UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-Q





x
            Quarterly
      report pursuant Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
quarterly period ended June 30, 2009





 ̈
            Transition
      report pursuant Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the
transition period from _______ to _______





001-33674


(Commission
file number)





AGFEED
INDUSTRIES, INC.


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





Nevada
              20-2597168(State
      or other jurisdiction
              (IRS
      Employerof
      incorporation or organization)
              Identification
      No.)





Rm.
A1001-1002, Tower 16


Hengmao
Int'l Center


333
S. Guangchang Rd.


Nanchang,
Jiangxi Province


China
330003


(Address of principal
executive offices)





011-86-0791-6669093


(Issuer’s telephone
number)





N/A


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





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


Yes           x           No            ̈





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


Large
accelerated filer  ̈                                                                    Accelerated
filer x


Non-accelerated
filer  ̈                                                                      Smaller
reporting company ̈


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes            ̈      No           x





On August
7 2009, 42,200,263 shares of the registrant's common stock were
outstanding.





TABLE
OF CONTENTS





PART
      I – FINANCIAL INFORMATION
                  3Item
      1.
                  Financial
      Statements
                  3Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  24Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  35Item
      4.
                  Controls
      and Procedures
                  35Part
      II.
                  OTHER
      INFORMATION
                  36Item
      1.
                  Legal
      Proceedings
                  36Item 1A.
                  Risk
      Factors
                  36Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  36Item
      3.
                  Defaults
      Upon Senior Securities
                  36Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  36Item
      5.
                  Other
      Information
                  37Item
      6.
                  Exhibits
                  37SIGNATURES
                  37


2


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEET





PART
I – FINANCIAL INFORMATION





Item
1.            Financial
Statements





June
      30,
                                  
                                  
                                  December
      31,2009
                                  
                                  
                                  2008(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                  
                                  $
                                  30,912,081
                                  
                                  
                                  $
                                  24,839,378Accounts
      receivable, net of allowance for doubtful accounts of $69,660 and
      $520,413
                                  
                                  
                                  14,610,095
                                  
                                  
                                  
                                  9,462,380Advances
      to suppliers
                                  
                                  
                                  689,152
                                  
                                  
                                  
                                  518,829Other
      receivables
                                  
                                  
                                  93,811
                                  
                                  
                                  
                                  2,066,030Inventory
                                  
                                  
                                  22,519,961
                                  
                                  
                                  
                                  20,616,560Prepaid
      expenses
                                  
                                  
                                  1,351,221
                                  
                                  
                                  
                                  1,166,646Debt
      issue costs
                                  
                                  
                                  49,875
                                  
                                  
                                  
                                  246,223Total
      current assets
                                  
                                  
                                  70,226,196
                                  
                                  
                                  
                                  58,916,046PROPERTY
      AND EQUIPMENT, net
                                  
                                  
                                  23,547,427
                                  
                                  
                                  
                                  20,810,094CONSTRUCTION-IN-PROCESS
                                  
                                  
                                  12,573,209
                                  
                                  
                                  
                                  10,853,389INTANGIBLE
      ASSETS
                                  
                                  
                                  43,770,481
                                  
                                  
                                  
                                  43,833,705OTHER
      ASSETS
                                  
                                  
                                  2,498,826
                                  
                                  
                                  
                                  2,641,902TOTAL
      ASSETS
                                  
                                  $
                                  152,616,139
                                  
                                  
                                  $
                                  137,055,136LIABILITIES AND EQUITYCURRENT
      LIABILITIES:Short-term
      loans
                                  
                                  $
                                  4,541,500
                                  
                                  
                                  $
                                  -Accounts
      payable
                                  
                                  
                                  6,357,298
                                  
                                  
                                  
                                  5,214,596Other
      payables
                                  
                                  
                                  3,716,938
                                  
                                  
                                  
                                  5,766,741Unearned
      revenue
                                  
                                  
                                  263,329
                                  
                                  
                                  
                                  321,664Accrued
      expenses
                                  
                                  
                                  302,681
                                  
                                  
                                  
                                  164,558Accrued
      payroll
                                  
                                  
                                  661,496
                                  
                                  
                                  
                                  818,052Tax
      and welfare payable
                                  
                                  
                                  282,867
                                  
                                  
                                  
                                  465,875Interest
      payable
                                  
                                  
                                  84,642
                                  
                                  
                                  
                                  121,139Total
      current liabilities
                                  
                                  
                                  16,210,751
                                  
                                  
                                  
                                  12,872,625CONVERTIBLE
      NOTES, net of debt discount of $117,371 and $579,444
                                  
                                  
                                  882,629
                                  
                                  
                                  
                                  3,220,556TOTAL
      LIABILITIES
                                  
                                  
                                  17,093,380
                                  
                                  
                                  
                                  16,093,181COMMITMENTS
      AND CONTINGENCIES (Note 11)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -EQUITY:AgFeed
      stockholders' equity:Common
      stock, $0.001 per share; 75,000,000 shares authorized; 41,285,554 issued
      and 40,918,259 outstanding at June 30, 2009 38,300,436 issued and
      37,933,141 outstanding at December 31, 2008
                                  
                                  
                                  41,286
                                  
                                  
                                  
                                  38,300Additional
      paid-in capital
                                  
                                  
                                  102,179,512
                                  
                                  
                                  
                                  90,903,261Other
      comprehensive income
                                  
                                  
                                  4,019,316
                                  
                                  
                                  
                                  4,167,217Statutory
      reserve
                                  
                                  
                                  3,838,442
                                  
                                  
                                  
                                  3,236,054Treasury
      stock (367,295 shares held in treasury)
                                  
                                  
                                  (1,811,746
                                  )
                                  
                                  
                                  (1,811,746
                                  )Retained
      earnings
                                  
                                  
                                  25,953,962
                                  
                                  
                                  
                                  22,311,258Total
      AgFeed stockholders' equity
                                  
                                  
                                  134,220,772
                                  
                                  
                                  
                                  118,844,344Noncontrolling
      interest
                                  
                                  
                                  1,301,987
                                  
                                  
                                  
                                  2,117,611Total
      equity
                                  
                                  
                                  135,522,759
                                  
                                  
                                  
                                  120,961,955TOTAL
      LIABILITIES AND EQUITY
                                  
                                  $
                                  152,616,139
                                  
                                  
                                  $
                                  137,055,136





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


3


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME





Three
      Months Ended June 30,
                              
                              
                              Six
      Months Ended June 30,2009
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008(unaudited)
                              
                              (unaudited)
                              
                              
                              (unaudited)
                              
                              
                              (unaudited)Revenues
                              
                              $
                              38,527,770
                              
                              $
                              35,635,327
                              
                              
                              $
                              71,957,044
                              
                              
                              $
                              47,782,411Cost
      of goods sold
                              
                              
                              33,306,111
                              
                              
                              24,600,502
                              
                              
                              
                              60,931,980
                              
                              
                              
                              33,314,625Gross
      profit
                              
                              
                              5,221,659
                              
                              
                              11,034,825
                              
                              
                              
                              11,025,064
                              
                              
                              
                              14,467,786Operating
      expensesSelling
      expenses
                              
                              
                              999,342
                              
                              
                              873,580
                              
                              
                              
                              1,863,209
                              
                              
                              
                              1,627,202General
      and administrative expenses
                              
                              
                              1,960,520
                              
                              
                              1,389,088
                              
                              
                              
                              3,717,692
                              
                              
                              
                              2,343,309Total
      operating expenses
                              
                              
                              2,959,862
                              
                              
                              2,262,668
                              
                              
                              
                              5,580,901
                              
                              
                              
                              3,970,511Income
      from operations
                              
                              
                              2,261,797
                              
                              
                              8,772,157
                              
                              
                              
                              5,444,163
                              
                              
                              
                              10,497,275Non-operating
      income (expense):Other
      income (expense)
                              
                              
                              (189,205
                              )
                              
                              (10,999
                              )
                              
                              
                              3,476
                              
                              
                              
                              (25,570
                              )Interest
      income
                              
                              
                              52,554
                              
                              
                              76,060
                              
                              
                              
                              113,116
                              
                              
                              
                              126,235Interest
      and financing costs
                              
                              
                              (624,514
                              )
                              
                              (4,312,559
                              )
                              
                              
                              (777,428
                              )
                              
                              
                              (4,639,201
                              )Foreign
      currency transaction gain (loss)
                              
                              
                              5,133
                              
                              
                              (319,273
                              )
                              
                              
                              3,302
                              
                              
                              
                              (543,746
                              )Total
      non-operating income (expense)
                              
                              
                              (756,032
                              )
                              
                              (4,566,771
                              )
                              
                              
                              (657,534
                              )
                              
                              
                              (5,082,282
                              )Income
      before provision for income taxes
                              
                              
                              1,505,765
                              
                              
                              4,205,386
                              
                              
                              
                              4,786,629
                              
                              
                              
                              5,414,993Provision
      for income taxes
                              
                              
                              285,958
                              
                              
                              116,826
                              
                              
                              
                              501,508
                              
                              
                              
                              213,089Net
      income including noncontrolling interest
                              
                              
                              1,219,807
                              
                              
                              4,088,560
                              
                              
                              
                              4,285,121
                              
                              
                              
                              5,201,904Less:
      Net income (loss) attributed to noncontrolling interest
                              
                              
                              (6,445
                              )
                              
                              167,047
                              
                              
                              
                              40,029
                              
                              
                              
                              361,094Net
      income attributed to AgFeed
                              
                              
                              1,226,252
                              
                              
                              3,921,513
                              
                              
                              
                              4,245,092
                              
                              
                              
                              4,840,810Other
      comprehensive incomeForeign
      currency translation gain (loss)
                              
                              
                              5,953
                              
                              
                              1,776,427
                              
                              
                              
                              (147,901
                              )
                              
                              
                              2,788,128Comprehensive
      Income
                              
                              $
                              1,232,205
                              
                              $
                              5,697,940
                              
                              
                              $
                              4,097,191
                              
                              
                              $
                              7,628,938Weighted
      average shares outstanding :Basic
                              
                              
                              39,549,944
                              
                              
                              32,054,366
                              
                              
                              
                              38,746,009
                              
                              
                              
                              29,928,503Diluted
                              
                              
                              41,446,344
                              
                              
                              32,404,339
                              
                              
                              
                              39,581,891
                              
                              
                              
                              30,233,681Earnings
      per share attributed to AgFeed common stockholders:Basic
                              
                              $
                              0.03
                              
                              $
                              0.12
                              
                              
                              $
                              0.11
                              
                              
                              $
                              0.16Diluted
                              
                              $
                              0.03
                              
                              $
                              0.12
                              
                              
                              $
                              0.11
                              
                              
                              $
                              0.16





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


4


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Six
      Months Ended June 30,2009
                      
                      
                      2008(unaudited)
                      
                      
                      (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income including noncontrolling interest
                      
                      $
                      4,285,121
                      
                      
                      $
                      5,201,904Adjustments
      to reconcile net income including noncontrolling interest to net cash
      provided by operating activities:Depreciation
                      
                      
                      1,282,959
                      
                      
                      
                      548,435Amortization
                      
                      
                      38,779
                      
                      
                      
                      26,297Loss
      on disposal of assets
                      
                      
                      524,409
                      
                      
                      
                      16,774Stock
      based compensation
                      
                      
                      282,497
                      
                      
                      
                      30,882Amortization
      of debt issuance costs
                      
                      
                      196,348
                      
                      
                      
                      1,292,858Amortization
      of discount on convertible debt
                      
                      
                      462,073
                      
                      
                      
                      3,042,523(Increase)
      / decrease in assets:Accounts
      receivable
                      
                      
                      (5,163,082
                      )
                      
                      
                      (1,181,173
                      )Other
      receivable
                      
                      
                      1,530,631
                      
                      
                      
                      (261,770
                      )Inventory
                      
                      
                      (1,932,432
                      )
                      
                      
                      (6,734,125
                      )Due
      from former stockholders
                      
                      
                      -
                      
                      
                      
                      (320,799
                      )Advances
      to suppliers
                      
                      
                      (171,112
                      )
                      
                      
                      (716,690
                      )Prepaid
      expense
                      
                      
                      (186,209
                      )
                      
                      
                      (152,889
                      )Other
      assets
                      
                      
                      139,541
                      
                      
                      
                      (1,714,363
                      )Increase
      / (decrease) in current liabilities:Accounts
      payable
                      
                      
                      1,150,362
                      
                      
                      
                      1,752,653Other
      payables
                      
                      
                      (2,011,532
                      )
                      
                      
                      2,754,802Due
      to related party
                      
                      
                      
                      
                      
                      
                      -Unearned
      revenue
                      
                      
                      (57,926
                      )
                      
                      
                      (32,436
                      )Accrued
      expenses
                      
                      
                      138,378
                      
                      
                      
                      385,186Accrued
      payroll
                      
                      
                      (155,514
                      )
                      
                      
                      157,328Tax
      and welfare payable
                      
                      
                      (182,459
                      )
                      
                      
                      122,047Interest
      payable
                      
                      
                      (36,497
                      )
                      
                      
                      296,033Net
      cash provided by operating activities
                      
                      
                      134,335
                      
                      
                      
                      4,513,477CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                      
                      
                      (6,336,942
                      )
                      
                      
                      (3,097,732
                      )Acquisition
      of intangible assets
                      
                      
                      (35,309
                      )
                      
                      
                      (71,646
                      )Cash
      paid for purchase of subsidiaries
                      
                      
                      (1,266,374
                      )
                      
                      
                      (47,798,825
                      )Cash
      from the sale of subsidary
                      
                      
                      307,650
                      
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (7,330,975
                      )
                      
                      
                      (50,968,203
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the sale of common stock
                      
                      
                      10,000,000
                      
                      
                      
                      57,200,058Offering
      costs paid
                      
                      
                      (1,380,720
                      )
                      
                      
                      (5,908,325
                      )Proceeds
      from short-term loans
                      
                      
                      4,541,500
                      
                      
                      
                      -Proceeds
      from the exercise of warrants
                      
                      
                      -
                      
                      
                      
                      2,061,760Proceeds
      from the issuance of convertible notes
                      
                      
                      -
                      
                      
                      
                      19,000,000Issuance
      costs for convertible notes
                      
                      
                      -
                      
                      
                      
                      (1,716,666
                      )Payment
      on note payable
                      
                      
                      -
                      
                      
                      
                      (1,110,413
                      )Capital
      contributed by noncontrolling interest holders
                      
                      
                      118,664
                      
                      
                      
                      -Net
      cash provided by financing activities
                      
                      
                      13,279,444
                      
                      
                      
                      69,526,414Effect
      of exchange rate changes on cash and cash equivalents
                      
                      
                      (10,101
                      )
                      
                      
                      499,830NET
      INCREASE IN CASH & CASH EQUIVALENTS
                      
                      
                      6,072,703
                      
                      
                      
                      23,571,518CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
                      
                      
                      24,839,378
                      
                      
                      
                      7,696,209CASH
      & CASH EQUIVALENTS, ENDING BALANCE
                      
                      $
                      30,912,081
                      
                      
                      $
                      31,267,727SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                      
                      $
                      147,982
                      
                      
                      $
                      40,696Income
      taxes paid
                      
                      $
                      416,012
                      
                      
                      $
                      90,878





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


5


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Note
1 - Organization and Basis of Presentation





The
unaudited consolidated financial statements have been prepared by AgFeed
Industries, Inc. pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”).  The information furnished herein
reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company’s Annual Report on Form 10-K.  The results for
the six months ended June 30, 2009 are not necessarily indicative of the results
to be expected for the full year ending December 31, 2009.





Organization and Lines of
Business





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





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





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





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





On
December 20, 2006, the Company acquired 100% of the capital stock of Guangxi
Huijie Sci. & Tech. Feed Co, Ltd. (“Guangxi Huijie”).  On November
6, 2007, the Company acquired 90% of the capital stock of Lushan Breeder Pig
Farm Co., Ltd. (“Lushan”).  In 2008, the Company purchased  29
more hog producing farms and one feed company.  The Company’s
ownership interest in these hog farms ranges from 60% to 100%.





The
Company is engaged in the research and development, manufacturing, marketing,
distribution and sale of pre-mix fodder blended feed and feed additives
primarily for use in China's domestic pork husbandry market. The Company
operates production plants in Nanchang, Shanghai, Nanning, Shandong, and Hainan
provinces.  The Company sells to distributors and large-scale swine
farms.  The Company is also engaged in the business of raising,
breeding and selling hogs for use in China's pork production and hog breeding
markets through one breeder farm and 29 meat hog producing farms located in
Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces.


6


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Basis of
Presentation





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





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




Noncontrolling
Interest





In 2008,
the Company purchased interests in 29 producing hog farms and one feed
company ranging from 55% to 100%.  As a result of these purchases, the
Company recognized initial noncontrolling interest on its consolidated balance
sheet of $508,150. The net income (loss) attributed to noncontrolling interest
has been separately designated in the accompanying statement of income and other
comprehensive income.




Certain
amounts presented for prior periods that were previously designated as minority
interest have been reclassified to conform to the current year presentation.
Effective January 1, 2009, the Company adopted SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51,” which established new standards governing the accounting for
and reporting of noncontrolling interests (NCIs) in partially owned consolidated
subsidiaries and the loss of control of subsidiaries. Certain provisions of this
standard indicate, among other things, that NCIs (previously referred to as
minority interests) be treated as a separate component of equity, not as a
liability (as was previously the case); that increases and decreases in the
parent’s ownership interest that leave control intact be treated as equity
transactions, rather than as step acquisitions or dilution gains or losses; and
that losses of a partially owned consolidated subsidiary be allocated to the NCI
even when such allocation might result in a deficit balance. This standard also
required changes to certain presentation and disclosure requirements. The
provisions of the standard were applied to all NCIs prospectively, except for
the presentation and disclosure requirements, which were applied retrospectively
to all periods presented. As a result, upon adoption, the Company retroactively
reclassified the “Minority interest” balance previously included in the “Other
liabilities” section of the consolidated balance sheet to a new component of
equity with respect to NCIs in consolidated subsidiaries. The adoption also
impacted certain captions previously used on the consolidated statement of
income and other comprehensive income, largely identifying net income including
NCI and net income attributable to AgFeed.





Foreign Currency
Translation





The
accounts of the Company’s Chinese subsidiaries are maintained in the Chinese
Yuan Renminbi (RMB) and the accounts of the U.S. parent company are maintained
in the U.S. Dollar (USD).   The accounts of the Chinese
subsidiaries were translated into USD in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," with the
RMB as the functional currency for the Chinese subsidiaries. According to the
Statement, all assets and liabilities were translated at the exchange rate on
the balance sheet date, stockholders’ equity are translated at the historical
rates and statement of operations items are translated at the weighted average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, "Reporting
Comprehensive Income”.





Note
2 – Summary of Significant Accounting Policies





Use of
Estimates





The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.


7


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Reclassification





Certain
prior period amounts have been reclassified to conform to the current
presentation.





Cash and Cash
Equivalents





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





Accounts
Receivable





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





Advances to
Suppliers





The
Company makes advances to certain vendors for purchases of material. The
advances to suppliers are interest free and unsecured.





Inventories





Inventory
is stated at the lower of cost, as determined by weighted-average method, or
market. Management compares the cost of inventories with the market value, and
allowance is made for writing down the inventories to their market value, if
lower. Costs of raised animals include proportionate costs of breeding,
including depreciation of the breeding herd, plus the costs of maintenance
through the balance sheet date. Purchased pigs are carried at purchase cost plus
costs of maintenance through the balance sheet date.





Property &
Equipment





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





Office
      equipment
                5
      yearsOperating
      equipment
                10
      yearsVehicles
                5
      yearsSwine
      for reproduction
                3.5
      yearsBuildings
                20
      years




8


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





The
following are the details of the property and equipment at June 30, 2009 and
December 31, 2008:





June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Office
      equipment
                  
                  $
                  595,169
                  
                  
                  $
                  433,157Operating
      equipment
                  
                  
                  3,110,592
                  
                  
                  
                  2,042,522Vehicles
                  
                  
                  790,657
                  
                  
                  
                  655,853Swines
      for reproduction
                  
                  
                  14,458,480
                  
                  
                  
                  13,137,425Buildings
                  
                  
                  7,894,777
                  
                  
                  
                  6,673,822Total
                  
                  
                  26,849,675
                  
                  
                  
                  22,942,779Less
      accumulated depreciation
                  
                  
                  (3,302,248
                  )
                  
                  
                  (2,132,685
                  )$
                  23,547,427
                  
                  
                  $
                  20,810,094





Depreciation
expense for the three and six months ended June 30, 2009 and 2008 was $672,253
and $1,282,959, and $362,682 and $548,435, respectively.





Construction-in-Process





Construction-in-process
consists of amounts expended for building construction. Once building
construction is completed, the cost accumulated in construction-in-process is
transferred to property and equipment.





Long-Lived
Assets





The
Company applies the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of,” and the accounting and reporting
provisions of APB Opinion No. 30, “Reporting the Results of Operations for a
Disposal of a Segment of a Business.” The Company periodically evaluates the
carrying value of long-lived assets to be held and used in accordance with SFAS
144. SFAS 144 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of June 30, 2009
there were no significant impairments of its long-lived assets.


9


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Intangible
Assets





Net
intangible assets at June 30, 2009 and December 31, 2008 are as
follows:





June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Right
      to use land
                  
                  $
                  808,071
                  
                  
                  $
                  809,174Customer
      list
                  
                  
                  293,000
                  
                  
                  
                  293,400Computer
      software
                  
                  
                  143,279
                  
                  
                  
                  108,135Intangible
      related to hog farm acquisitions
                  
                  
                  42,685,976
                  
                  
                  
                  42,744,247Total
                  
                  
                  43,930,326
                  
                  
                  
                  43,954,956Less
      Accumulated amortization
                  
                  
                  (159,845
                  )
                  
                  
                  (121,251
                  )Intangibles,
      net
                  
                  $
                  43,770,481
                  
                  
                  $
                  43,833,705





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





Revenue
Recognition





The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (SAB) 104. Revenue is recognized when services are rendered
to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue. The Company is not subject to VAT
withholdings.  The Company gives volume rebates to certain customers
based on volume achieved. The Company accrues sales rebates based on actual
sales volume.





Advertising
Costs





The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place.  Advertising costs for the
three and six months ended June 30, 2009 and 2008 were not
significant.





Stock-Based
Compensation





The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No.
123.”  The Company recognizes in the statement of operations the
grant-date fair value of stock options and other equity-based compensation
issued to employees and non-employees.  There were 210,000 options
outstanding at June 30, 2009.





Income
Taxes





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


10


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





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





Foreign Currency
Transactions and Comprehensive Income





Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain statements, however, require entities to
report specific changes in assets and liabilities, such as gain or loss on
foreign currency translation, as a separate component of the equity section of
the balance sheet. Such items, along with net income, are components of
comprehensive income. The functional currency of the Company’s Chinese
subsidiaries is Chinese Renminbi. The unit of Renminbi is in Yuan. Translation
gains of $4,019,316 and $4,167,217 at June 30, 2009 and December 31, 2008,
respectively, are classified as an item of other comprehensive income in the
stockholders’ equity section of the consolidated balance
sheet.  During the six months ended June 30, 2009 and 2008, other
comprehensive income in the consolidated statements of income and other
comprehensive income included translation gain (loss) of $(147,901) and
$2,788,128, respectively.





Basic and Diluted Earnings
Per Share





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


11


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings per share computations for the three and six months
ended June 30, 2009 and 2008:





Three
      Months Ended
                  
                  June
      30, 2009
                  
                  
                  June
      30, 2008Per
      Share
                  
                  
                  
                  
                  
                  Per
      ShareShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  AmountBasic  earnings
      per share
                  
                  
                  39,549,994
                  
                  
                  $
                  0.03
                  
                  
                  
                  32,054,366
                  
                  
                  $
                  0.12Effect
      of dilutive stock options and warrants
                  
                  
                  1,896,400
                  
                  
                  
                  -
                  
                  
                  
                  349,973
                  
                  
                  
                  -Diluted
      earnings per share
                  
                  
                  41,446,344
                  
                  
                  $
                  0.03
                  
                  
                  
                  32,404,339
                  
                  
                  $
                  0.12





Six
      Months Ended
                  
                  June
      30, 2009
                  
                  
                  June
      30, 2008Per
      Share
                  
                  
                  
                  
                  
                  Per
      ShareShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  AmountBasic  earnings
      per share
                  
                  
                  38,746,009
                  
                  
                  $
                  0.11
                  
                  
                  
                  29,928,503
                  
                  
                  $
                  0.16Effect
      of dilutive stock options and warrants
                  
                  
                  835,882
                  
                  
                  
                  -
                  
                  
                  
                  305,178
                  
                  
                  
                  -Diluted
      earnings per share
                  
                  
                  39,581,891
                  
                  
                  $
                  0.11
                  
                  
                  
                  30,233,681
                  
                  
                  $
                  0.16





Statement of Cash
Flows





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





Segment
Reporting





SFAS No.
131, “Disclosure About Segments of an Enterprise and Related Information”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. The Company determined that it has four reportable segments (See
Note 10).





Fair Value of Financial
Instruments





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





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





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





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


12


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





As of
June 30, 2009, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.





Joint Venture /
Alliance





On April
15, 2009 a strategic alliance was signed between the Company and Hypor, a
Hendrix Genetics company, to complement the Company’s growth strategy through
genetics. Hypor will provide top line breeding stock to the Company’s existing
base of approximately 22,000 sows and will provide genetically superior animals
to a new to- be-constructed sows farrow-to-finish nucleus unit known as the
Wunnin farm. Hypor will join AgFeed International Protein (defined below) in
establishing a western style of production taking the role as a long-term
supplier of high health top quality genetics. This arrangement could lead to a
multi level joint venture serving the Pan Asian market.





On July
13, 2009, the Company formed a joint venture with M2P2, LLC, a leading U.S. hog
production and industry management consulting company.  The new
company, AgFeed International Protein Technology Corp. (“AgFeed International
Protein”) will focus on enhancing hog production systems for Chinese and other
Pan Asian clients based on modern western standards to increase productivity and
ensure the highest bio-security health standards in the Pan Asian hog
industry.  AgFeed International Protein was formed to take advantage
of the coming commercialization and consolidation of the hog industry being
fostered by the Chinese central and local governments.  The Company
will be the joint venture's first client.  AgFeed International
Protein is owned 80.1% by the Company and certain affiliates and 19.9% by
M2P2.





Recent Accounting
Pronouncements





In
April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair
Values When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly.”  This FSP provides guidance on (1) estimating the fair value
of an asset or liability when the volume and level of activity for the asset or
liability have significantly declined and (2) identifying transactions that
are not orderly. The FSP also amends certain disclosure provisions of SFAS
No. 157 to require, among other things, disclosures in interim periods of
the inputs and valuation techniques used to measure fair value. This
pronouncement is effective prospectively beginning April 1, 2009. The
Company is currently evaluating the impact of this standard, but would not
expect it to have a material impact on the Company’s consolidated results of
operations or financial condition.




In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments” (FSP 115-2).
This FSP modifies the requirements for recognizing other-than-temporarily
impaired debt securities and changes the existing impairment model for such
securities. The FSP also requires additional disclosures for both annual and
interim periods with respect to both debt and equity securities. Under the FSP,
impairment of debt securities will be considered other-than-temporary if an
entity (1) intends to sell the security, (2) more likely than not will
be required to sell the security before recovering its cost, or (3) does
not expect to recover the security’s entire amortized cost basis (even if the
entity does not intend to sell). The FSP further indicates that, depending on
which of the above factor(s) causes the impairment to be considered
other-than-temporary, (1) the entire shortfall of the security’s fair value
versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulated other comprehensive income. This pronouncement is effective
April 1, 2009. The Company does not believe this standard will have a
material impact on the Company’s consolidated results of operations or financial
condition.


13


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)




In
April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments.” This FSP essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the FSP requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. These additional disclosures are required
beginning with the quarter ending June 30, 2009.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events(“SFAS
165”) [ASC 855-10-05], which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was selected. SFAS 165
is effective for interim and annual periods ending after June 15, 2009, and
accordingly, the Company adopted this pronouncement during the second quarter of
2009. SFAS 165 requires that public entities evaluate subsequent events through
the date that the financial statements are issued. The Company has evaluated
subsequent events through the time of filing these financial statements with the
SEC on August 7, 2009.





In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets—anamendment of FASBStatement No. 140(“SFAS
166”) [ASC 860], which requires entities to provide more information regarding
sales of securitized financial assets and similar transactions,
particularly if the entity has continuing exposure to the risks related to
transferred financial assets. SFAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets and requires additional disclosures. SFAS 166 is effective
for fiscal years beginning after November 15, 2009. The Company has not
completed its assessment of the impact SFAS 166 will have on its financial
condition, results of operations or cash flows.





In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R)(“SFAS 167”) [ASC 810-10], which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS
167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose
and design and a company’s ability to direct the activities of the entity that
most significantly impact the entity’s economic performance. SFAS 167
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. SFAS 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS 167
is effective for fiscal years beginning after November 15, 2009. The Company has
not completed its assessment of the impact SFAS 167 will have on its
financial condition, results of operations or cash flows.





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTMand
theHierarchy of Generally Accepted
Accounting Principles a Replacement of FASB Statement No. 162(“SFAS
168”). This Standard establishes the FASB Accounting Standards
CodificationTM (the “Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities
in the preparation of financial statements in conformity with US GAAP. The
Codification does not change current US GAAP, but is intended to simplify
user access to all authoritative US GAAP by providing all the authoritative
literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective in the third quarter of 2009,
and accordingly, the Quarterly Report on Form 10-Q for the quarter ending
September 30, 2009 and all subsequent public filings will reference
the Codification as the sole source of authoritative
literature.


14




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Note
3 – Convertible Notes and Warrants





On
February 25, 2008, the Company entered into a Securities Purchase Agreement with
Apollo Asia Opportunity Master Fund, L.P., Jabcap Multi-Strategy Master Fund
Limited, J-Invest Ltd., and Deutsche Bank AG London Branch (the “Investors”) in
connection with a private placement transaction providing for, among other
things, the issuance of senior convertible notes for aggregate gross proceeds of
$19 million (the “Notes”) and warrants to purchase up to an aggregate of 380,000
shares (the “Warrants”) of the Company’s $0.001 par value per share common
stock.  The notes mature on the third anniversary of the issuance
date, bear interest at 7% per annum and are convertible into shares of the
Company’s common stock at an initial conversion price of $10.00 per
share.  The conversion price is subject to a “weighted average
ratchet” anti-dilution adjustment. The conversion price is also subject to
adjustment on a proportional basis, to the extent that the Company’s audited net
income for the fiscal years ending 2008 and 2009 is less than $30 million and
$40 million, respectively; subject to a per share floor price of
$5.00.  Due to the Company not generating $30 million net income for
the year ended December 31, 2008, the conversion price on the convertible notes
was reduced to $5.00.  Due to the re-pricing of the conversion price,
the Company recorded financing cost of $267,748 during the year ended December
31, 2008 which represents the difference between the fair value of the
conversion feature at a $5.00 conversion price and the original $10.00
conversion price.  The fair value was determined by using the
Black-Scholes pricing model with the following assumptions: expected life
of 2.2 years, a risk free interest rate of 2.0%, a dividend yield of
0% and volatility of 102%.





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





In
connection with the issuance of the Notes and the Warrants issued to the
Investors on February 25, 2008, the Company paid $1,716,666 in debt issuance
cost which is being amortized over the life of the Notes.  For the
three and six months ended June 30, 2009 and 2008, the Company amortized
$168,155 and $196,348 and  $1,238,037 and $1,292,858, respectively, of
the aforesaid issuance costs as interest and financing costs in the accompanying
consolidated statements of operations.





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





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





The
exercise price of the Warrants is subject to a “weighted average ratchet”
anti-dilution adjustment. The exercise price is also subject to adjustment, on a
proportional basis, to the extent that the Company’s audited net income for the
fiscal years ending 2008 and 2009 is less than $30 million and $40 million,
respectively; subject to a per share floor price of $5.00.  Due to the
Company not generating $30 million net income for the year ended December 31,
2008, the exercise price on the Warrants was reduced to $5.00.  Due to
the re-pricing of the exercise price, the Company recorded financing cost of
$22,782 which represents the difference between the fair value of the $5.00
exercise price and the original $10.00 exercise price.  The fair value
was determined by using the Black-Scholes pricing model with the following
assumptions: expected life of 2.2 years, a risk free interest rate
of 2.0%, a dividend yield of 0% and volatility of 102%.





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


15


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





The
Warrants granted to the Investor on February 25, 2008 and conversion feature in
the above Notes are not considered derivative instruments that need to be
bifurcated from the original security since the Warrants and the conversion
price of the Notes have a floor of $5.00, which means the Company can determine
the maximum shares that could be issued upon conversion. The Company determined
the fair value of the detachable warrants issued in connection with the Notes to
be $1,269,442, using the Black-Scholes option pricing model and the following
assumptions:  expected life of 1 year, a risk free interest rate
of 2.10%, a dividend yield of 0% and volatility of 70%. In addition,
the Company determined the value of the beneficial conversion feature to be
$2,770,442. The combined total discount for the Notes is $4,039,885 and is
being amortized over the term of the Notes. For the three and six months ended
June 30, 2009 and 2008, the Company amortized $395,724 and $462,072 and
$2,913,512 and $3,042,523, respectively, of the aforesaid discounts as interest
and financing costs in the accompanying consolidated statements of
operations.





During
the year ended December 31, 2008, $15,200,000 of the Notes were converted into
1,520,000 shares of common stock and during the six months ended June 30, 2009,
$2,800,000 of the Notes were converted into 560,000 shares of common
stock.





Note
4 – Short-Term Loans





Short
term loans at June 30, 2009 are follows:





Short
      term bank loan payable to Shanghai Pudong Development Bank.  The
      loan accrues interest at 5.84% per annum and is due on May 24,
      2010.  The loan is collateralized by buildings and land use
      rights.
                    
                    $
                    4,395,000Short
      term bank loan payable to Ganzhou Rural Credit Cooperative.  The
      loan accrues interest at 7.16% per annum and is due on June 7,
      2010.
                    
                    
                    146,500$
                    4,541,500




Note
5 – Stockholders’ Equity





Treasury
Stock





During
the year ended December 31, 2008, the Company purchased 367,295 shares of its
common stock on the open market (treasury shares) for $1,811,746.  The
Company accounted for the purchase of these treasury shares using the cost
method.





Private
Placement





On May 8,
2009, the Company closed a private placement offering of its common stock by
issuing 2,329,645 shares of common stock for gross proceeds of $10
million.  The Company paid $1,103,835 in costs related to this
offering which was offset against the offering proceeds.  The Company
also issued 1,164,822 common stock purchase warrants to the investors and
244,613 common stock purchase warrants to the placement agent.  The
warrants are exercisable immediately; have an exercise price of $4.50 per share
and expire five years from the date of issuance. The Company determined the fair
value of the 1,409,435 warrants issued in connection with this private placement
offering to be $4,379,181, using the Black-Scholes option pricing model and the
following assumptions:  expected life of 5 year, a risk free
interest rate of 2.50%, a dividend yield of 0% and volatility
of 109%.  The value of the warrants was recorded directly to
additional paid in capital as these warrants were issued in connection with the
sale of the Company’s equity securities.


16


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Exercise of
Warrants





During
the six months ended June 30, 2009, certain warrants holders exercised 300,000
warrants in connection with a cashless exercise provision in the warrant
agreement that resulted in the issuance of 95,473 shares of the Company’s common
stock.





Note
6 – Employee Common Welfare





The total
expense for the employee common welfare was $98,134 and $215,199, and $(2,856)
and $35,172 for the three and six months ended June 30, 2009 and 2008,
respectively.  The Company has recorded welfare payable of $53,473 and
$3,336 at June 30, 2009 and December 31, 2008, respectively, which is included
in tax and welfare payable in the accompanying consolidated balance
sheet.  The Chinese government abolished the 14% welfare plan policy
at the beginning of 2007.  The Company is not required to establish
welfare and common welfare reserves. The balance of welfare payable is remaining
amount due under the welfare plan provided for prior to 2007.





Note
7 – Statutory Common Welfare Fund





As
stipulated by the Company Law of the People’s Republic of China (PRC), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:





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





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





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





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





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





The
Company has appropriated $258,006 and $602,388 and $789,263 and $848,823 as
reserve for the statutory surplus reserve and welfare fund for the three and six
months ended June 30, 2009 and 2008, respectively.


17


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Note
8 – Stock Options and Warrants





Stock
Options





Following
is a summary of the stock option activity:





Options
                        outstanding
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        average
                        remaining
                        contractual life
                      
                      
                      Aggregate
                        Intrinsic ValueOutstanding,
      December 31, 2008
                      
                      
                      180,000
                      
                      
                      $
                      9.27
                      
                      
                      
                      4.65
                      
                      
                      $
                      -Granted
                      
                      
                      30,000
                      
                      
                      
                      3.30Forfeited
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -Outstanding,
      June 30, 2009
                      
                      
                      210,000
                      
                      
                      $
                      8.42
                      
                      
                      
                      4.24
                      
                      
                      $
                      78,900Exercisable,
      June 30, 2009
                      
                      
                      6,666
                      
                      
                      $
                      8.85
                      
                      
                      
                      3.42
                      
                      
                      $
                      -





The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option- pricing model for options granted during
2009:





Risk-free
      interest rate
                    
                    
                    2.5
                    %Expected
      life of the options
                    
                    5
      yearsExpected
      volatility
                    
                    
                    109
                    %Expected
      dividend yield
                    
                    
                    0
                    %





The
exercise price for options outstanding at June 30, 2009 is as
follows:





Number of
                                                Options
                                              
                                              Exercise
                                                Price30,000
                                              
                                              $
                                              3.3020,000
                                              
                                              $
                                              8.85160,000
                                              
                                              $
                                              9.32210,000





For
options granted during 2009 where the exercise price equaled the stock
price at the date of the grant, the weighted-average fair value of such options
was $2.61 and the weighted-average exercise price of such options
was $3.30.  No options were granted during 2009, where the
exercise price was less than the stock price at the date of the grant or the
exercise price was greater than the stock price at the date of
grant.  At June 30, 2009, the unamortized compensation costs related
to nonvested options amounted to $618,190, which will be expensed through the
second quarter of 2012.


18


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Warrants





Following
is a summary of the warrant activity:





Outstanding,
      December 31, 2008
                  
                  
                  4,323,204Granted
                  
                  
                  1,409,435Forfeited
                  
                  
                  -Exercised
                  
                  
                  300,000Outstanding,
      June 30, 2009
                  
                  
                  5,432,639





The
exercise price for warrants outstanding at June 30, 2009 is as
follows:





Number of
                                            Warrants
                                          
                                          Exercise
                                            Price3,800,004
                                          
                                          $
                                          2.501,409,435
                                          
                                          $
                                          4.503,200
                                          
                                          $
                                          5.00220,000
                                          
                                          $
                                          10.005,432,639





Note
9 – Taxes





Local PRC
Income Tax





Pursuant
to the tax laws of China, general enterprises are subject to income tax at an
effective rate of 25%.





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





Hog
production is an income tax exempt sector in China and sow owners receive
government grants and subsidies.





A
reconciliation of tax at United States federal statutory rate to provision for
income tax recorded in the financial statements is as follows:





For the Three Months EndedJune 30, 2009
                  
                  
                  June 30, 2008Tax
      provision at statutory rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %Foreign
      tax rate difference
                  
                  
                  (9
                  )%
                  
                  
                  (9
                  )%US
      NOL for which no benefit is realized
                  
                  
                  8
                  %
                  
                  
                  2
                  %Effect
      of tax holiday
                  
                  
                  (14
                  )%
                  
                  
                  (24
                  )%19
                  %
                  
                  
                  3
                  %


19


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





For the Six Months EndedJune 30, 2009
                  
                  
                  June 30, 2008Tax
      provision at statutory rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %Foreign
      tax rate difference
                  
                  
                  (9
                  )%
                  
                  
                  (9
                  )%US
      NOL for which no benefit is realized
                  
                  
                  3
                  %
                  
                  
                  2
                  %Effect
      of tax holiday
                  
                  
                  (17
                  )%
                  
                  
                  (23
                  )%11
                  %
                  
                  
                  4
                  %





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





If the
Company had not been exempt from paying income taxes, income tax expense for the
three and six months June 30, 2009 would have been approximately $376,000 and
$695,000 and earnings per share would have been reduced by $0.00 and $0.02; and
income tax expense for the three and six months ended June 30, 2008 would have
been approximately $1,370,000 and $1,700,000 and earnings per share would have
been reduced by $0.05 and $0.05, respectively.





Foreign
pretax earnings approximated $6,300,000 and $10,200,000 for the six months ended
June 30, 2009 and 2008 respectively. Pretax earnings of a foreign subsidiary are
subject to U.S. taxation when effectively repatriated. The Company provides
income taxes on the undistributed earnings of non-U.S. subsidiaries except to
the extent that such earnings are indefinitely invested outside the United
States. At June 30, 2009, approximately $34,800,000 of accumulated undistributed
earnings of non-U.S. subsidiaries was indefinitely invested. At the existing
U.S. federal income tax rate, additional taxes of $3,100,000 would have to be
provided if such earnings were remitted currently.





Note
10 – Segment Information





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





Shanghai
is located in the Qingcun Town, Fengxian district, Shanghai and sells its
products to approximately 609 customers, consisting
of 404 distributors and 205 large scale pig farms.  Guangxi
is located in Coastal Industrial Park, Liangqin district, Nanning city, Guangxi
Province and sells its products to approximately 650 customers, consisting
of 449 distributors and 201 large scale pig farms.  Nanchang is
located in Chang Bei District Industrial Park, in Nanchang, Jiangxi province and
sells its products to approximately 662 customers, consisting of 454
distributors and 208 large scale pig farms. The hog farms are engaged
mainly in raising, breeding, and sale of pigs all over the country and are
located in the PRC provinces of Jiangxi, Shanghai, Hainan, Guangxi and
Fujian.


20


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





The
following tables summarize segment information for the three and six months
ended June 30, 2009 and 2008:





Three
                  
                  
                  Three
                  
                  
                  Six
                  
                  
                  SixMonths
                  
                  
                  Months
                  
                  
                  Months
                  
                  
                  MonthsEnded
                  
                  
                  Ended
                  
                  
                  Ended
                  
                  
                  Ended6/30/2009
                  
                  
                  6/30/2008
                  
                  
                  6/30/2009
                  
                  
                  6/30/2008Revenues
      from unrelated entitiesShanghai
                  
                  $
                  2,300,559
                  
                  
                  $
                  5,176,236
                  
                  
                  $
                  4,047,230
                  
                  
                  $
                  8,680,037Guangxi
                  
                  
                  5,022,543
                  
                  
                  
                  1,952,261
                  
                  
                  
                  10,135,914
                  
                  
                  
                  3,221,739Nanchang
                  
                  
                  3,813,415
                  
                  
                  
                  5,088,775
                  
                  
                  
                  7,066,629
                  
                  
                  
                  9,327,797Hog
      farms
                  
                  
                  27,391,253
                  
                  
                  
                  23,418,055
                  
                  
                  
                  50,707,271
                  
                  
                  
                  26,552,838$
                  38,527,770
                  
                  
                  $
                  35,635,327
                  
                  
                  $
                  71,957,044
                  
                  
                  $
                  47,782,411Intersegment
      revenuesShanghai
                  
                  $
                  348,452
                  
                  
                  $
                  211,246
                  
                  
                  $
                  664,786
                  
                  
                  $
                  360,137Guangxi
                  
                  
                  2,772,261
                  
                  
                  
                  413,917
                  
                  
                  
                  4,351,132
                  
                  
                  
                  413,917Nanchang
                  
                  
                  655,052
                  
                  
                  
                  624,927
                  
                  
                  
                  1,430,253
                  
                  
                  
                  1,066,492Hog
      farms
                  
                  
                  230,593
                  
                  
                  
                  1,490
                  
                  
                  
                  318,855
                  
                  
                  
                  5,982$
                  4,006,358
                  
                  
                  $
                  1,251,580
                  
                  
                  $
                  6,765,026
                  
                  
                  $
                  1,846,528Total
      RevenuesShanghai
                  
                  $
                  2,649,011
                  
                  
                  $
                  5,387,482
                  
                  
                  $
                  4,712,016
                  
                  
                  $
                  9,040,174Guangxi
                  
                  
                  7,794,804
                  
                  
                  
                  2,366,178
                  
                  
                  
                  14,487,046
                  
                  
                  
                  3,635,656Nanchang
                  
                  
                  4,468,467
                  
                  
                  
                  5,713,702
                  
                  
                  
                  8,496,882
                  
                  
                  
                  10,394,289Hog
      farms
                  
                  
                  27,621,846
                  
                  
                  
                  23,419,545
                  
                  
                  
                  51,026,126
                  
                  
                  
                  26,558,820Less
      Intersegment revenues
                  
                  
                  (4,006,358
                  )
                  
                  
                  (1,251,580
                  )
                  
                  
                  (6,765,026
                  )
                  
                  
                  (1,846,528
                  )$
                  38,527,770
                  
                  
                  $
                  35,635,327
                  
                  
                  $
                  71,957,044
                  
                  
                  $
                  47,782,411Income
      from operationsShanghai
                  
                  $
                  668,661
                  
                  
                  $
                  1,020,044
                  
                  
                  $
                  848,779
                  
                  
                  $
                  1,666,733Guangxi
                  
                  
                  404,555
                  
                  
                  
                  397,753
                  
                  
                  
                  895,338
                  
                  
                  
                  585,785Nanchang
                  
                  
                  665,300
                  
                  
                  
                  740,541
                  
                  
                  
                  1,382,030
                  
                  
                  
                  1,445,445Hog
      farms
                  
                  
                  1,026,823
                  
                  
                  
                  6,859,564
                  
                  
                  
                  3,186,452
                  
                  
                  
                  7,363,212Holding
      Company
                  
                  
                  (503,542
                  )
                  
                  
                  (245,745
                  )
                  
                  
                  (868,436
                  )
                  
                  
                  (563,900
                  )$
                  2,261,797
                  
                  
                  $
                  8,772,157
                  
                  
                  $
                  5,444,163
                  
                  
                  $
                  10,497,275Interest
      incomeShanghai
                  
                  $
                  1,009
                  
                  
                  $
                  540
                  
                  
                  $
                  1,553
                  
                  
                  $
                  1,270Guangxi
                  
                  
                  993
                  
                  
                  
                  1,174
                  
                  
                  
                  3,472
                  
                  
                  
                  2,212Nanchang
                  
                  
                  15,109
                  
                  
                  
                  36,384
                  
                  
                  
                  43,834
                  
                  
                  
                  49,670Hog
      farms
                  
                  
                  5,277
                  
                  
                  
                  6,783
                  
                  
                  
                  10,313
                  
                  
                  
                  7,400Holding
      Company
                  
                  
                  30,166
                  
                  
                  
                  31,179
                  
                  
                  
                  53,944
                  
                  
                  
                  65,683$
                  52,554
                  
                  
                  $
                  76,060
                  
                  
                  $
                  113,116
                  
                  
                  $
                  126,235




21


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Interest
      and financing costsShanghai
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Guangxi
                        
                        
                        1
                        
                        
                        
                        2,950
                        
                        
                        
                        1
                        
                        
                        
                        7,785Nanchang
                        
                        
                        15,358
                        
                        
                        
                        (12,566
                        )
                        
                        
                        15,358
                        
                        
                        
                        -Hog
      farms
                        
                        
                        7,145
                        
                        
                        
                        2
                        
                        
                        
                        7,145
                        
                        
                        
                        2Holding
      Company
                        
                        
                        602,010
                        
                        
                        
                        4,322,173
                        
                        
                        
                        754,924
                        
                        
                        
                        4,631,414$
                        624,514
                        
                        
                        $
                        4,312,559
                        
                        
                        $
                        777,428
                        
                        
                        $
                        4,639,201Income
      tax expense (benefit)Shanghai
                        
                        $
                        83,407
                        
                        
                        $
                        -
                        
                        
                        $
                        104,294
                        
                        
                        $
                        -Guangxi
                        
                        
                        127,945
                        
                        
                        
                        60,576
                        
                        
                        
                        248,549
                        
                        
                        
                        113,501Nanchang
                        
                        
                        74,606
                        
                        
                        
                        56,250
                        
                        
                        
                        148,665
                        
                        
                        
                        99,588Hog
      farms
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Holding
      Company
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -$
                        285,958
                        
                        
                        $
                        116,826
                        
                        
                        $
                        501,508
                        
                        
                        $
                        213,089Net
      IncomeShanghai
                        
                        $
                        583,849
                        
                        
                        $
                        1,024,197
                        
                        
                        $
                        741,101
                        
                        
                        $
                        1,675,165Guangxi
                        
                        
                        276,733
                        
                        
                        
                        179,827
                        
                        
                        
                        935,353
                        
                        
                        
                        310,756Nanchang
                        
                        
                        589,717
                        
                        
                        
                        537,582
                        
                        
                        
                        1,256,245
                        
                        
                        
                        974,400Hog
      farms
                        
                        
                        844,788
                        
                        
                        
                        6,717,580
                        
                        
                        
                        2,875,117
                        
                        
                        
                        7,012,283Holding
      Company
                        
                        
                        (1,068,835
                        )
                        
                        
                        (4,537,673
                        )
                        
                        
                        (1,562,724
                        )
                        
                        
                        (5,131,794
                        )$
                        1,226,252
                        
                        
                        $
                        3,921,513
                        
                        
                        $
                        4,245,092
                        
                        
                        $
                        4,840,810Provision
      for depreciationShanghai
                        
                        $
                        13,462
                        
                        
                        $
                        21,373
                        
                        
                        $
                        19,292
                        
                        
                        $
                        42,746Guangxi
                        
                        
                        86,128
                        
                        
                        
                        12,991
                        
                        
                        
                        103,829
                        
                        
                        
                        25,982Nanchang
                        
                        
                        33,208
                        
                        
                        
                        6,216
                        
                        
                        
                        45,938
                        
                        
                        
                        12,432Hog
      farms
                        
                        
                        539,455
                        
                        
                        
                        322,102
                        
                        
                        
                        1,113,900
                        
                        
                        
                        467,275$
                        672,253
                        
                        
                        $
                        362,682
                        
                        
                        $
                        1,282,959
                        
                        
                        $
                        548,435





As of
                
                
                As of6/30/08
                
                
                12/31/08Total
      AssetsShanghai
                
                $
                6,943,855
                
                
                $
                8,633,418Guangxi
                
                
                14,327,601
                
                
                
                14,356,062Nanchang
                
                
                12,718,080
                
                
                
                8,087,484Hog
      farms
                
                
                102,130,625
                
                
                
                96,454,117Holding
      Company
                
                
                16,495,978
                
                
                
                9,524,055$
                152,616,139
                
                
                $
                137,055,136




22


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(unaudited)





Note
11 – Commitments and Contingencies





At June
30, 2009, the Company had commitments to expend $4,455,201 in connection to
building construction currently in process.





Note
12 – Acquisition and Dispositions





During
the six months ended June 30, 2009, the Company purchased the non-controlling
interest of 30% and 45% in two hog farms for $370,026 and $896,348,
respectively.  As a result of the purchase of the non-controlling
interest, the excess of the purchase price over the carrying value of the
non-controlling interest of $159,249 and $263,291, respectively as been recorded
against additional paid in capital.





Also,
during the six months ended June 30, 2009, the Company sold its 70% interest in
a subsidiary for $307,650.  This subsidiary had not commenced
operations.





Note
13 – Subsequent Events





Exercise of
Warrants





Subsequent
to June 30, 2009, 1,282,004 warrants were exercised for gross cash proceeds of
$3,205,010.





Joint
Venture





On July
13, 2009, the Company and M2P2 formed AgFeed International Protein. The joint
venture will focus on enhancing hog production systems for Chinese and other Pan
Asian clients based on modern western standards to increase productivity and
ensure the highest bio-security health standards in the Pan Asian hog industry,
taking advantage of the coming commercialization and consolidation of the hog
industry being fostered by the Chinese central and local
governments.  The Company will be AgFeed International Protein's first
client.  AgFeed International Protein is owned 80.1% by the Company
and certain affiliates and 19.9% by M2P2.


23


CAUTIONARY
STATEMENT FOR FORWARD-LOOKING STATEMENTS





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





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





Overview





We are a
Nevada corporation engaged in the animal nutrition (premix, concentrates and
complete feeds) and commercial hog producing business in China through our
operating subsidiaries.




Our
animal nutrition business consists of the research and development, manufacture,
marketing and sale of premix feed and blended feed for use in the domestic
animal husbandry markets, primarily for hog production in
China.  Premix is an animal feed additive that is broadly used in
commercial animal production worldwide. The use of premix feed can significantly
reduce an animal’s growth cycle, enabling the animal to reach market size
sooner. We have been in the premix feed business since 1995 and now operate five
premix feed manufacturing facilities located in the cities of Nanchang,
Shandong, Shanghai, Nanning, and Hainan.




We
entered the hog breeding and production business in November 2007.  In
this business, we mainly produce hogs for slaughter and sell breeding
stock.  We have one breeder farm and 29 meat hog producing farms in
the Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces.




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 China.  As a result of a merger into a wholly-owned
subsidiary, we changed our name to AgFeed Industries, Inc. on November 17,
2006.




AgFeed
had revenues of $71.96 million for the six months ended June 30, 2009 compared
to revenues of $47.78 million for the six months ended June 30,
2008.  The increase (50.6%) we experienced in this period was the
result of organic growth in our feed business and the hog farm acquisitions we
made beginning in late 2007 and throughout 2008.




Animal
Nutrition Business




We
manufacture, distribute, market and sell three main product lines - additive
premix, concentrates and complete feeds for use in all stages of a pig’s
life.  We conduct these operations through our subsidiaries Nanchang
Best, Shanghai Best, Guangxi Huijie, Shandong AgFeed Agribusiness Co., Ltd.
("Shandong Feed"), and Hainan HopeJia Feed Co., Ltd. ("HopeJia"). We also
provide extensive technical and veterinary support free of charge to our
customers.


24


Nanchang
Best, Shanghai Best, Guangxi Huijie, Shandong Feed and HopeJia are collectively
referred to as our "feed operating companies."  They operate
manufacturing facilities in Nanchang, Shanghai, Nanning, Shandong, and Hainan
provinces,  primarily serving the Hog industry.  Each
subsidiary independently conducts local marketing and sales
efforts.  We share sales referrals and leads among the subsidiaries,
but our subsidiaries do not compete against each other for new sales. Nanchang
Best and Guangxi Huijie are primarily responsible for our ongoing research and
development efforts and share their expertise in this area with all of our
manufacturing operations.  There are no formal written agreements
relating to these services as each of these companies are our wholly owned
subsidiaries.




As of
June 30, 2009, we have established relationships with approximately 1,239
independently owned feed distribution chain stores that sell our products
exclusively, targeting backyard and small hog farms. These complement our direct
sales to approximately 712 large size commercial hog farms. We rely on the
distributors to market and sell our products to the smaller hog
farms.  Approximately 96% of China’s total annual hog production is
supplied by backyard and small farms that raise less than 100 hogs per year per
family. Through our network of distributors and direct sales, we are able to
market our premix feed to the producers of more than 70% of the annual hog
production in China.




AgFeed is
one of a handful of companies that have received “Green Certification” from the
Minister of Agriculture of PRC for its premix products under the brand label
“BEST.”  This means that these products are safe,
environmentally-friendly, and can effectively promote the healthy growth of
pigs. According to current government regulations, pork cannot be accredited by
the government as “green” unless it is produced using government certified green
feed. Having our feed certified as green requires us to adhere to strict
operational controls and procedures. This green certification laid the ground
for our Hog Farms to produce hogs providing high quality “Green” pork products.
It is also an incentive for other commercial hog farms to enter into sales
contracts with our feed operations.




AgFeed
invests capital in research and development to maintain and improve on a
superior quality product while experimenting with environmentally sensitive
premix formulas. We will continue to invest up to 1% of our revenues to
increasing our long term profitability and competitiveness.




The
increase in our revenues was attributable to an increase in the volume of
products sold and expansion into new markets that recognize the strong AgFeed
brand name. This was in spite of the reduction of hog inventory by small
farmers. Offsetting this increase was a substantial increase in the cost of
goods sold - primarily corn, soy and fuel - during the six months ended June 30,
2009.





According
to the Access Asia Limited 2008 market analysis in their study titled “Fresh
& Processed Meat in China 2009,” food preferences are changing rapidly in
China. Chinese people are now eating much more meat than previously. But there
is also a growing diversity in the average diet. The fresh meat market
is expected to grow over 23% during the period from 2009 to 2013. This
market value is estimated to be over $70.0 billion by 2013.  Pork will
continue to be 62.5% of all fresh meat sold.  Poultry, lamb, veal,
mutton and beef will constitute 36% of the growth. In view of this we have
decided to explore the expansion and funding to serve the animal nutrition
products needed for this growing market.




Hog
Production Business




We raise,
breed and sell hogs for use in China's pork production and hog breeding
markets.  We own one breeder farm (Lushan) and 29 meat hog producing
farms located in Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces, which
are strategically located in or near the largest pork consumption areas in the
PRC.




We
entered the hog farming business on November 9, 2007 as a result of our
acquisition of ninety percent (90%) of the capital stock of
Lushan.  Lushan owns and operates a breeder hog farm in Jiangxi
Province.  Lushan is a mid-scale hog farm engaged in the business of
raising, breeding and selling hogs in the PRC for use in the pork production
market in the PRC.  Lushan operates as a majority-owned subsidiary of
Nanchang Best.  In 2008, we acquired at least a majority interest in
29 meat hog producing farms in the Jiangxi, Shanghai, Hainan, Guangxi, and
Fujian provinces through our subsidiaries - Nanchang Best, Shanghai Best,
Guangxi Huijie and Jiangxi Best Swine Development Co. ("Best
Swine").  Our meat hog producing farms generate revenue primarily from
the sale of meat hogs to slaughterhouses.  Our meat hogs are sold
primarily in Jiangxi, Shanghai, Hainan, Guangxi, Fujian, Guangdong and other
neighboring provinces.


25


Lushan
generates revenue primarily from the sale of breeder hogs to commercial hog
farms and, to a lesser extent, the sale of meat hogs to hog
slaughterhouses.  It also generates revenue by providing consulting
services to hog farmers in the areas of feed production, feed formulation and
veterinary services.  Lushan's customers include large-scale hog
farms, mid-scale hog farms and small-scale farms.  Our breeder hogs
are sold throughout the PRC, primarily in southeastern China.




Capital
spending for the first six months of 2009 consisted of approximately $3.2
million on building renovations, equipment purchases and environmental
expenditures, $1.3 million on swine purchases for reproduction and $1.7 million
related to construction in progress.  Our current capital spending
plans over the next two and a half years include an estimated $4.2 million for
bio security, $4.0 million for environmental compliance and projects and $8.3
million for genetics programs.  For 2009, AgFeed plans to achieve a
production capacity of up to 650,000 hogs.  In the first half of 2009
AgFeed sold approximately 316,000 hogs with an average selling price of
$159/head as compared to $219/head for the full year 2008. We anticipate the
sale of another 325,000 to 350,000 hogs in the second half of 2009 at higher
expected prices.




On April
15, 2009 we formed a strategic alliance with Hypor. The alliance has four
phases: (1) upgrading the genetic base of our existing herds; (2) creating a sow
farrow-to -finish nucleus facility (Wunnin Farms) to supply superior breeding
stock to be utilized in our production systems and for sale to outside
commercial hog farms; (3) establishing high health, top quality genetics to the
farms being developed by AgFeed International Protein; and (4) developing gene
transfer centers to maximize the use of the top performing boars in China across
AgFeed's production system.




On July
13, 2009, we formed a joint venture with M2P2. AgFeed International Protein will
focus on enhancing hog production systems for Chinese and other Pan Asian
clients based on modern western standards to increase productivity and ensure
the highest bio-security health standards in the Pan Asian hog
industry.  The joint venture was formed to take advantage of the
coming commercialization and consolidation of the hog industry being fostered by
the Chinese central and local governments.  We will be the joint
venture's first client.  AgFeed International Protein is owned 80.1%
by us and certain affiliates and 19.9% by M2P2.




AgFeed's  current strategic
plan calls for development of a platform for the production and sale of
approximately 2.5 million hogs into the Chinese market between now and the end
of 2011. The key element to this future growth is scientific breeding which is
underscored by our arrangement with Hypor. In April 2009 we began this by
stocking the 1,200 sow farrow-to-finish Lushan Breeding Farm with the Hypor
Large White Pureline Sows, the Hypor Landrace Pureline Boars and the Duroc
Terminal Sire. In the third quarter, AgFeed International Protein will begin to
build the first of six new farms that will house an additional 20,000
genetically superior sows and 400 boars.  When fully operational, we
anticipate that these farms will produce 500,000 pigs per year. We believe the
genetics program will be accretive to earnings by second half 2010. It is
anticipated that the cost to build the six farms will be approximately $45 to
$50 million over the next two years.




AgFeed's investment plans also include
modernization of our existing pork production facilities, investment in
reporting and cash management systems and the training of our employees, and the
development of enhanced environmental and health safety programs including
upgraded bio security measures. These actions are part of our effort to improve
on the standards of the new China Food Safety Law that was implemented on June
1, 2009 and to ensure the production of consistently high quality, safe
pork.


26


According
to the China Feed Industry Association, the PRC has the world's largest and most
profitable markets for hog production, which processed 625 million hogs in 2008,
compared to approximately 100 million in the US. More than 1.2 billion Chinese
consume pork as their primary source of meat. 63% of all meat consumed in the
PRC is pork. Chinese consumers consume more pork each year than the rest of the
world combined. Pork production in China is a key political, social and security
issue for consumers. The Chinese government supports hog producers with
favorable tax status and subsidies, insurance, vaccines, caps on feed costs and
land use grants. Hog production is exempt from all taxes and sow owners receive
government grants and subsidies.




Examples
of the importance that the PRC puts on hog production are exemplified by the
adoption of new policies and enactment of new laws benefiting hog producers. In
January 2008, the Chinese central government instituted a set of measures that
could prevent large declines in hog prices with the view of stabilizing hog
production and hog prices in order to protect the interest of hog farms. In July
2008, the NDRC announced that they were channeling $5.6 billion RMB for
livestock farm construction and another $2.8 billion RMB to support live pig
production. The Food Safety Law, which went into effect on June 1, 2009,
provides a legal basis for the government to strengthen food safety control
“from the production line to the dining table.”





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


27





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 of AgFeed exist and collectability is reasonably assured. Payments
received before all of the relevant criteria for revenue recognition are
satisfied are recorded as unearned revenue. We are not subject to VAT
withholdings.  We give volume rebates to certain customers based on
volume achieved.




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





Sales
returns and allowances have historically been
insignificant.  Accordingly, estimating returns is not
critical.  However, if circumstances change, returns and allowance may
impact the company’s earnings. There are no differences in our arrangements with
our different types of customers.  Accordingly, we do not have
different revenue recognition policies for different types of
customers.   We offer credit terms ranging from 30 to 90 days for
most customers.  From some large customers, we may extend these terms
beyond 90 days.





Recent
Accounting Pronouncements




In
April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair
Values When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly.”  This FSP provides guidance on (1) estimating the fair value
of an asset or liability when the volume and level of activity for the asset or
liability have significantly declined and (2) identifying transactions that
are not orderly. The FSP also amends certain disclosure provisions of SFAS
No. 157 to require, among other things, disclosures in interim periods of
the inputs and valuation techniques used to measure fair value. This
pronouncement is effective prospectively beginning April 1, 2009. We are
currently evaluating the impact of this standard, but would not expect it to
have a material impact on our consolidated results of operations or financial
condition.


28




In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments” (FSP 115-2).
This FSP modifies the requirements for recognizing other-than-temporarily
impaired debt securities and changes the existing impairment model for such
securities. The FSP also requires additional disclosures for both annual and
interim periods with respect to both debt and equity securities. Under the FSP,
impairment of debt securities will be considered other-than-temporary if an
entity (1) intends to sell the security, (2) more likely than not will
be required to sell the security before recovering its cost, or (3) does
not expect to recover the security’s entire amortized cost basis (even if the
entity does not intend to sell). The FSP further indicates that, depending on
which of the above factor(s) causes the impairment to be considered
other-than-temporary, (1) the entire shortfall of the security’s fair value
versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulated other comprehensive income. This pronouncement is effective
April 1, 2009. We do not believe this standard will have a material impact
on our consolidated results of operations or financial condition.




In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments.” This FSP essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the FSP requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. These additional disclosures are required
beginning with the quarter ending June 30, 2009.





In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events(“FAS 165”)
[ASC 855-10-05], which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. FAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was selected. FAS 165
is effective for interim and annual periods ending after June 15, 2009, and
accordingly, we adopted this pronouncement during the second quarter of 2009.
FAS 165 requires that public entities evaluate subsequent events through the
date that the financial statements are issued. We have evaluated subsequent
events through the time of filing these financial statements with the SEC on
August 7, 2009.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of
Financial Assets—anamendment of FASB Statement No. 140(“FAS 166”) [ASC 860], which requires entities to provide more
information regarding sales of securitized financial assets and similar
transactions, particularly if the entity has continuing exposure to the risks
related to transferred financial assets. FAS 166 eliminates the concept of
a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets and requires additional disclosures. FAS 166
is effective for fiscal years beginning after November 15, 2009. We have not
completed its assessment of the impact FAS 166 will have on its financial
condition, results of operations or cash flows.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation
No. 46(R)(“FAS 167”) [ASC 810-10], which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. FAS
167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose
and design and a company’s ability to direct the activities of the entity that
most significantly impact the entity’s economic performance. FAS 167
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. FAS 167 also requires additional disclosures
about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. FAS 167 is
effective for fiscal years beginning after November 15, 2009. We have
not completed its assessment of the impact FAS 167 will have on its
financial condition, results of operations or cash flows.


29


In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards
CodificationTMand
theHierarchy of Generally Accepted
Accounting Principles a Replacement of FASB Statement No. 162(“FAS
168”). This Standard establishes the FASB Accounting Standards
CodificationTM (the “Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities
in the preparation of financial statements in conformity with U.S. GAAP. The
Codification does not change current U.S. GAAP, but is intended to simplify
user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective in the third quarter of 2009,
and accordingly, the Quarterly Report on Form 10-Q for the quarter ending
September 30, 2009 and all subsequent public filings will reference
the Codification as the sole source of authoritative
literature.





Results
of Operations





Comparison
of Three Months Ended June 30, 2009 and 2008





Three
      Months Ended June 30,
                                                
                                                $
                                                
                                                %2009
                                                
                                                2008
                                                
                                                Change
                                                
                                                ChangeRevenues
                                                
                                                $
                                                38,527,770
                                                
                                                $
                                                35,635,327
                                                
                                                $
                                                2,892,443
                                                
                                                8.12Cost
      of goods sold
                                                
                                                
                                                33,306,111
                                                
                                                
                                                24,600,502
                                                
                                                
                                                8,705,609
                                                
                                                35.39Gross
      profit
                                                
                                                
                                                5,221,659
                                                
                                                
                                                11,034,825
                                                
                                                
                                                (5,813,166
                                                )
                                                (52.68
                                                )Operating
      expenses
                                                
                                                
                                                2,959,862
                                                
                                                
                                                2,262,668
                                                
                                                
                                                697,194
                                                
                                                30.81Interest
      and financing costs
                                                
                                                
                                                624,514
                                                
                                                
                                                4,312,559
                                                
                                                
                                                (3,688,045
                                                )
                                                (85.52
                                                )Net
      income
                                                
                                                
                                                1,226,252
                                                
                                                
                                                3,921,513
                                                
                                                
                                                (2,695,261
                                                )
                                                (68.73
                                                )




Revenues. The
increase in revenues was due to an increase in the volume of feed products that
we sold.  Our total feed
sales in the second quarter of 2009 were approximately 23,312 metric tons, which
consists of 7,604 metric tons of premix fodder, 3,324 metric tons of concentrate
feed, 11,040 metric tons of complete feed and 1.343 metric tons of core feed
products.  The feed sales in the second quarter of 2009 increased
47.6%, or 7,516 metric tons, compared to the same period in 2008. The increase
in feed product sales was a result of expanding our distribution channels by the
opening of additional exclusive distribution stores for our
products.   We experienced favorable market conditions that increased
the demand for our feed products.  A stronger “AgFeed” brand name
fueled our sales. We are also able to justify premium pricing due to the strong
brand name recognition of our operating companies, hands-on after market
support, and superior, more effective products developed as a result of a strong
research and development program. 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.  Additionally, as a result of economies of scale, we were
able to cut hog production cost through centralized raw materials purchases,
sales and marketing channels, and finance and internal control
management.  At the beginning of this year, AgFeed managed to
negotiate a number of agreements with dealers and suppliers to ensure that we
receive supplies of key raw materials at a discount to market.  This
is an important aspect of our ongoing strategy to mitigate corn and soybean meal
price disruptions. Our increase in revenues described above was offset by (i) an
increase in the cost of goods sold – primarily corn, soy and fuel – in the
period and (ii) a reduction in the selling price for our hogs during the latter
part of 2008 and the first quarter of 2009.  Due to a decline in hog
prices, we experienced a decrease in the selling price for our hogs during the
second quarter of 2009. Our total hogs sold in the second quarter of 2009 was
approximately 183,878 head, up 87,403 head, or 90.6%, compared to the same
period in 2008.   But, lower hog sale prices, higher feed costs,
or both had a negative effect on our results of operations.


30


Cost of Goods Sold. We
experienced increases in the unit cost of goods sold for our two business lines
during the three months ended June 30, 2009 compared to the same period in
2008.  These raw materials constitute approximately 60 - 75% of our raw
material costs.  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 various additives used in our production fluctuates,
which can result in temporary increases in the unit cost of goods
sold.  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.




Gross Profit. Gross
margins decreased to 13.6% from 30.1% during the three months June 30, 2009 as
compared to the same period in 2008.  The decrease in gross margin can be
attributed to the increase in the cost of hog feed that began in the last half
of 2008 and continued into 2009 and a reduction in the selling price for our
hogs.  This was offset somewhat by actions taken at the beginning of
2009, including expansion of our product distribution channels, and our entry
into long-term contracts for key product ingredients which locked in favorable
cost savings.




Selling, General and Administrative
Expenses.  Selling, general and administrative expense includes
overhead expenses such as rent, management and staff salaries, general
insurance, marketing, accounting, legal and offices expenses. The increase
in our selling, general and administrative expense also reflects the addition of
our new subsidiaries, which had a total of approximately $1.1 million in
selling, general and administrative expenses during the three months ended June
30, 2009. Selling expenses for the period increased by 30.8% due to costs
associated with the aggressive expansion into markets in neighboring provinces,
and the costs associated with market development.  We attempt to
control our selling expenses through strict cost controls and efficient use of
our distribution channels.




Other income (expense). Other
income (expense) of $(189,205) for the three months ended June 30, 2009 is
principally related to sales of culled breeder hogs.  In light of
market conditions, we have sped up culling and will introduce genetically
superior sows and boars for better gains when the market is
favorable.





Interest and Financing Costs.
We incurred interest and financing costs of $624,514 and $4.3 million during the
three months ended June 30, 2009 and 2008, respectively, principally as a result
of the issuance of $19 million principal amount of convertible notes issued
during February 2008.  During the three months ended June 30, 2009 and
2008, $2.8 million and $13.7 million, respectively, of the convertible notes
were converted into shares of common stock which resulted in accelerated
amortization of the debt discounts and debt issue costs associated with the
convertible debt..




Hog
production is an income tax exempt sector in China and sow owners receive
government grants and subsidies.  Some of our feed manufacturing
companies benefit from exemption from value-added tax.




Net Income.  The
decrease in our net income was due to the increase in our cost of sales and
higher operating expenses.  The higher sales and the benefits from
economies of scale in our business resulting in a modest increase in operating
efficiency was offset by higher cost of sales and a charge to earnings to
reflect the increase in our derivative liability. We continued to benefit from
the tax exempt status for our hog production business.


31


Comparison
of Six Months Ended June 30, 2009 and 2008





Six
      Months Ended June 30,
                                                  
                                                  $
                                                  
                                                  %2009
                                                  
                                                  2008
                                                  
                                                  Change
                                                  
                                                  ChangeRevenues
                                                  
                                                  $
                                                  71,957,044
                                                  
                                                  $
                                                  47,782,411
                                                  
                                                  $
                                                  24,174,633
                                                  
                                                  50.59Cost
      of goods sold
                                                  
                                                  
                                                  60,931,980
                                                  
                                                  
                                                  33,314,625
                                                  
                                                  
                                                  27,617,355
                                                  
                                                  82.90Gross
      profit
                                                  
                                                  
                                                  11,025,064
                                                  
                                                  
                                                  14,467,786
                                                  
                                                  
                                                  (3,442,722
                                                  )
                                                  (23.80
                                                  )Operating
      expenses
                                                  
                                                  
                                                  5,580,901
                                                  
                                                  
                                                  3,970,511
                                                  
                                                  
                                                  1,610,390
                                                  
                                                  40.56Interest
      and financing costs
                                                  
                                                  
                                                  777,428
                                                  
                                                  
                                                  4,639,201
                                                  
                                                  
                                                  (3,861,773
                                                  )
                                                  (83.24
                                                  )Net
      income
                                                  
                                                  
                                                  4,245,092
                                                  
                                                  
                                                  4,840,810
                                                  
                                                  
                                                  (595,718
                                                  )
                                                  (12.31
                                                  )





Revenues. The
increase in revenues was due to an increase in the volume of feed products that
we sold.  Our total feed
sales in the six months ended June 30, 2009 were approximately 43,542 metric
tons, an increase of 14,756 metric tons, or 51%, compared to the same period in
2008. Our
total feed sales in the six months ended June 30, 2009 consists of 14,667 metric
tons of premix fodder, 6,108 metric tons of concentrate feed, 20,371 metric tons
of complete feed and 2.396 metric tons of core feed products.  The
increase in feed product sales was a result of expanding our distribution
channels by the opening of additional exclusive distribution stores for our
products.   We experienced favorable market conditions that increased
the demand for our feed products.  A stronger “AgFeed” brand name
fueled our sales. We are also able to justify premium pricing due to the strong
brand name recognition of our operating companies, hands-on after market
support, and superior, more effective products developed as a result of a strong
research and development. 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. Additionally, as a
result of economies of scale, we were able to cut hog production cost through
centralized raw materials purchases, sales and marketing channels, and finance
and internal control management.  At the beginning of this year,
AgFeed managed to negotiate a number of agreements with dealers and suppliers to
ensure that we receive supplies of key raw materials at a discount to
market.  This is an important aspect of our ongoing strategy to
mitigate corn and soybean meal price disruptions. Our increase in revenues
described above was offset by (i) an increase in the cost of goods sold –
primarily corn, soy and fuel – in the period and (ii) a reduction in the selling
price for our hogs during the latter part of 2008 and the first quarter of
2009.  Due to a decline in hog prices, we experienced a
decrease in the selling price for our hogs during the second quarter of 2009.
Our total hogs sold in the first half of 2009 were approximately 316,923 head,
an increase of 211,427 head, or 201%, compared to the same period in
2008.  But, lower hog sale prices, higher feed costs, or both had a
negative effect on our results of operations.




Cost of Goods Sold. We
experienced increases in the unit cost of goods sold for our two business lines
during the six months ended June 30, 2009 compared to the same period in
2008.  These raw materials constitute approximately 60 - 75% of our raw
material costs.  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 various additives used in our
production fluctuates, which can result in temporary increases in
the unit cost of goods sold.  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.




Gross Profit. Gross
margins decreased to 15.3% from 30.3% during the six months June 30, 2009 as
compared to the same period in 2008.  The decrease in gross margin can be
attributed to the increase in the cost of hog feed that began in the last half
of 2008 and continued into 2009 and a reduction in the selling price for our
hogs.  The increase in the cost of hog feed was offset somewhat by
actions taken in the first quarter of 2009, including expansion of our product
distribution channels, and our entry into long-term contracts for key product
ingredients which locked in favorable cost savings.


32


Selling, General and
Administrative Expenses.  Selling, general and administrative
expense includes overhead expenses such as rent, management and staff salaries,
general insurance, marketing, accounting, legal and offices expenses. The
increase in our selling, general and administrative expense also reflects the
addition of our new subsidiaries, which had a total of approximately $2.2
million in selling, general and administrative expenses during the six months
ended June 30, 2009. Selling expenses for the period increased by 40.6% due to
costs associated with the aggressive expansion into markets in neighboring
provinces, and the costs associated with the absorption of our new
subsidiaries and the costs associated with market development. We attempt
to control our selling expenses through stricter cost controls and efficient use
of our distribution channels.





Interest and Financing Costs.
We incurred interest and financing costs of $777,428 and $4.6 million during the
six months ended June 30, 2009 and 2008, respectively, principally as a result
of the issuance of $19 million principal amount of convertible notes issued
during February 2008.   During the six months ended June 30, 2009
and 2008, $2.8 million and $13.7 million, respectively, of the convertible notes
were converted into shares of common stock which resulted in accelerated
amortization of the debt discounts and debt issue costs associated with the
convertible debt.




Hog
production is an income tax exempt sector in China and sow owners receive
government grants and subsidies.  Some of our feed manufacturing
companies benefit from exemption from value-added tax.




Net Income.  The
decrease in our net income was due to the increase in cost of goods sold and
higher operating expenses. We continued to benefit from the tax exempt status
for our hog production business.  The higher sales and the benefits
from economies of scale in our business resulting in a modest increase in
operating efficiency was offset by higher cost of sales and a charge to earnings
to reflect the increase in our derivative liability. We continued to benefit
from the tax exempt status for our hog production business.




Off-Balance
Sheet Arrangements




There
were no off-balance sheet arrangements during the six months ended June 30, 2009
that have, or are reasonably likely to have, a current or future effect 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




At June
30, 2009, we had $30.9 million in cash and cash equivalents on
hand.




During
first quarter of 2008, we completed two financings.  We received
aggregate gross proceeds of $22 million through the sale of 2,444,448 shares of
common stock at $9 per share.  We received aggregate proceeds of $19
million 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.  The exercise
price on the warrants were subsequently reduced to $5 per share.  We
paid offering costs of $3,432,670 related to the sale of shares and $1,716,666
related to the issuance of the convertible notes.




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.  We
paid $703,472 in offering cost related to this offering.


33


On April
22, 2008, we entered into Securities Purchase Agreements with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 1,322,836 shares of the Company’s Common
Stock at price of $19.05 per share for aggregate gross proceeds of $25.2
million.  We paid $1,772,752 in offering cost related to this
offering.




On
December 29, 2008, we completed a financing and raised gross proceeds of $8.75
million through the sale to institutional investors of 5 million newly issued
common stock units at $1.75 per unit under an effective Form S-3 Registration
Statement. Each unit consists of one share of newly issued common stock and a
warrant to purchase 0.7 of a share of common stock for $2.50 a share, which is
exercisable over a five-year period.  We paid offering cost related to
this offering of $1,227,616.




During
the period from October 6, 2008 through October 31, 2008, the Company
repurchased 367,295 shares of our common stock for gross proceeds of $1,811,746.
No additional shares have been repurchased.




On May 8,
2009, we closed a private placement offering of our common stock by issuing
2,329,645 shares of common stock for gross proceeds of $10 million to certain
institutional investors.  We also issued 1,164,822 common stock
purchase warrants to the investors and 244,613 common stock purchase warrants to
the placement agent for the transaction.  The warrants are exercisable
immediately have an exercise price of $4.50 per share and expire five years from
the date of issuance. We paid offering costs related to this offering of $1.1
million.




As of
June 30, 2009, we had short-term loans outstanding in the amount of
$4,541,500.  The loans were entered into during the second
quarter of 2009 and are due in May 2010.




During
the six months ended June 30, 2009, we generated $134,335 of cash from our
operating activities. The cash generated was generated primarily through the net
income including noncontrolling interest, a decrease in other receivables and an
increase in accounts payable offset by an increase in accounts receivable and
inventory and a decrease in other payables.




We used
approximately $7.3 million in investing activities during the six months ended
June 30, 2009; of which $6.3 million was for the acquisition of property and
equipment and $1.3 million was for the purchase of the noncontrolling interest
in two subsidiaries.  We also sold our interest in another subsidiary
for $307,650.




We
generated $13.3 million in cash from financing activities as a result of the
sale of 2,329,645 shares of our common stock for gross proceeds of $10
million.  .  We generated cash of $4,541,500 from issued
short-term loans.




At June
30, 2009, our accounts receivable balance was approximately $14.6 million, an
increase of $5.1 million from December 31, 2008.




Our
principal demands for liquidity are to increase capacity, purchase raw
materials, distribute our products, consolidate our existing farm operations and
make strategic acquisitions or investments in our industry as opportunities
present themselves, as well as general corporate purposes.   We intend
to use the net proceeds from the latest PIPE for the development of our genetics
program and other growth initiatives. We may seek additional funds from the
capital markets to further support our genetics program to increase hog
production and profitability.  We expect our genetics program to be
accretive to earnings in the near future.





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.


34


The
majority of our revenues and expenses were denominated in RMB, the currency of
the PRC.  There is no assurance that exchange rates between the RMB
and the USD will remain stable.




Contractual
Obligations




No
contractual obligation occurred during the six months ended June 30, 2009 and
therefore it is not expected to have any effect on our liquidity and cash flow
in future periods.




Inflation
and Seasonality




Demand
for our products remains fairly consistent throughout the year and we do not
believe our operations have been materially affected by inflation or
seasonality.





Item
3.            Quantitative
and Qualitative Disclosures About Market Risk





Disclosures
About Market Risk




We may be
exposed to changes in financial market conditions in the normal course of
business.  Market risk generally represents the risk that losses may
occur as a result of movements in interest rates and equity
prices.  We currently do not use financial instruments in the normal
course of business that are subject to changes in financial market
conditions.





Currency
Fluctuations and Foreign Currency Risk




Substantially
all of our operations are conducted in the PRC, with the exception of our
limited export business and overseas purchases of raw materials.  Most
of our sales and purchases are conducted within the PRC in RMB, which is the
official currency of the PRC.  The effect of the fluctuations of
exchange rates is considered minimal to our business operations.




Substantially
all of our revenues and expenses are denominated in RMB.  However, we
use US dollars for financial reporting purposes.  Conversion of RMB
into foreign currencies is regulated by the People’s Bank of China through a
unified floating exchange rate system.  Exchange rate fluctuations may
adversely affect the value, in U.S. dollar terms, of our net assets and income
derived from its operations in the PRC.




Interest
Rate Risk




We have
interest rate risk related
to the short-term notes entered into during the quarter ended June 30, 2009;
however, we do not believe this interest rate risk is
significant.




Credit
Risk




We have
not experienced significant credit risk, as most of our customers are long-term
customers with superior payment records.  Our receivables are
monitored regularly by our credit managers.





Item
4.            Controls
and Procedures




The
Company carried out an evaluation, under the supervision and with the
participation of its management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s “disclosure controls and procedures” (as defined in the Exchange Act
Rule 13a-15(e)) as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are effective.


35


There was
no change in the Company’s internal control over financial reporting that
occurred during the Company’s most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.





Part
II.  OTHER INFORMATION





Item
1.            Legal
Proceedings





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





Item
1A.         Risk
Factors





There
have been no material changes from the disclosure provided in Part 1, Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2008, as
amended.





Item
2.            Unregistered
Sales of Equity Securities and Use of Proceeds





None





Item
3.            Defaults
Upon Senior Securities





None.





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





On June
11, 2009, the Company held its Annual Meeting of Stockholders at the offices of
Buchanan Ingersoll & Rooney PC at Two Liberty Place, 50 S. 16th Street,
Suite 3200, Philadelphia, PA  19102.  At the meeting, the
following actions were taken:





1.
            With
      respect to the election of five directors to hold office for a one-year
      term expiring at the annual meeting in 2009 and until their respective
      successors are elected and qualified, the directors received the following
      votes:




Director Name
                          
                          For
                          
                          WithheldSongyan
      Li
                          
                          
                          30,512,014
                          
                          887,516Junhong
      Xiong
                          
                          
                          30,539,271
                          
                          860,259Lixiang
      Zhang
                          
                          
                          30,491,545
                          
                          907,985Frederic
      W. Rittereiser
                          
                          
                          30,466,591
                          
                          932,939Arnold
      Staloff
                          
                          
                          30,438,914
                          
                          960,616




2.
            To
      approve the issuance of 5,000,006 shares of common stock and warrants to
      acquire 3,500,004 shares of common stock previously issued to certain
      investors:




For:
                              
                              
                              18,001,694Against:
                              
                              
                              568,967Abstained:
                              
                              
                              49,040Non
      Votes:
                              
                              
                              12,779,829


36


Item
5.            Other
Information





None.





Item
6.            Exhibits





(a)
            Exhibits





Exhibit Number
                    
                    Description
      of Exhibit31.1
                    
                    Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.31.2
                    
                    Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.32.1
                    
                    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
  Officer).32.2
                    
                    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer).





SIGNATURES





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





AgFeed
      Industries, Inc.August
      10, 2009
                      By:
                      /s/ Xiong JunhongXiong
      Junhong
                        Chief
      Executive Officer (Principal
                        Executive
      Officer)August
      10, 2009
                      By:
                      /s/ Selina
      JinSelina
      Jin
                        Chief
      Financial Officer
                        (Principal
      Financial and Accounting
                        Officer)


37