aggregate purchase price was 20,112,020 RMB, equivalent to US$2,699,600 at a conversion rate of RMB 7.45 = US$1.00. In connection with this transaction, we also assumed and satisfied at closing 4,919,980 RMB (US $660,400) of indebtedness owed by Lushan.

On January 3, 2008, we acquired 70% of the issued and outstanding capital stock of Wannian. The acquisition was consummated pursuant to a stock purchase agreement, dated January 3, 2008, between our company and Wannian. The aggregate purchase price was 12,250,000 RMB, equivalent to US$1,666,667 at a conversion rate of RMB 7.35 = US$1.00. Under the terms of the transaction documents, a master lease for the Wannian facilities remains with the other shareholders of Wannian and we sublease the facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 900,000 RMB (currently approximately US$122,450) per year in exchange for use of the facilities.

On January 3, 2008, we acquired 70% of the issued and outstanding capital stock of Huyun. The acquisition was consummated pursuant to a stock purchase agreement, dated January 3, 2008, between our company and Huyun. The aggregate purchase price was 6,482,000 RMB, equivalent to US$881,905 at a conversion rate of RMB 7.35 = US$1.00. Under the terms of the transaction documents, a master lease for the Huyun facilities remains with the other shareholders of Huyun and we sublease the facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 900,000 RMB (currently approximately US$122,450) for the first year and 450,000 RMB (currently approximately US$61,225) for every 10,000 hogs sold beginning in the second year and thereafter in exchange for use of the facilities.

On January 4, 2008, we acquired 60% of the issued and outstanding capital stock of Ganzhou. The acquisition was consummated pursuant to a stock purchase agreement, dated January 4, 2008, between our company and Ganzhou. The aggregate purchase price was 6,480,000 RMB, equivalent to US$881,632 at a conversion rate of RMB 7.35 = US$1.00. Under the terms of the transaction documents, a master lease for the Ganzhou facilities remains with the other shareholders of Ganzhou and we sublease the facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 700,000 RMB (currently approximately US$97,000) per year in exchange for use of the facilities.

On January 7, 2008, we acquired all of the hogs and stock of Gang Feng. The acquisition was consummated pursuant to a stock purchase agreement, dated January 7, 2008, between our company and Gang Feng. The aggregate purchase price was 4,820,000 RMB, equivalent to US$655,782 at a conversion rate of RMB 7.35 = US$1.00. Under the terms of the transaction documents, we are subleasing the Gang Feng facilities under a 6 and 1/2-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 450,000 RMB (currently approximately US$61,225) per year in exchange for use of the facilities.

On January 9, 2008, we acquired 55% of the issued and outstanding capital stock of Yichun. The acquisition was consummated pursuant to a stock purchase agreement, dated January 9, 2008, between our company and Yichun. The aggregate purchase price was 8,855,000 RMB, equivalent to US$1,204,762 at a conversion rate of RMB 7.35 = US$1.00. Under the terms of the transaction documents, a master lease for the Yichun facilities remains with the other shareholders of Yichun and we sublease the facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 800,000 RMB (currently approximately US$108,844) per year in exchange for use of the facilities.

AgFeed operates its hog breeding operations through each of Lushan, Wannian, Huyun, Ganzhou, Gang Feng and Yichun. We currently anticipate achieving total production of approximately 120,000 hogs for 2008 from these operations.

Description of Feed Business

Products

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

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

In combination, the feed operating companies’ total feed output in 2007 was approximately 53,230 metric tons. Together they produced a combined 25,575 metric tons of premix fodder; Nanchang Best produced 8,213 metric tons of premix fodder, Shanghai Best produced 8,834 metric tons and Guangxi Huijie produced 8,583 metric tons. Nanchang Best produced 16,109 metric tons of blended feed, Shanghai Best produced 3,134 metric tons and Guangxi Huijie produced 3,939 metric tons. The feed operating companies produced an aggregate of approximately 4,418 metric tons of other feed product.

Pork premix

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

Premix sales represent approximately 47.3% of annual revenues and carry a gross profit margin of approximately 33.9%. The willingness of the feed operating companies to formulate customized premix fodder to meet customer specifications allows them to charge a premium for their products. The average price of premix sold by the feed operating companies is $709/metric ton. Based on an informal survey that we conducted of our clients, our competitors charge $500/metric ton on average. The feed operating companies are able to justify premium pricing due to their strong brand name recognition, hands-on after market support, and superior, more effective products developed as a result of a strong R&D program. According to management estimates, Shanghai Best is a market leader in the lactating and pregnant sow market in the city of Shanghai. Large scale piggeries are willing to pay a premium for more effective products as they are concerned with producing healthy piglets, controlling disease and marketing profitable pork products.

Guangxi Huijie has approximately a 12% market share of pre-mix fodder category in its home province of Guangxi.

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

Piglet blended feed

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

We sell blended feed for an average price of $707/metric ton. Blended feed contributes approximately 45% to our total revenues and has gross margins of approximately 22%. As a result of government policies aimed at increasing the economic success of the agriculture industry as a whole and greater regulation requiring advanced technology to provide safeguards to the country’s food supply, the smaller pig farms are being forced out of business or are merging with larger pig raising operations. The larger operations increasingly purchase premix as opposed to blended feeds in order to realize significant cost savings by leveraging their economies of scale. For this reason, we expect the blended feed business to diminish over time. This was also a factor in Shanghai Best’s decision not to enter this market. However, we believe that our blended feed revenue will be replaced by selling more of the profitable premix products to the increasing number of large scale pig farms.

Chicken premix

We also produce three brands of premix for the poultry industry. Most of this production takes place at the Shanghai Best production facility. It produces approximately 314 metric tons annually and has a nominal impact on our total revenues. While there are no current plans to expand the chicken feed product line, future expansion remains a possibility.

Market Information

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

China’s feed manufacturing industry is second only to the United States in volume. The feed industry grew to approximately 66 million tons in 1998, after growing at an annual rate of 15% from 1990 to 1998, and approximately 107 million tons in 2005 and 111 million tons in 2006. (Data for 2007 has not yet been published.) As incomes rise in China, annual meat consumption is expected to rise from the current 53 kg per person to around 70 kg per person in the coming years. The country's annual pork consumption almost doubled from 20kg per person in 1990 to 39.6kg per person in 2006. (Data for 2007 has not yet been published.) According to a report by the USDA Foreign Agricultural Services, developing countries average 24 kg per person annually while developed countries average 75 kg per person annually. It is estimated that 4 kg of feed grain are needed to produce 1 kg of pork.

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


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additive premix fodder;
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proteins; and
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blended feed.

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

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

Blended Feed Industry

According to a recent China Animal Feed Industry Development Report, the blended feed market for pork was approximately $12 and $14 billion for 2004 and 2005, respectively. The largest player in the market had approximately a 7% market share, and 40 companies shared the top 33% of the market. From 2000 to 2005, blended feed sales have grown at an average annual rate of 4.5%. From 2005 to 2006, blended feed sale growth was 4.6%.

Premix Industry

In 2005, the premix market in China totaled $1.45 billion and included over 2,500 companies. From 2000 to 2005, premix industry sales grew at an average annual rate of 13.5%. In 2006, the premix market increased 3% from 2005. There is no single dominant market participant, with the largest player in the market realizing only 1.2% market share. Of the various components that make up blended feed, the premix, which constitutes the smallest proportion of the total blend at 4%, requires the most sophisticated formulas to produce. The research, development and technology necessary to produce premix makes it necessary for premix to carry a higher price per ton than blended feed.


Since the founding of Nanchang Best and the subsequent founding of Shanghai Best, the feed operating companies have aggressively marketed and promoted the “Best” brand. Guangxi Huijie markets its products under the “Huijie” brand name. The feed operating companies send their sales force and technicians to the pig farms to educate their clients on new product developments and improvements to existing products. The feed operating companies conduct educational seminars in pig farming regions to explain the benefits of a balanced, nutritious diet for pigs in producing a healthy herd and to educate the farmers to properly prepare and mix the various feed components. Although not unique among premix manufacturers, management believes its services in this area are superior to competitors due to its high ratio of technicians to sales people, which allows the sales team to develop a stronger relationship with its customers. As the feed operating companies market and sell directly to pig farmers, they are able to collect and analyze data from the farmer which assists in the preparation and design of new products. The feed operating companies also attend agricultural conventions that take place in the market areas where they currently conduct business as well as in provinces that they expect to enter. The feed operating companies also place advertisements and promotional pieces in agricultural trade journals.

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

Starting in January 2007, we began to open independently-owned and operated franchise chain stores. The franchise program allows us to cost-effectively sell our products to the individual “mom and pop” farmer that may raise only a few hogs per year for personal consumption or for sale in the marketplace as an additional source of income. Some of the more successful franchise stores have reached sales levels of 3 to 4 metric tons per month. As of December 31, 2007, we had approximately 503 locations open and operating under the AgFeed brand name. Approximately 70% of the franchise store operators were previously in the animal feed distribution business. The franchisees do not pay an initiation fee to become franchised distributors but do receive marketing and technical training from our staff. Each franchise operator signs an exclusive agreement with us, agreeing not to sell any other brand of animal feed products and to decorate their store with approved AgFeed marketing materials and signage.

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

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

CEO BACKGROUND

Dr. Li has served as Chairman of our board of directors since December 2006. Dr. Li served as Chairman of the Boards of Nanchang Best and Shanghai Best from July 2004 to December 2006. As one of the original founders of Nanchang Best, Mr. Li served as the Manager of the Technical Research and Development Department of Nanchang Best from 1995 to July 2004. Prior to that, he worked as the Technical Manager in Guangxi Peter Hand Premix Feed Company, a Chinese subsidiary of global animal nutrition conglomerate Provimi S.A. from 1991 to 1994. He received his Ph.D. in Animal Nutrition from Nanjing Agricultural University in 2004.

Mr. Xiong has served as our Chief Executive Officer and Vice Chairman since November 2006. Mr. Xiong has also served as Chief Executive Officer of Nanchang Best since its founding in 1995. Prior to that, Mr. Xiong worked for Guangzhou Huashi Animal Nutritionals Company as a sales representative, sales manager, and head of marketing from 1993 to 1995. He was a technician at the Chongming Progressing Farm Company in Shanghai from 1992 to 1993. Mr. Xiong graduated from Animal Husbandry & Veterinary College in Jiangxi Agricultural University and received a Bachelors Degree in 1992.

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


Mr. Rittereiser has served on our board of directors since November 2007. From October 1996 until retiring in 2002, Mr. Rittereiser served as Chairman of the Board and Chief Executive Officer of Ashton Technology Group, Inc., a company that develops and commercializes online transaction systems for the financial industry.


Mr. Staloff has served on our board of directors since November 2007. From December 2005 to May 2007, Mr. Staloff served as Chairman of the Board of SFB Market Systems, Inc., a New Jersey-based company that provides technology solutions for the management and generation of options series data. From March 2003 to December 2005, Mr. Staloff was an independent consultant. From June 1990 to March 2003, Mr. Staloff served as President and Chief Executive Officer of Bloom Staloff Corporation, an equity and options market-making firm and foreign currency options floor broker. Mr. Staloff serves as a director for Lehman Brothers Derivative Products Inc., a derivative product company that serves as an intermediary for over-the-counter transactions.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Our primary business consists of the research and development, manufacture, marketing and sale of fodder and blended feed for use in the domestic animal husbandry markets in the PRC. As a result of the acquisition of Lushan on November 9, 2007, we are also engaged in the business of raising, breeding and selling hogs for use in China’s pork production and hog breeding markets.

We operate through nine direct and indirect subsidiaries in the PRC.

Nanchang Best located in Jiangxi Province - Nanchang Best is primarily engaged in the business of the research and development, manufacture, marketing and sale of fodder and blended feed for use in China’s domestic animal husbandry markets. As of November 9, 2007, through the acquisition of Lushan, Nanchang Best is also in the business of raising, breeding and selling hogs for use in China’s pork production and hog breeding markets. Nanchang Best’s hog operations are located in Jiangxi Province and were conducted solely through Lushan until early 2008. Subsequent to the end of 2007, we acquired a majority interest in each of Wannian, Huyun, Ganzhou, Gang Feng and Yichun. Each of these hog farms is located in Jiangxi Province.

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

Guangxi Huijie located in Guangxi Province - Guangxi Huijie is engaged in the research and development, manufacture, marketing, distribution and sale of premix fodder blended feed and feed additives primarily for use in China’s domestic pork husbandry markets.

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

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

AgFeed had revenues of $36.2 million for the year ended December 31, 2007, an increase of 321% over revenues of $8.6 million for the year ended December 31, 2006, and net income of $6.7 million for the year ended December 31, 2007, an increase of 467% compared to net income of $1.2 million for the year ended December 31, 2006. The increases we experienced in this period were the result of our organic growth at each operating subsidiary. In addition, the growth reflects the acquisition of Guangxi Huijie in December 2006 and Lushan in late 2007. Since we acquired Nanchang Best and Shanghai Best in October 2006, we have effectively marketed our products through a team-based approach, sharing sales leads and referrals. We also developed the new "Airubao Series" product at Nanchang Best and introduced the product at all three of our subsidiaries.

Since January 2007, we established approximately 503 franchise chain stores that sell our products exclusively to complement our existing distribution channels. We will continue to market our products to the operators of large swine farms and large distributors. We will now rely on the franchisees to market and sell our products to the smaller swine farms. Even though the number of small swine farms in China is declining, we did not want to lose revenues by forgoing sales to this market segment. We determined that the best and most efficient use of our resources is to concentrate on the larger customers and allow the franchisees to sell to the smaller farmers.

In order to provide excellent customer service and differentiate ourselves from our competition, at our customers’ request, we supply them with customized formulations of our products. In any given month, the cost of the various additives used in these customized formulations fluctuates, often resulting in temporary increases in the unit cost of goods sold. We believe even though this may have an effect on our short-term profits, we take the long-term view that it increases customer loyalty and builds the AgFeed brand. The increase in our revenues during the year ended December 31, 2007 was mostly due to increases in the volume of products sold as a direct result of new products launched and our expansion into new markets. We also experienced increases in our cost of goods sold during the year ended December 31, 2007. The costs of corn and soybean meal, which are two of our main raw materials, increased approximately 12% and 20%, respectively. In order to remain competitive in our markets, we have not increased the prices of our products to pass these cost increases on to our customers. Accordingly, our revenues have not increased during the twelve month period ended December 31, 2007 in proportion to the increases in our cost of goods sold. We believe that this competitive pricing strategy has and will continue to increase our sales volume and ultimately increase our long-term revenue growth. We also continue to aggressively search for acquisition targets in our industry throughout China. The growth in sales and net revenues we experienced in year ended December 31, 2007 compared to the year ended December 31, 2006 was due in part to our acquisition of Guangxi Huijie late in December 2006.

Critical Accounting Policies

In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make certain estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it will likely result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time. Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.

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

Areas that require estimates and assumptions include valuation of accounts receivable and inventory, determination of useful lives of property and equipment, estimation of certain liabilities and sales returns.

Allowance For Doubtful Accounts . We continually monitor customer payments and maintains a reserve for estimated losses resulting from our customers’ inability to make required payments. In determining the reserve, we evaluate the collectibility of our accounts receivable based upon a variety of factors. In cases where we become aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due. For all other customers, we recognize allowances for doubtful accounts based on our historical write-off experience in conjunction with the length of time the receivables are past due, customer creditworthiness, geographic risk and the current business environment. Actual future losses from uncollectible accounts may differ from our estimates.

Inventories . Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. We evaluate our ending inventories for estimated excess quantities and obsolescence. Our evaluation includes the analysis of future sales demand by product, within specific time horizons. Inventories in excess of projected future demand are written down to net realizable value. In addition, we assess the impact of changing technology on inventory balances and writes-down inventories that are considered obsolete. Inventory obsolescence and excess quantities have historically been minimal.

Long-Lived Assets . We periodically assess potential impairments to our long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires, among other things, that an entity perform an impairment review whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Factors we considered include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends. When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, we recognize an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair market value of the asset, based on the fair market value if available, or discounted cash flows. To date, there has been no impairment of long-lived assets.

Property and equipment. Useful lives of property and equipment is based on historical experience and industry norms. Changes in useful lives due to changes in technology or other factors can affect future depreciation estimates.

Revenue Recognition. Our revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. We are not subject to VAT withholdings. We give volume rebates to certain customers based on volume achieved. We accrue sales rebates based on actual sales volume. Sales rebates for the years ended December 31, 2005, 2006 and 2007 were $ 74,046, $258,503 and $238,307, respectively. We do not offer any of our customers the unconditional right to return purchased products. Customers are only permitted to return defective products. In addition, we do not provide any price protection or similar rights to our customers. Sales returns for years ended December 31, 2005, 2006 and 2007 were $68,312, $82,941 and $110,962, respectively.

We make estimates and judgments when determining whether the collectibility of revenue from customers is reasonably assured. Management estimates regarding collectibility impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectibility could differ from actual events, thus materially impacting our financial position and results of operations.

Sales returns and allowances have historically been insignificant. Accordingly, estimating returns is not critical. However, if circumstances change, returns and allowance may impact the company’s earnings.

There are no differences in our arrangements with our different types of customers. Accordingly, we do not have different revenue recognition policies for different types of customers. We offer credit terms ranging from 30 to 90 days for most customers. From some large customers, we may extend these terms beyond 90 days.

Recent Accounting Pronouncements

Fair Value Measurements

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

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

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

Fair Value Option for Financial Assets and Financial Liabilities

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

Other-Than-Temporary Impairment

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

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

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

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

Results of Operations

Comparison of Fiscal Years Ended December 31, 2007 and December 31, 2006

Revenues. The increase in revenues was due to an increase in the volume of feed products that we sold, the acquisition of Guangxi Huijie and the introduction in early 2007 of the Airubao Series, a new special blended feed product formulated especially for baby pigs. Guangxi Huijie contributed approximately 858 metric tons of premix volume during the fiscal year ended December 31, 2007, Nanchang Best experienced a decrease of approximately 838 metric tons and Shanghai Best experienced an increase of approximately 1,335 metric tons of premix during the year ended December 31, 2007 as compared to the year ended December 31, 2006 to account for the increase in premix volume. We focused on increasing sales of the Airubao Series, which is a special blended feed product. For comparative purposes, we will analyze the blended feed and Airubao Series together. This increase was due primarily to the new Airubao sales and approximately 394 metric tons of blended feed sold by Guangxi Huijie. Nanchang Best sold 12,165 metric tons during the year ended December 31, 2007 compared to 1,097 metric tons during the same period in 2006. Guangxi Huijie also accounted for 1,581 metric tons of other feed products, Nanchang Best sold 226 metric tons and Shanghai Best sold 231 metric tons of other feed products during the year ended December 31, 2007. Overall, the Guangxi Huijie acquisition provided approximately 31% of our revenues while Nanchang Best provided 42% and Shanghai Best provided 27% of our total revenues during the fiscal year ended December 31, 2007. Guangxi Huijie contributed approximately 29.3%, Nanchang Best approximately 48.1% and Shanghai Best approximately 22.6% of the total volume of feed sold during the year ended December 31, 2007. Nanchang Best’s revenues increased approximately 226% during the year ended December 31, 2007 compared to the same period in 2006. Shanghai Best’s revenues increased approximately 187% during the year ended December 31, 2007 compared to the same period in 2006. Lushan, acquired in November 2007, did not materially contribute to our overall revenues.

The increase in the average sales price of our blended products during the year ended December 31, 2007 compared to the same period during 2006 contributed to our increase in revenues, as well as the growth in sales volume in all of our product categories.

The average sale price/metric ton was calculated in US dollars using a conversion factor of one US dollar to 7.62 RMB. The average price for each product category was calculated by multiplying the prices charged in each product category at each operating subsidiary by a weighted average of revenues generated in each product category at each operating subsidiary as compared to total revenues generated by that product by all operating subsidiaries for the period. The Airubao Series is included in the calculations for blended feed.

During the first quarter of 2007, we launched the Airubao Series, a new special blended feed designed specifically for baby pigs. We have gained immediate acceptance of this product from our customers. We shipped approximately $2.41 million of this new product to customers during the year ended December 31, 2007. This product line consists of a series of three distinct formulations, the average gross margin is approximately 25% and the average selling price is approximately $771 per metric ton. The Annual Report on China’s Feed Industry, published by the Chinese government, estimates that the market for premium baby pig feed is approximately $3.8 billion per year.

Cost of Goods Sold . We experienced an approximate 46% and 35% increase in the unit cost of goods sold for blended feed and premix products, respectively, during the twelve month period ended December 31, 2007 compared to the same period in 2006. In order to provide excellent customer service and differentiate ourselves from our competition, at our customers’ request, we supply them with customized formulations of our products. In any given month, the cost of the various additives used fluctuates, which can result in temporary increases in unit cost of goods sold. We experienced an increase in the costs of corn and soybean meal of approximately 12% and 20% , respectively over their levels during the year ended December 31, 2007. These additives constitute approximately 70% of our raw material costs. These increased costs offset our increases in revenues. Even though this may have an adverse effect on our short term profits, we take the long-term view that this practice results in increased customer loyalty, builds the AgFeed brand and will ultimately lead to increased sales and gross profits. In addition, we are presently experiencing more stable pricing in these additives, which we anticipate will stabilize our cost of goods sold.

Nanchang Best experienced a 269% increase in cost of goods sold during the year ended December 31, 2007 compared to the same period in 2006. Shanghai Best experienced a 233% increase in cost of goods sold during the year ended December 31, 2007 compared to the same period in 2006.

Gross Profit . Gross margins decreased to 29% for the year ended December 31, 2007 from 37% for the same period in 2006. The decrease in gross margin can be attributed to several factors: (i) the cost of introducing the Airubao Series; (ii) we experienced an approximate 46% increase in the unit cost of goods sold of blended feed during the twelve months ended December 31, 2007 compared to the same period in 2006; (iii) the unit cost of goods sold for premix products increased approximately 35% during the year ended December 31, 2007 compared to the same period in 2006.

Gross margins at Nanchang Best for the year ended December 31, 2007 were approximately 26% compared to 34% for the same period in 2006. Gross margins at Shanghai Best for the year ended December 31, 2007 were 28% compared to 38% for the same period in 2006. Gross margins at Guangxi Huijie for the year ended December 31, 2007 were approximately 28%. Gross margin calculations for each subsidiary are calculated prior to any adjustments for intercompany sales, which are reflected in the consolidated financial statements.

Selling, General and Administrative Expenses. We incurred legal and audit expense in the year ended December 31, 2007 of approximately $450,000 associated with being a U.S. publicly traded reporting company that we did not incur during the same period in 2006. The increase in our general and administrative expense also reflects the addition of Guangxi Huijie, which had approximately $878,000 of general and administrative expenses during the year ended December 31, 2007. General and administrative expense includes overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting and legal and office expenses. Selling expenses for the period increased by 109% due to the 321% increase in revenues and the costs associated with entering markets in neighboring provinces as well as the addition of Guangxi Huijie, which had approximately $639,000 of selling expenses during the year ended December 31, 2007. We attempted to control our selling expenses through the use of strict cost controls and efficient use of our distribution channels.

Net Income . Our increase in net income was due to an increase in income from operations offset by an increase in non-operating income due to net interest expense offset by other income of approximately $149,000. The major reason for the increase in non-operating income during 2007 was interest earned on the net proceeds of our financings of approximately $142,000 and other income of approximately $160,000 offset by interest paid in connection with short term loans of approximately $154,000. In addition, our Nanchang Best subsidiary became a Sino Foreign Joint Venture due to an investment by a foreign investor in July 2006. Nanchang Best receives favorable tax status and is exempt from all income tax through July 14, 2008 after which will pay tax at a reduced rate of 15% for the next three years.

Revenues . The increase in revenues was due to an increase in the volume of all feed products sold by us. While we expect sales of blended feed through Nanchang Best and Guangxi Huijie to increase in volume, we anticipate that premix will become the principal segment of total sales volume in the future. During the year ended December 31, 2006, the increase in revenues is primarily driven by an increase in volume of the products sold. Our prices on a whole remained relatively flat, a 3% decrease in the average price of premix and a 0.4% increase in the average price of blended feed sold. Even though the average price of other feeds decreased 63.6%, the volume of other feeds is approximately only 3.2% of the total volume sold during the period. We did experience a 2% total increase in the cost of goods sold while we had 17.3% increase in the number of metric tons we sold which enables us to keep our pricing relatively flat.

Overall, Nanchang Best provided approximately 61% and Shanghai Best provided 39% of our total revenues for the year ended December 31, 2006 compared to the year ended December 31, 2005, Nanchang Best providing 64% and Shanghai Best 36% of our total revenues.

Nanchang Best and Shanghai Best contributed approximately 63% and 37% respectively of our total volume during the year ended December 31, 2006. During the year ended December 31, 2005 Nanchang Best and Shanghai Best provided 64% and 36% of our total volume.

Nanchang Best’s revenues increased approximately 8.8% during the year ended December 31, 2006 compared to the same period in 2005. Shanghai Best’s revenues increased approximately 21.7% during the year ended December 31, 2006 compared to the same period in 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Revenues. The increase in revenues was due to an increase in the volume of feed products that we sold and the acquisition of the five hog farms. The increase in feed product sales was a result of expanding our distribution channels by the opening of additional chain stores. We experienced favorable market conditions which increased the demand for our feed products. Due to anticipated raising hog prices we have kept our hogs longer than normal which has increased the weight of the hogs that bring a higher sales price.

While the increase in the average sales price of our blended products also contributed to our increase in revenues, this effect was offset by the decrease in the average sales price of our other products category. Also, we strategically did not seek to maximize our sales prices in order to remain competitive in our markets. We believe that this competitive pricing strategy has and will contribute to our increased sales volumes and ultimately lead to long-term revenues growth.

The average sale price/MT was calculated in U.S. Dollars using a conversion factor of 7.18 RMB to $1.00 USD. The average price for each product category was calculated by multiplying the prices charged in each product category at each operating subsidiary by a weighted average of revenues generated in each product category at each operating subsidiary as compared to total revenues generated by that product by all operating subsidiaries for the period. The Airubao Series is included in the calculations for blended feed.

Cost of Goods Sold. We experienced approximately 6.4% and 37.8% increases in the unit cost of goods sold for blended feed and premix products, respectively, during the three month period ended March 31, 2008 compared to the same period in 2007. In order to provide excellent customer service and differentiate ourselves from our competition, at our customer’s request, we supply customized formulations of our products. In any given period, the cost of the various additives used as raw materials in our products fluctuates, which can result in increases in unit cost of goods sold. During the three month period ended March 31, 2008, the costs of corn and soybean meal increased approximately 15% and 10%, respectively. These additives constitute approximately 70% of our raw material costs. These increased costs offset our increases in revenues. Even though this may have an adverse effect on our short term profits, we take the long term view that this practice results in customer loyalty, builds the AgFeed brand and will ultimately lead to increased sales and gross profits. In addition, we are presently experiencing more stable pricing in these additives, which we anticipate will stabilize our cost of goods sold.

Gross Profit. Gross margins decreased to 28.3% from 31.0% during the three months ended March 31, 2008 as compared to the same period last year. The decrease in gross margin can be attributed to several factors: (i) the cost of introducing the Airubao Series; (ii) we experienced an approximate 6.4% increase in the unit cost of goods sold of blended feed during the three months ended March 31, 2008 compared to the same period in 2007; and (iii) the unit cost of goods sold for premix products increased approximately 37.8% during the three months ended March 31, 2008 compared to the same period in 2007.

Selling, General and Administrative Expenses. We incurred legal and audit expense in the three month period ended March 31, 2008 of approximately $302,047 associated with being a publicly traded United States reporting company that we did not incur during the same period in 2007. The increase in our selling, general and administrative expense also reflects the addition of our new subsidiaries, which had approximately $442,450 general and administrative expenses during the three months ended March 31, 2008. General and administrative expense includes overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting, legal and offices expenses. Selling expenses for the period increased by 6.20% due to the 22% increase in revenues and the costs associated with entering markets in neighboring provinces, as well as the addition of our new subsidiaries, which had approximately $209,409 of selling expenses during the three months ended March 31, 2008. We attempted to control our selling expenses through the use of strict cost controls and efficient use of our distribution channels.

Net Income. Our decrease in net income was due to the net loss from operations for the new subsidiaries.

Due to continual appreciation in RMB against the US dollar, we incurred a loss on foreign translation of $224,473 during the first quarter in 2008, as we could not timely convert USD deposits into RMB as a result of bank policies.

In addition, our Nanchang Best subsidiary became a Sino Foreign Joint Venture due to an investment by a foreign investor in July 2006. Nanchang Best receives favorable tax status and is exempt from all income tax through July 14, 2008 and then will pay a reduced rate of 15% for the next three years.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the three months ended March 31, 2008 that have, or are reasonably likely to have, a current or future affect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.

Liquidity and Capital Resources

Recent financing

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

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

At March 31, 2008, we had $36,924,135 cash and cash equivalents on hand.

During the three month period ending March 31, 2008, we completed our $41,000,000 financing. We received aggregate gross proceeds of $22,000,032 through the sale of 2,444,448 shares of common stock at $10 per share. We received aggregate proceeds of $19,000,000 through the issuance of three year convertible notes bearing interest at 7% per annum and convertible into common stock at $10 per share. In connection with the convertible notes, we issued 380,000 warrants which are exercisable immediately and have a $10 strike price. We paid $3,432,670 related to the sell of shares and $1,716,666 related to the issuance of the convertible notes.

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

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

As of March 31, 2008, we had total notes payable of $1,155,165, comprised of two loans. There was one short term bank loan to Nanchang Best of $855,678, with an interest rate of 7.884% per annum payable monthly. This loan matures on May 27, 2008, and is collateralized by our office building, workshop, employee dorms, and use right of land. There was one short term bank loan to Guangxi Huijie totaling $299,487, with an interest rate of 6.57% per annum payable monthly. This loan matures on May 24, 2008 and is collateralized by the Company’s right to use land, machinery and equipment.

During the three months ended March 31, 2008, we used $868,393 in our operating activities. This use of cash was primarily due to net income of $919,297, an increase of $641,521 in other receivables, an increase in accounts payable of $1,482,467, and an increase in other payables of $539,211, offset by increases in accounts receivable of $2,082,250 and an increase in inventory of $3,077,865.

We used $5,997,353 in investing activities during the three month period ended March 31, 2008; of which $635,952 was for the acquisition of property and equipment, and $5,290,747 for the acquisition of the five hog farms.

We received $35,850,696 in cash from financing activities. During the three months ended March 31, 2008, we received $22,000,032 from the sale of our securities and paid $3,432,670. We also received $19,000,000 from the issuance of convertible notes and warrants, of which the Company paid $1,716,666 for the cost of issuing the convertible notes and warrants.

At March 31, 2008, our accounts receivable balance was approximately $8.07 million, which was approximately 66.5% of our net revenues for the three months ended March 31, 2008. The reason for the large increase in our accounts receivable at March 31, 2008 is that our sales increased due to the expansion of our marketing channels and the introduction of our Airubao product line in the quarter.

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

We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations and funds raised through cash investments.

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


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