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 September 30, 2010





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


For the
transition period from _______ to _______





001-33674


(Commission
file number)





AGFEED
INDUSTRIES, INC.


(Exact
name of registrant as specified in its charter)








Nevada
                
                20-2597168(State
      or other jurisdiction of incorporation
                  or
      organization)
                
                (I.R.S.
      Employer Identification
No.)





Rm.
      A1001-1002, Tower 16
                  Hengmao
      Int’l Center
                  333
      S. Guangchang Rd.
                  Nanchang,
      Jiangxi Province
                  China
                
                330003(Address
      of principal executive offices)
                
                (Zip
      Code)





(86)
      0791-6669093(Registrant’s
      telephone number, including area
code)








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


Yes xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files).  Yes o   No o





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


Large
      accelerated filer o
              Accelerated
      filer xNon-accelerated
      filer o
              Smaller
      reporting company o(Do
      not check if a smaller reporting company)


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


Yes oNo x





On
November 8, 2010, 51,350,213 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
                    23Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    35Item
      4.
                    Controls
      and Procedures
                    36Part
      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
                    37Item
      4.
                    (Removed
      and Reserved)
                    37Item
      5.
                    Other
      Information
                    37Item
      6.
                    Exhibits
                    37SIGNATURES
                    
                    39
  2





PART
I – FINANCIAL INFORMATION





Item
1.  Financial Statements




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS




September
      30,
                                              
                                              
                                              December
      31,2010
                                              
                                              
                                              2009(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                              
                                              $
                                              19,100,754
                                              
                                              
                                              $
                                              37,580,154Accounts
      receivable, net of allowance for doubtful accountsof
      $536,110 and $415,765
                                              
                                              
                                              19,928,454
                                              
                                              
                                              
                                              14,397,793Advances
      to suppliers
                                              
                                              
                                              3,162,906
                                              
                                              
                                              
                                              1,173,941Other
      receivables
                                              
                                              
                                              2,997,889
                                              
                                              
                                              
                                              2,186,643Inventory
                                              
                                              
                                              85,479,143
                                              
                                              
                                              
                                              23,835,412Prepaid
      expenses
                                              
                                              
                                              3,466,898
                                              
                                              
                                              
                                              1,325,150Debt
      issue costs
                                              
                                              
                                              12,201
                                              
                                              
                                              
                                              34,706Total
      current assets
                                              
                                              
                                              134,148,245
                                              
                                              
                                              
                                              80,533,799PROPERTY
      AND EQUIPMENT, net
                                              
                                              
                                              59,772,190
                                              
                                              
                                              
                                              26,991,851CONSTRUCTION-IN-PROCESS
                                              
                                              
                                              3,885,369
                                              
                                              
                                              
                                              7,615,132INTANGIBLE
      ASSETS, net
                                              
                                              
                                              33,369,685
                                              
                                              
                                              
                                              43,808,499OTHER
      ASSETS
                                              
                                              
                                              9,649,949
                                              
                                              
                                              
                                              3,998,739TOTAL
      ASSETS
                                              
                                              $
                                              240,825,438
                                              
                                              
                                              $
                                              162,948,020LIABILITIES AND
EQUITYCURRENT
      LIABILITIES:Short-term
      loan
                                              
                                              $
                                              4,491,000
                                              
                                              
                                              $
                                              4,401,000Accounts
      payable
                                              
                                              
                                              10,874,229
                                              
                                              
                                              
                                              6,162,385Other
      payables
                                              
                                              
                                              10,197,392
                                              
                                              
                                              
                                              1,892,858Unearned
      revenue
                                              
                                              
                                              225,970
                                              
                                              
                                              
                                              582,266Accrued
      expenses
                                              
                                              
                                              2,757,467
                                              
                                              
                                              
                                              83,649Accrued
      payroll
                                              
                                              
                                              1,628,990
                                              
                                              
                                              
                                              975,485Tax
      and welfare payable
                                              
                                              
                                              1,926,760
                                              
                                              
                                              
                                              396,370Interest
      payable
                                              
                                              
                                              409,391
                                              
                                              
                                              
                                              120,419Current
      portion of long-term debt
                                              
                                              
                                              1,400,000
                                              
                                              
                                              
                                              -Convertible
      notes, net of discount of $28,713
                                              
                                              
                                              971,287
                                              
                                              
                                              
                                              -Total
      current liabilities
                                              
                                              
                                              34,882,486
                                              
                                              
                                              
                                              14,614,432CONVERTIBLE
      NOTES, net of debt discount of $81,675
                                              
                                              
                                              -
                                              
                                              
                                              
                                              918,325ACQUISITION
      NOTE PAYABLE
                                              
                                              
                                              9,621,434
                                              
                                              
                                              
                                              -LINE
      OF CREDIT
                                              
                                              
                                              36,007,752
                                              
                                              
                                              
                                              -LONG-TERM
      DEBT
                                              
                                              
                                              15,749,697
                                              
                                              
                                              
                                              -TOTAL
      LIABILITIES
                                              
                                              
                                              96,261,369
                                              
                                              
                                              
                                              15,532,757COMMITMENTS
      AND CONTINGENCIES (Note 14)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -EQUITY:AgFeed
      stockholders' equity:Common
      stock, $0.001 per share; 75,000,000 shares authorized;51,736,908
      issued and 51,350,213 outstanding at September 30, 201044,510,558
      issued and 44,143,263 outstanding at December 31, 2009
                                              
                                              
                                              51,738
                                              
                                              
                                              
                                              44,511Additional
      paid-in capital
                                              
                                              
                                              128,774,415
                                              
                                              
                                              
                                              109,281,086Deferred
      compensation
                                              
                                              
                                              (2,710,840
                                              )
                                              
                                              
                                              -Other
      comprehensive income
                                              
                                              
                                              6,758,081
                                              
                                              
                                              
                                              4,176,450Statutory
      reserve
                                              
                                              
                                              5,477,401
                                              
                                              
                                              
                                              4,685,115Treasury
      stock (386,695 shares)
                                              
                                              
                                              (1,858,942
                                              )
                                              
                                              
                                              (1,811,746
                                              )Retained
      earnings
                                              
                                              
                                              7,895,078
                                              
                                              
                                              
                                              31,210,563Total
      AgFeed stockholders' equity
                                              
                                              
                                              144,386,931
                                              
                                              
                                              
                                              147,585,979Noncontrolling
      interest (deficit)
                                              
                                              
                                              177,138
                                              
                                              
                                              
                                              (170,716
                                              )Total
      equity
                                              
                                              
                                              144,564,069
                                              
                                              
                                              
                                              147,415,263TOTAL
      LIABILITIES AND EQUITY
                                              
                                              $
                                              240,825,438
                                              
                                              
                                              $
                                              162,948,020


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





3





AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)





Three
      Months Ended September 30,
                                            
                                            
                                            Nine
      Months Ended September 30,2010
                                            
                                            
                                            2009
                                            
                                            
                                            2010
                                            
                                            
                                            2009(unaudited)
                                            
                                            
                                            (unaudited)
                                            
                                            
                                            (unaudited)
                                            
                                            
                                            (unaudited)Revenues
                                            
                                            $
                                            53,606,079
                                            
                                            
                                            $
                                            45,115,442
                                            
                                            
                                            $
                                            144,127,101
                                            
                                            
                                            $
                                            117,072,486Cost
      of goods sold
                                            
                                            
                                            49,284,430
                                            
                                            
                                            
                                            37,554,278
                                            
                                            
                                            
                                            130,926,892
                                            
                                            
                                            
                                            98,486,258Gross
      profit
                                            
                                            
                                            4,321,649
                                            
                                            
                                            
                                            7,561,164
                                            
                                            
                                            
                                            13,200,209
                                            
                                            
                                            
                                            18,586,228Operating
      expensesSelling
      expenses
                                            
                                            
                                            1,062,866
                                            
                                            
                                            
                                            960,574
                                            
                                            
                                            
                                            3,076,806
                                            
                                            
                                            
                                            2,823,783General
      and administrative expenses
                                            
                                            
                                            5,020,641
                                            
                                            
                                            
                                            2,888,845
                                            
                                            
                                            
                                            12,193,722
                                            
                                            
                                            
                                            6,606,537Impairment
      of intangible assets
                                            
                                            
                                            16,752,201
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            16,752,201
                                            
                                            
                                            
                                            -Total
      operating expenses
                                            
                                            
                                            22,835,708
                                            
                                            
                                            
                                            3,849,419
                                            
                                            
                                            
                                            32,022,729
                                            
                                            
                                            
                                            9,430,320Income
      (loss) from operations
                                            
                                            
                                            (18,514,059
                                            )
                                            
                                            
                                            3,711,745
                                            
                                            
                                            
                                            (18,822,520
                                            )
                                            
                                            
                                            9,155,908Non-operating
      income (expense):Other
      expense
                                            
                                            
                                            (192,828
                                            )
                                            
                                            
                                            (387,979
                                            )
                                            
                                            
                                            (643,735
                                            )
                                            
                                            
                                            (384,503
                                            )Interest
      income
                                            
                                            
                                            54,903
                                            
                                            
                                            
                                            75,344
                                            
                                            
                                            
                                            140,976
                                            
                                            
                                            
                                            188,460Interest
      and financing costs
                                            
                                            
                                            (290,911
                                            )
                                            
                                            
                                            (192,963
                                            )
                                            
                                            
                                            (555,752
                                            )
                                            
                                            
                                            (970,391
                                            )Foreign
      currency transaction gain (loss)
                                            
                                            
                                            (35,380
                                            )
                                            
                                            
                                            (18,121
                                            )
                                            
                                            
                                            (56,014
                                            )
                                            
                                            
                                            (14,819
                                            )Total
      non-operating expense
                                            
                                            
                                            (464,216
                                            )
                                            
                                            
                                            (523,719
                                            )
                                            
                                            
                                            (1,114,525
                                            )
                                            
                                            
                                            (1,181,253
                                            )Income
      (loss) before provision for income taxes
                                            
                                            
                                            (18,978,275
                                            )
                                            
                                            
                                            3,188,026
                                            
                                            
                                            
                                            (19,937,045
                                            )
                                            
                                            
                                            7,974,655Provision
      for income taxes
                                            
                                            
                                            1,758,556
                                            
                                            
                                            
                                            292,647
                                            
                                            
                                            
                                            2,853,275
                                            
                                            
                                            
                                            794,155Net
      income (loss) including noncontrolling interest
                                            
                                            
                                            (20,736,831
                                            )
                                            
                                            
                                            2,895,379
                                            
                                            
                                            
                                            (22,790,320
                                            )
                                            
                                            
                                            7,180,500Less:
      Net income (loss) attributed to noncontrolling interest
                                            
                                            
                                            (100,966
                                            )
                                            
                                            
                                            (962
                                            )
                                            
                                            
                                            (267,121
                                            )
                                            
                                            
                                            39,067Net
      income (loss) attributed to AgFeed
                                            
                                            
                                            (20,635,865
                                            )
                                            
                                            
                                            2,896,341
                                            
                                            
                                            
                                            (22,523,199
                                            )
                                            
                                            
                                            7,141,433Other
      comprehensive incomeForeign
      currency translation gain
                                            
                                            
                                            2,282,185
                                            
                                            
                                            
                                            168,640
                                            
                                            
                                            
                                            2,581,631
                                            
                                            
                                            
                                            20,739Comprehensive
      Income (loss)
                                            
                                            $
                                            (18,353,680
                                            )
                                            
                                            $
                                            3,064,981
                                            
                                            
                                            $
                                            (19,941,568
                                            )
                                            
                                            $
                                            7,162,172Weighted
      average shares outstanding :Basic
                                            
                                            
                                            48,486,839
                                            
                                            
                                            
                                            42,420,914
                                            
                                            
                                            
                                            46,137,142
                                            
                                            
                                            
                                            39,984,438Diluted
                                            
                                            
                                            48,486,839
                                            
                                            
                                            
                                            43,329,228
                                            
                                            
                                            
                                            46,137,142
                                            
                                            
                                            
                                            40,641,679Earnings
      (loss) per share attributed to AgFeed common stockholders:Basic
                                            
                                            $
                                            (0.43
                                            )
                                            
                                            $
                                            0.07
                                            
                                            
                                            $
                                            (0.49
                                            )
                                            
                                            $
                                            0.18Diluted
                                            
                                            $
                                            (0.43
                                            )
                                            
                                            $
                                            0.07
                                            
                                            
                                            $
                                            (0.49
                                            )
                                            
                                            $
                                            0.18


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




4





AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS




Nine
      Months Ended September 30,2010
                                      
                                      
                                      2009(unaudited)
                                      
                                      
                                      (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss) including noncontrolling interest
                                      
                                      $
                                      (22,790,320
                                      )
                                      
                                      $
                                      7,180,500Adjustments
      to reconcile net income (loss) including noncontrolling
      interestto
      net cash provided by (used in) operating activities:Depreciation
                                      
                                      
                                      2,310,313
                                      
                                      
                                      
                                      1,952,213Amortization
                                      
                                      
                                      98,604
                                      
                                      
                                      
                                      49,286Loss
      on disposal of assets
                                      
                                      
                                      1,345,688
                                      
                                      
                                      
                                      882,854Impairment
      of intangible asset
                                      
                                      
                                      16,752,201
                                      
                                      
                                      
                                      -Stock
      based compensation
                                      
                                      
                                      225,844
                                      
                                      
                                      
                                      427,551Issuance
      of common stock for services
                                      
                                      
                                      1,127,160
                                      
                                      
                                      
                                      -Amortization
      of debt issuance costs
                                      
                                      
                                      22,505
                                      
                                      
                                      
                                      203,932Amortization
      of discount on convertible debt
                                      
                                      
                                      52,962
                                      
                                      
                                      
                                      479,920(Increase)
      / decrease in assets:Accounts
      receivable
                                      
                                      
                                      (1,315,378
                                      )
                                      
                                      
                                      (6,759,546
                                      )Other
      receivables
                                      
                                      
                                      (978,420
                                      )
                                      
                                      
                                      1,201,329Inventory
                                      
                                      
                                      289,980
                                      
                                      
                                      
                                      (1,777,302
                                      )Advances
      to suppliers
                                      
                                      
                                      (1,931,073
                                      )
                                      
                                      
                                      (716,870
                                      )Prepaid
      expenses
                                      
                                      
                                      (516,064
                                      )
                                      
                                      
                                      (340,333
                                      )Other
      assets
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (244,980
                                      )Increase
      / (decrease) in current liabilities:Accounts
      payable
                                      
                                      
                                      329,240
                                      
                                      
                                      
                                      1,624,279Other
      payables
                                      
                                      
                                      (1,747,900
                                      )
                                      
                                      
                                      (2,347,476
                                      )Unearned
      revenue
                                      
                                      
                                      (361,807
                                      )
                                      
                                      
                                      43,465Accrued
      expenses
                                      
                                      
                                      1,128,689
                                      
                                      
                                      
                                      287,838Accrued
      payroll
                                      
                                      
                                      (198,908
                                      )
                                      
                                      
                                      (132,716
                                      )Tax
      and welfare payable
                                      
                                      
                                      1,518,678
                                      
                                      
                                      
                                      (80,312
                                      )Interest
      payable
                                      
                                      
                                      155,375
                                      
                                      
                                      
                                      (18,608
                                      )Net
      cash provided by (used in) operating activities
                                      
                                      
                                      (4,482,631
                                      )
                                      
                                      
                                      1,915,024CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases/deposits
      for property and equipment
                                      
                                      
                                      (15,226,109
                                      )
                                      
                                      
                                      (7,486,470
                                      )Purchase
      of intangible assets
                                      
                                      
                                      (117,854
                                      )
                                      
                                      
                                      (35,314
                                      )Cash
      paid for purchase of subsidiaries
                                      
                                      
                                      (11,322,824
                                      )
                                      
                                      
                                      (2,518,089
                                      )Cash
      acquired with acquisition of subsidiary
                                      
                                      
                                      211,124
                                      
                                      
                                      
                                      -Cash
      from the sale of subsidiary
                                      
                                      
                                      -
                                      
                                      
                                      
                                      835,770Net
      cash used in investing activities
                                      
                                      
                                      (26,455,663
                                      )
                                      
                                      
                                      (9,204,103
                                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the sale of common stock
                                      
                                      
                                      13,000,000
                                      
                                      
                                      
                                      10,000,000Offering
      costs paid
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,740,072
                                      )Purchase
      of treasury stock
                                      
                                      
                                      (47,196
                                      )
                                      
                                      
                                      -Repayment
      of borrowings under line of credit facility, net
                                      
                                      
                                      (767,669
                                      )
                                      
                                      
                                      -Proceeds
      from short-term loans
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4,541,500Proceeds
      from exercise of warrants
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,580,010Capital
      contributed by noncontrolling interest holders
                                      
                                      
                                      401,282
                                      
                                      
                                      
                                      118,664Repayment
      of contribution of noncontrolling interest holders
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (586,800
                                      )Purchase
      of noncontrolling interest in majority owed hog farms
                                      
                                      
                                      (406,103
                                      )
                                      
                                      
                                      -Net
      cash provided by financing activities
                                      
                                      
                                      12,180,314
                                      
                                      
                                      
                                      18,913,302Effect
      of exchange rate changes on cash and cash equivalents
                                      
                                      
                                      278,580
                                      
                                      
                                      
                                      16,652NET
      INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
                                      
                                      
                                      (18,479,400
                                      )
                                      
                                      
                                      11,640,875CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
                                      
                                      
                                      37,580,154
                                      
                                      
                                      
                                      24,839,378CASH
      & CASH EQUIVALENTS, ENDING BALANCE
                                      
                                      $
                                      19,100,754
                                      
                                      
                                      $
                                      36,480,253SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                                      
                                      $
                                      214,609
                                      
                                      
                                      $
                                      212,414Income
      taxes paid
                                      
                                      $
                                      1,483,837
                                      
                                      
                                      $
                                      616,693The
      accompanying notes are an integral part of these consolidated financial
      statements.





5





AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)




Note
1 - Organization and Basis of Presentation





The
unaudited consolidated financial statements were prepared by AgFeed Industries,
Inc. pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”).  The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America (“US GAAP”) were omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009.  The results
for the nine months ended September 30, 2010 are not necessarily indicative of
the results to be expected for the full year ending December 31,
2010.





Organization and Lines of
Business





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





The
Company is engaged in the animal nutrition premix, concentrate and complete
feeds business and commercial hog production business in the United States and
China through its operating subsidiaries.




The
Company’s animal nutrition business consists of the manufacture, marketing and
sale of premix, concentrate and complete feed for use in the Chinese animal
husbandry markets almost exclusively for hog production. Premix is an animal
feed additive that is used in commercial animal production worldwide. The
Company has been almost exclusively in the premix feed business since 1995 and
now operate five premix, concentrate and complete feed manufacturing facilities
located in the cities of Nanchang, Shandong, Shanghai, Nanning, and Hainan. The
Company is expanding its concentrate and complete feed lines to meet the growing
demand of commercial producers as they modernize their production technology and
focus on the requirements of the food safety laws.




The
Company entered the hog breeding and production business in China in November
2007. In this business, the Company mainly produces hogs for processing and sell
breeding stock. The Company currently has two breeder farms and 29 meat hog
producing farms in the Jiangxi, Shanghai, Hainan, Guangxi and Fujian
provinces.




The
Company entered the hog breeding and production business in the United States in
September 2010 with the acquisition of M2 P2, LLC (“M2P2”) (see Note
3).  The purchase of M2P2 allowed the Company to establish hog farm
operations in the United States and obtain a breadth and depth of human
resources that it expects to be instrumental in the development of the Company’s
western-style hog farms in China.  M2P2 operates hog farms and
facilities in Colorado, Oklahoma, North Carolina and Iowa. The operating results
of M2P2 are included in the accompanying consolidated statements of operations
from the acquisition date.





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.










6


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)


Non-controlling
Interest




In 2008,
the Company purchased interests in 29 producing hog farms and one feed
company ranging from 55% to 100%.   The Company subsequently
purchased the non-controlling interest in certain of these hog
farms.




Effective
January 1, 2009, the Company adopted Financial Accounting Standards
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,”
which established new standards governing the accounting for and reporting of
non-controlling 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.




The net
income (loss) attributed to the NCI was separately designated in the
accompanying statements of operations and other comprehensive income (loss).
Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in
the subsidiary’s equity. The excess attributable to the NCI is attributed to
those interests. The NCI shall continue to be attributed its share of losses
even if that attribution results in a deficit NCI balance.





Foreign Currency
Translation




The
accounts of the Company’s Chinese subsidiaries are maintained in RMB and the
accounts of the U.S. parent company and U.S. subsidiaries are maintained in USD.
The accounts of the Chinese subsidiaries were translated into USD in accordance
with Accounting Standards Codification (“ASC”) Topic 830 “Foreign Currency
Matters,” with the RMB as the functional currency for the Chinese subsidiaries.
According to ASC Topic 830, all assets and liabilities were translated at the
exchange rate on the balance sheet dates, stockholders’ equity is translated at
historical rates and statement of income items are translated at the weighted
average exchange rate for the period. The resulting translation adjustments are
reported under other comprehensive income in accordance with ASC Topic 220,
“Comprehensive Income.” Gains and losses resulting from the translations of
foreign currency transactions and balances are reflected in the statements of
income.








Note
2 – Summary of Significant Accounting Policies





Use of
Estimates





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





Reclassification





Certain
prior period amounts were reclassified to conform to the current presentation.





Cash and Cash
Equivalents













7


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)


Accounts
Receivable




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





Advances to
Suppliers





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





Inventory





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





Inventory
consisted of the following at September 30, 2010 and December 31,
2009:








September
      30,
                        
                        
                        December
      31,2010
                        
                        
                        2009(audited)Raw
      material
                        
                        $
                        11,263,848
                        
                        
                        $
                        7,638,999Work
      in Process
                        
                        
                        89,936
                        
                        
                        
                        84,494Finished
      Goods - feed
                        
                        
                        1,792,906
                        
                        
                        
                        460,349Finished
      Goods - hogs
                        
                        
                        72,435,937
                        
                        
                        
                        15,703,12785,582,627
                        
                        
                        
                        23,886,969Less:
      reserve for obsolescence
                        
                        
                        (103,484
                        )
                        
                        
                        (51,557
                        )$
                        85,479,143
                        
                        
                        $
                        23,835,412





Property &
Equipment





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





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





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




8


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)





September
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009(audited)Office
      equipment
                  
                  $
                  1,441,868
                  
                  
                  $
                  525,991Operating
      equipment
                  
                  
                  14,286,263
                  
                  
                  
                  4,655,298Vehicles
                  
                  
                  1,004,350
                  
                  
                  
                  871,058Swine
      for reproduction
                  
                  
                  17,530,019
                  
                  
                  
                  13,432,353Land
                  
                  
                  752,500
                  
                  
                  
                  -Buildings
                  
                  
                  30,871,841
                  
                  
                  
                  11,659,693Total
                  
                  
                  65,886,841
                  
                  
                  
                  31,144,393Less
      accumulated depreciation
                  
                  
                  (6,114,651
                  )
                  
                  
                  (4,152,542
                  )$
                  59,772,190
                  
                  
                  $
                  26,991,851





Construction-in-Process





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





Long-Lived
Assets





The
Company applies the provisions of ASC Topic 360, “Property, Plant, and
Equipment,” which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. ASC Topic 360 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair value of the long-lived assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair values are reduced for the
cost of disposal.  The Company assesses goodwill for impairment
annually, or more frequently if circumstances warrant a review.  An
impairment loss is recognized when the carrying amount of the reporting unit
exceeds the fair value of the reporting unit, with the fair value of the
reporting unit determined using a discounted cash flow (DCF)
analysis.  The extreme operating conditions that the Company has
experienced during 2010 has lead to a full review of its established Chinese
production system (the farms acquired during 2007 and 2008).  This
review has resulted in a change in the management of this farm system and an
assessment that while the system can be operated profitably it cannot sustain a
high enough level of profitability to support the original acquisition values
and resulting goodwill.  As a result of this review, management
determined that a write down of intangible assets of $16,752,201 was
necessary.





Intangible
Assets





The
following are the details of intangible assets at September 30, 2010 and
December 31, 2009:








September
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009(audited)Right
      to use land
                  
                  $
                  772,563
                  
                  
                  $
                  825,007Customer
      list
                  
                  
                  5,699,400
                  
                  
                  
                  293,400Computer
      software
                  
                  
                  312,901
                  
                  
                  
                  159,894Intangible
      related to hog farm acquisitions
                  
                  
                  26,866,161
                  
                  
                  
                  42,744,247Total
                  
                  
                  33,651,025
                  
                  
                  
                  44,022,548Less
      Accumulated amortization
                  
                  
                  (281,340
                  )
                  
                  
                  (214,049
                  )Intangibles,
      net
                  
                  $
                  33,369,685
                  
                  
                  $
                  43,808,499







9


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)


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




Revenue
Recognition




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




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 nine
months ended September 30, 2010 and 2009 were not significant.




Research and
Development




The
Company expenses its research and development costs as incurred. Research and
development costs for the three and nine months ended September 30, 2010 and
2009 were not significant.





Stock-Based
Compensation




The
Company records stock-based compensation in accordance with ASC Topic 718,
“Compensation – Stock Compensation.” ASC Topic 718 requires companies to measure
compensation cost for stock-based employee compensation at fair value at the
grant date and recognize the expense over the employee’s requisite service
period. The Company recognizes in the statement of operations the grant-date
fair value of stock options and other equity-based compensation issued to
employees and non-employees. There were 210,000 options outstanding as of
September 30, 2010.




Income
Taxes




The
Company accounts for income taxes in accordance with ASC Topic 740, “Income
Taxes.” ASC Topic 740 requires a company to use the asset and liability method
of accounting for income taxes, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.




Under ASC
Topic 740, a tax position is recognized as a benefit only if it is “more likely
than not” that the tax position would be sustained in a tax examination, with a
tax examination being presumed to occur. The amount recognized is the largest
amount of tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the “more likely than not” test, no
tax benefit is recorded. The adoption had no effect on the Company’s
consolidated financial statements.





Foreign Currency
Transactions and Comprehensive Income




US GAAP
requires that recognized revenue, expenses, gains and losses be included in net
income. Certain statements, however, require entities to report specific changes
in assets and liabilities, such as gain or loss on foreign currency translation,
as a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. The functional
currency of the Company’s Chinese subsidiaries is the RMB. The unit of Renminbi
is in Yuan. Translation gains are classified as an item of other comprehensive
income in the stockholders’ equity section of the consolidated balance
sheet.




Basic and Diluted Earnings
(Loss) Per Share




Earnings
per share is calculated in accordance with the ASC Topic 260, “Earnings Per
Share.” Basic earnings per share is based upon the weighted average number of
common shares outstanding. Diluted earnings per share is based on the assumption
that all dilutive convertible shares and stock warrants were converted or
exercised. Dilution is computed by applying the treasury stock method. Under
this method, warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.





The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings (loss) per share computations for the three and nine
months ended September 30, 2010 and 2009:





Three
      months ended September 30,
                
                2010
                
                
                2009Per
      Share
                
                
                
                
                
                Per
      ShareShares
                
                
                Amount
                
                
                Shares
                
                
                AmountBasic
      earnings (loss) per share
                
                
                48,486,839
                
                
                $
                (0.43
                )
                
                
                42,420,914
                
                
                $
                0.07Effect
      of dilutive stock options and warrants
                
                
                -
                
                
                
                -
                
                
                
                908,314
                
                
                
                -Diluted
      earnings (loss) per share
                
                
                48,486,839
                
                
                $
                (0.43
                )
                
                
                43,329,228
                
                
                $
                0.07








Nine
      months ended September 30,
                
                2010
                
                
                2009Per
      Share
                
                
                
                
                
                Per
      ShareShares
                
                
                Amount
                
                
                Shares
                
                
                AmountBasic
      earnings (loss) per share
                
                
                46,137,142
                
                
                $
                (0.49
                )
                
                
                39,984,438
                
                
                $
                0.18Effect
      of dilutive stock options and warrants
                
                
                -
                
                
                
                -
                
                
                
                657,241
                
                
                
                -Diluted
      earnings (loss) per share
                
                
                46,137,142
                
                
                $
                (0.49
                )
                
                
                40,641,679
                
                
                $
                0.18





Statement of Cash
Flows




In
accordance ASC Topic 230, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.




10





AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)





Segment
Reporting





ASC Topic
280, “Segment Report,” requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance.  The Company determined it has four
reportable segments (See Note 13).  The Company had previously
reported its feed operations as three separate segments since the three
operations were located in different Provinces.  The Company
determined its feed operations should be reported as one segment.





Fair Value of Financial
Instruments





For
certain of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, advances to suppliers,
accounts payable, accrued liabilities and short-term debt, the carrying amounts
approximate their fair values due to their short maturities. In addition, the
Company has long-term debt with financial institutions. The carrying amounts of
the line of credit and other long-term liabilities approximate their fair values
based on current rates of interest for instruments with similar
characteristics.





ASC Topic 820, “Fair Value Measurements and
Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value,
and establishes a three-level valuation hierarchy for disclosures of fair value
measurement that enhances disclosure requirements for fair value
measures.  The carrying amounts reported in the consolidated balance
sheets for receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of their fair values 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
of valuation hierarchy are defined as follows:






            Level
      1 inputs to the valuation methodology are quoted prices for identical
      assets or liabilities in active
markets.





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





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




The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC Topic 480, “Distinguishing Liabilities from Equity,” and ASC
Topic 825.





As of
September 30, 2010 and December 31, 2009, the Company did not identify any
assets and liabilities that are required to be presented on the balance sheet at
fair value.





Recent Accounting
Pronouncements




On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01,
“Topic 105 - Generally Accepted Accounting Principles - amendments based on
Statement of Financial Accounting Standards No. 168, “The FASB Accounting
Standards CodificationTM and the Hierarchy of Generally Accepted Accounting
Principles” (“ASU No. 2009-01”). ASU No. 2009-01 re-defines authoritative GAAP
for nongovernmental entities to be only comprised of the FASB Accounting
Standards CodificationTM (“Codification”) and, for SEC registrants, guidance
issued by the SEC. The Codification is a reorganization and compilation of all
then-existing authoritative GAAP for nongovernmental entities, except for
guidance issued by the SEC. The Codification is amended to effect non-SEC
changes to authoritative GAAP. Adoption of ASU No. 2009-01 only changed the
referencing convention of GAAP in Notes to the Consolidated Financial
Statements.




11




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)




On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.





On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC Topic 815-15-25, Derivatives and Hedging — Embedded
Derivatives — Recognition. All other embedded credit derivative features should
be analyzed to determine whether their economic characteristics and risks are
“clearly and closely related” to the economic characteristics and risks of the
host contract and whether bifurcation is required. The ASU is effective for the
Company on July 1, 2010. The adoption of this ASU did not have a material impact
on the Company’s consolidated financial statements.





In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU
No. 2010-17 provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. FASB ASU No. 2010-17 is
effective for fiscal years beginning on or after June 15, 2010, and is
effective on a prospective basis for milestones achieved after the adoption
date. The Company does not expect this ASU will have a material impact on
its financial position or results of operations when it adopts this update on
January 1, 2011.





Note
3 – Purchase of M2P2, LLC





On
September 13, 2010, pursuant to a Membership Purchase Agreement
(the “Purchase Agreement”), the Company acquired all of the outstanding
equity interests of M2P2 from AF Sellco, LLC.  In connection with
closing, the Company delivered to AF Sellco, LLC (i) an amount in cash
equal to approximately $11,323,000, (ii) 1,194,641 shares of common
stock, and (iii) a promissory note in the amount of approximately
$8,877,000.  Concurrently, the Company deposited in an escrow account
(i) an amount in cash equal to approximately $1,258,000,
(ii) 137,737 shares of common stock, and (iii) a promissory note
in the amount of approximately $986,000.  Consideration equal to
approximately $1,834,000 will be released from the escrow account to AF
Sellco, LLC.








The
following table summarizes the preliminary fair values of the assets
acquired and liabilities assumed at the date of acquisition.





Cash
                      
                      $
                      211,124Accounts
      receivable
                      
                      
                      3,879,200Inventories
                      
                      
                      61,424,320Prepaid
      assets
                      
                      
                      1,556,438Other
      assets
                      
                      
                      89,611Property
      and equipment
                      
                      
                      22,095,924Customer
      list
                      
                      
                      5,400,000Accounts
      payable
                      
                      
                      (4,266,714
                      )Other
      payables
                      
                      
                      (9,009,231
                      )Accrued
      expenses
                      
                      
                      (1,619,912
                      )Accrued
      payroll
                      
                      
                      (837,744
                      )Interest
      payable
                      
                      
                      (133,597
                      )Line
      of credit
                      
                      
                      (36,775,421
                      )Notes
      payable
                      
                      
                      (17,149,697
                      )Purchase
      price
                      
                      $
                      24,864,301




12


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)


The
customer list purchased in the transaction is being amortized over 5-7
years.





The
purchase of M2P2 allowed the Company to establish hog farm operations in the
United States and obtain a breadth and depth of human capital that we expect to
be instrumental in the development of our western-style hog farms in China as
well as our future harvest strategy.  Furthermore, we believe that
M2P2 provides the Company with a platform from which growth opportunities in the
U.S. can be pursued.  The operating results of M2P2 are included in
the accompanying consolidated statements of operations from the acquisition
date.  M2P2’s operating results from the acquisition date to September
30, 2010 are as follows:








Revenue
                    
                    $
                    10,254,534Cost
      of goods sold
                    
                    
                    9,746,489Gross
      profit
                    
                    
                    508,045Operating
      expenses
                    
                    
                    265,272Income
      from operations
                    
                    
                    242,773Net
      income
                    
                    
                    140,482





The pro
forma financial information that the consolidated operations of the Company as
if the M2P2 acquisition had occurred as of January 1, 2010 is presented
below.





Nine
      Months ended September 30, 2010AgFeed
                        
                        
                        
                        M2P2(4)
                        
                        
                        Adjustments
                        
                        
                        
                        Pro
      formaRevenues
                        
                        $
                        144,127,101
                        
                        
                        $
                        125,661,531
                        
                        
                        $
                        -
                        
                        
                        
                        $
                        269,788,632Cost
      of goods sold
                        
                        
                        130,926,892
                        
                        
                        
                        119,209,926
                        
                        
                        
                        -
                        
                        
                        
                        
                        250,136,818Gross
      profit
                        
                        
                        13,200,209
                        
                        
                        
                        6,451,605
                        
                        
                        
                        -
                        
                        
                        
                        
                        19,651,814Operating
      expenses
                        
                        
                        15,270,528
                        
                        
                        
                        1,702,859
                        
                        
                        
                        578,571
                        
                        (1)
                        
                        
                        17,551,958Impairment
      of intangible assets
                        
                        
                        16,752,201
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        16,752,201Income
      from operations
                        
                        
                        (18,822,520
                        )
                        
                        
                        4,748,746
                        
                        
                        
                        (578,571
                        )
                        
                        
                        
                        (14,652,345
                        )Non-operating
      expense
                        
                        
                        (1,114,525
                        )
                        
                        
                        (1,776,739
                        )
                        
                        
                        (577,286
                        )
                        (2)
                        
                        
                        (3,468,550
                        )Income
      before provision for income taxes
                        
                        
                        (19,937,045
                        )
                        
                        
                        2,972,007
                        
                        
                        
                        (1,155,857
                        )
                        
                        
                        
                        (18,120,895
                        )Provision
      for income taxes
                        
                        
                        2,853,275
                        
                        
                        
                        
                        
                        
                        
                        726,460
                        
                        (3)
                        
                        
                        3,579,735Net
      income including non-controlling interest
                        
                        
                        (22,790,320
                        )
                        
                        
                        2,972,007
                        
                        
                        
                        (1,882,317
                        )
                        
                        
                        
                        (21,700,630
                        )Net
      loss attributed to non-controlling interest
                        
                        
                        (267,121
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        (267,121
                        )Net
      income (loss) attributed to AgFeed
                        
                        $
                        (22,523,199
                        )
                        
                        
                        2,972,007
                        
                        
                        
                        (1,882,317
                        )
                        
                        
                        $
                        (21,433,509
                        )Basic
      (loss) per share
                        
                        $
                        (0.49
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        (0.45
                        )(1)
      To record amortization of purchased intangibles.
 (2)
      To record interest on $9.6 million promissory note in connection with
      the acquisition of M2P2.
 (3)
      To record tax provision of 40% (combined US federal and state income tax
      rate) since M2P2 as a limited liability company did not provide for income
      taxes; and to record tax effects of other pro forma
      adjustments.(4)
      Results of M2P2 are from January 1, 2010 to the date of
      acquisition.





13


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)


The pro
forma financial information that the consolidated operations of the Company as
if the M2P2 acquisition had occurred as of January 1, 2009 is presented
below.





Nine
      Months ended September 30, 2009AgFeed
                        
                        
                        
                        M2P2
                        
                        
                        Adjustments
                        
                        
                        
                        Pro
      formaRevenues
                        
                        $
                        117,072,486
                        
                        
                        $
                        131,660,641
                        
                        
                        $
                        
                        
                        
                        
                        $
                        248,733,127Cost
      of goods sold
                        
                        
                        98,486,258
                        
                        
                        
                        125,852,208
                        
                        
                        
                        
                        
                        
                        
                        
                        224,338,466Gross
      profit
                        
                        
                        18,586,228
                        
                        
                        
                        5,808,433
                        
                        
                        
                        -
                        
                        
                        
                        
                        24,394,661Operating
      expenses
                        
                        
                        9,430,320
                        
                        
                        
                        1,849,925
                        
                        
                        
                        578,571
                        
                        (1)
                        
                        
                        11,858,816Income
      from operations
                        
                        
                        9,155,908
                        
                        
                        
                        3,958,508
                        
                        
                        
                        (578,571
                        )
                        
                        
                        
                        12,535,845Non-operating
      expense
                        
                        
                        (1,181,253
                        )
                        
                        
                        (2,470,181
                        )
                        
                        
                        (577,286
                        )
                        (2)
                        
                        
                        (4,228,720
                        )Income
      before provision for income taxes
                        
                        
                        7,974,655
                        
                        
                        
                        1,488,327
                        
                        
                        
                        (1,155,857
                        )
                        
                        
                        
                        8,307,125Provision
      for income taxes
                        
                        
                        794,155
                        
                        
                        
                        
                        
                        
                        
                        132,988
                        
                        (3)
                        
                        
                        927,143Net
      income including non-controlling interest
                        
                        
                        7,180,500
                        
                        
                        
                        1,488,327
                        
                        
                        
                        (1,288,845
                        )
                        
                        
                        
                        7,379,982Net
      income attributed to non-controlling interest
                        
                        
                        39,067
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        39,067Net
      income (loss) attributed to AgFeed
                        
                        $
                        7,141,433
                        
                        
                        
                        1,488,327
                        
                        
                        
                        (1,288,845
                        )
                        
                        
                        $
                        7,340,915Basic
      earnings per share
                        
                        $
                        0.18
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        0.18(1)
      To record amortization of purchased intangibles.(2)
      To record interest on $9.6 million promissory note in connection with the
      acquisition of M2P2.(3)
      To record tax provision of 40% (combined US federal and state income tax
      rate) since M2P2 as a limited liability company did not provide for income
      taxes; and to record tax effects of other pro forma
      adjustments.








14




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)




Note
4 – Convertible Notes and Warrants





On
February 25, 2008, the Company entered into a Securities Purchase Agreement with
Apollo Asia Opportunity Master Fund, L.P., Jabcap Multi-Strategy Master Fund
Limited, J-Invest Ltd., and Deutsche Bank AG London Branch (collectively the
“Investors”) in connection with a private placement providing for, among other
things, the issuance of senior convertible notes (the “Notes”) for $19 million
and warrants (the “Warrants”) to purchase up to 380,000 shares of the Company’s
common stock $0.001 par value per share. The Notes mature on February 25, 2011,
bear interest at 7% and are convertible into shares of the Company’s common
stock at an initial conversion price of $10.00 per share. The conversion price
is subject to a “weighted average ratchet” anti-dilution adjustment. The
conversion price is also subject to adjustment on a proportional basis, to the
extent that the Company’s audited net income for the fiscal years ending 2008
and 2009 is less than $30 million and $40 million, respectively; subject to a
per share floor price of $5.00.  Due to the Company not generating $30
million net income for the year ended December 31, 2008, the conversion price on
the Notes was reduced to $5.00. Due to the re-pricing of the conversion price,
the Company recorded financing cost of $267,748 during the year ended December
31, 2008, which represented the difference between the fair value of the
conversion feature at a $5.00 conversion price and the original $10.00
conversion price. The fair value was determined by using the Black-Scholes
pricing model with the following assumptions: expected life of 2.2 years, a risk
free interest rate of 2.0%, a dividend yield of 0% and volatility of
102%.




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




In
connection with the issuance of the Notes and the Warrants issued to the
Investors on February 25, 2008, the Company paid $1,716,666 in debt issuance
cost which is amortized over the life of the Notes. For the three and nine
months ended September 30, 2010 and 2009, the Company amortized $7,584 and
$22,505 and $7,584 and $203,932, respectively, of the aforesaid issuance costs
as interest and financing costs in the accompanying consolidated statements of
operations.




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




The
Warrants are immediately exercisable, expire on February 25, 2011 and entitled
their holders to purchase up to $3,800,000 of shares of common stock at an
initial exercise price of $10.00 per share.




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





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




15


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (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 was $4,039,885 and is
being amortized over the term of the Notes. For the three and nine months ended
September 30, 2010 and 2009, the Company amortized $17,848 and $52,962 and
$17,848 and $479,921, respectively, of the aforesaid discounts as interest and
financing costs in the accompanying consolidated statements of
operations.





During
the years ended December 31, 2009 and 2008, $2,800,000 and $15,200,000,
respectively, of the Notes were converted into 560,000 and 1,520,000,
respectively, shares of common stock.





Note
5 – Short-Term Loans





Short-term
loans at September 30, 2010 and December 31, 2009 are follows:





September
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009(audited)Short-term
      bank loan payable to Shanghai Pudong Development Bank.  The loan
      accrues interest at 5.84%.  The note was renewed in May 2010 and
      is due May 4, 2011.  The loan is collateralized by buildings and
      land use
                  
                  $
                  4,491,000
                  
                  
                  $
                  4,401,000


Note
6 – Acquisition Note Payable





In
connection with the acquisition of M2P2, the Company issued a
promissory note payable in the amount of $9,621,434.  The note
bears interest at a rate of 8.0% per year, with payable quarterly in cash
on March 31, June 30, September 30 and December 31 of each
year, beginning on December 31, 2010.  The Company will make interest
only payments until June 30, 2012 and thereafter it will make amortizing
principal and interest payments with the last payment due on September 30,
2020.








Note
7 – Line of Credit





The
Company’s wholly-owned subsidiary, M2P2 has a $65 million senior revolving loan
facility that expires on June 1, 2012. The first $25 million borrowed under the
facility bears interest at 3.95%; and the remaining amount borrowed under the
facility bears interest at the 1-month LIBOR plus 3.25% (3.50% at September 30,
2010).  $300,000 of the facility is being used for a letter of credit
bearing a variable rate with the State of Colorado and is not accessible for
borrowing until the letter of credit is released. Borrowings are limited to the
lesser of $64.7 million or a defined borrowing base (approximately $55.3 million
at September 30, 2010) based primarily on inventory and
receivables.  This facility is collateralized by substantially all of
the assets of M2P2 and has various restrictive covenants, including, but not
limited to, certain restrictions on distributions, maintenance of a minimum net
worth and other financial covenant requirements.







16


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)


Note
8 – Long-Term Debt





Long-
term loans at September 30, 2010 and December 31, 2009 are follows:


September
      30,2010
                            
                            
                            December
      31,
                              2009(audited)Note
      payable, bearing interest at the prime rate plus 2% (5.25% at September
      30, 2010) and payable on November 25, 2018. The note is secured by the
      M2P2’s 100% interest in Heritage Farms LLC and is subordinated to certain
      senior debt.
                            
                            $
                            3,500,000
                            
                            
                            $
                            -Senior
      term loan - $6 million; bears interest at 5.0%; quarterly installments of
      $250,000 plus interest with remaining balance is due April 1, 2013.
      (A)
                            
                            
                            6,000,000
                            
                            
                            
                            -Senior
      term loan - $7.6 million; $6.1 million of the loan bears interest at 5.0%
      and the $1.5 million remaining balance bears interest at the 3-month LIBOR
      plus 1.75% (2.05% at September 30, 2010); payments are due in monthly
      installments of approximately $85,000. The remaining balance is due March
      1, 2020. (A)
                            
                            
                            7,649,697
                            
                            
                            
                            -17,149,697
                            
                            
                            
                            -Less
      current portion
                            
                            
                            (1,400,000
                            )
                            
                            
                            -$
                            15,749,697
                            
                            
                            $
                            -





(A)
            These
      borrowings are collateralized by substantially all of the assets of M2P2
      and have various restrictive covenants, including, but not limited to,
      certain restrictions on distributions, maintenance of a minimum net worth
      and other financial covenant
requirements.





Note
9 – Stockholders’ Equity





Treasury
Stock





During
the quarter ended September 30, 2010, the Company purchased 19,400 shares of its
common stock on the open market (treasury shares) for $47,196.  The
Company accounted for the purchase of these treasury shares using the cost
method.





Common
Stock





On
January 4, 2010, the Company approved grants of 760,000 shares of restricted
stock to certain officers, directors and key employees.  The restricted
stock awards have vesting schedules ranging from 1 to 3 years.  The
value of the awards granted was $3,838,000, which was calculated using the fair
market value of the Company’s stock price at the date of grant.  This
amount is being expensed over the vesting period as the restrictions
lapse.  The expense recognized during the three and nine months ended
September 30, 2010 was $375,720 and $1,127,160, respectively.  The
amount not expensed is shown as deferred compensation as a contra-equity account
in the accompanying consolidated balance sheet.





On April
23, 2010, the Company issued 150,000 shares of its common stock to Southridge
for Southridge’s surrender of its existing warrant to purchase 400,000 shares of
the Company’s common stock.  The warrant was subsequently cancelled by
the Company.  The warrant and common stock issued to Southridge were
related to equity financing; therefore the charge related to the value of these
equity instruments was recorded to additional paid-in capital.




17


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)


Equity Credit
Agreement





On
September 9, 2009, the Company entered into an Equity Credit Agreement with
Southridge Partners II, LP (“Southridge”), amended and restated as of November
9, 2009, providing for, among other things, the issuance of shares of its common
stock at any time and from time to time during the next two years for gross
proceeds of up to $50,000,000. In connection with the closing of the
transaction, the Company also issued Southridge a warrant to purchase an
additional 400,000 shares of its common stock during a five-year period at an
exercise price of $5.75 per share.  The fair value of the warrant was
charged to additional paid in capital as it was issued in connection with an
equity instrument.  During the quarter ended September 30, 2010, the
Company issued 5,029,762 shares of its common stock for $13,000,000 in
connection with this Equity Credit Agreement.





Note
10 – Employee Common Welfare





The total expense for the employee common welfare was $147,664
and $44,548 for the three months ended September 30, 2010 and 2009,
respectively, and was $308,917 and $259,747 for the nine months ended September
30, 2010 and 2009, respectively.  The Company recorded welfare payable
of $0 and $1,940 at September 30, 2010 and December 31, 2009, respectively,
which is included in tax and welfare payable in the accompanying consolidated
balance sheet.





Note
11 – Statutory Common Welfare Fund





As
stipulated by the Company Law of the PRC, net income after taxation can only be
distributed as dividends after appropriation has been made for the
following:





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





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





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





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





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





The
Company appropriated $269,404 and $392,074 as reserve for the statutory surplus
reserve and welfare fund for the three months ended September 30, 2010 and 2009,
respectively and $792,286 and $994,462 as reserve for the statutory surplus
reserve and welfare fund for the nine months ended September 30, 2010 and 2009,
respectively.




18


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)


Note
12 – Stock Options and Warrants





Stock
Options





Following
is a summary of stock option activity:





Options
      outstanding
                        
                        
                        Weighted
      Average Exercise Price
                        
                        
                        Weighted
      average remaining contractual life
                        
                        
                        Aggregate
      Intrinsic ValueOutstanding,
      December 31, 2009
                        
                        
                        210,000
                        
                        
                        $
                        8.42
                        
                        
                        
                        3.74
                        
                        
                        $
                        51,000Granted
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding,
      September 30, 2010
                        
                        
                        210,000
                        
                        
                        $
                        8.42
                        
                        
                        
                        2.99
                        
                        
                        $
                        -Exercisable,
      September 30, 2010
                        
                        
                        129,999
                        
                        
                        $
                        9.27
                        
                        
                        
                        2.91
                        
                        
                        $
                        -





The exercise price for options
outstanding at September 30, 2010 is as follows:





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





Warrants





Following
is a summary of the warrant activity:





Warrants
      outstanding
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Weighted
      average remaining contractual life
                  
                  
                  Aggregate
      Intrinsic ValueOutstanding,
      December 31, 2009
                  
                  
                  2,607,635
                  
                  
                  $
                  4.72
                  
                  
                  
                  3.61
                  
                  
                  $
                  2,142,218Granted
                  
                  
                  -
                  
                  
                  
                  -Forfeited/canceled
                  
                  
                  (403,200
                  )
                  
                  $
                  5.74Exercised
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      September 30, 2010
                  
                  
                  2,204,435
                  
                  
                  $
                  4.53
                  
                  
                  
                  2.67
                  
                  
                  $
                  46,000Exercisable,
      September 30, 2010
                  
                  
                  2,204,435
                  
                  
                  $
                  4.53
                  
                  
                  
                  2.67
                  
                  
                  $
                  46,000








The
exercise price for warrants outstanding at September 30, 2010 is as
follows:





Number
      of
                      Warrants
                    
                    Exercise
                      Price575,000
                    
                    $2.501,409,435
                    
                    $4.50220,000
                    
                    $10.002,204,435





19


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)





Note
13 – 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:  animal feed nutrition, hog production – United
States and hog production – China and Western style hog farms in
China.




The following tables summarize
segment information for the three and nine months ended September 30, 2010 and
2009:





Three
      Months Ended September 30,
                          
                          
                          Nine
      Months Ended September 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Revenues
      from unrelated entitiesAnimal
      feed nutrition
                          
                          $
                          27,276,285
                          
                          
                          $
                          17,150,476
                          
                          
                          $
                          77,935,235
                          
                          
                          $
                          38,400,249Hog
      production - United States
                          
                          
                          10,254,534
                          
                          
                          
                          -
                          
                          
                          
                          10,254,534
                          
                          
                          
                          -Hog
      production - China
                          
                          
                          16,075,260
                          
                          
                          
                          27,964,966
                          
                          
                          
                          55,937,332
                          
                          
                          
                          78,672,237$
                          53,606,079
                          
                          
                          $
                          45,115,442
                          
                          
                          $
                          144,127,101
                          
                          
                          $
                          117,072,486Intersegment
      revenuesAnimal
      feed nutrition
                          
                          $
                          2,749,286
                          
                          
                          $
                          3,343,116
                          
                          
                          $
                          8,240,222
                          
                          
                          $
                          9,789,287Hog
      production - United States
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          -Hog
      production - China
                          
                          
                          724,445
                          
                          
                          
                          232,027
                          
                          
                          
                          2,508,584
                          
                          
                          
                          550,882$
                          3,473,731
                          
                          
                          $
                          3,575,143
                          
                          
                          $
                          10,748,806
                          
                          
                          $
                          10,340,169Total
      revenuesAnimal
      feed nutrition
                          
                          $
                          30,025,571
                          
                          
                          $
                          20,493,592
                          
                          
                          $
                          86,175,457
                          
                          
                          $
                          48,189,536Hog
      production - United States
                          
                          
                          10,254,534
                          
                          
                          
                          -
                          
                          
                          
                          10,254,534
                          
                          
                          
                          -Hog
      production - China
                          
                          
                          16,799,705
                          
                          
                          
                          28,196,993
                          
                          
                          
                          58,445,916
                          
                          
                          
                          79,223,119Less
      Intersegment revenues
                          
                          
                          (3,473,731
                          )
                          
                          
                          (3,575,143
                          )
                          
                          
                          (10,748,806
                          )
                          
                          
                          (10,340,169
                          )$
                          53,606,079
                          
                          
                          $
                          45,115,442
                          
                          
                          $
                          144,127,101
                          
                          
                          $
                          117,072,486Gross
      profit (loss)Animal
      feed nutrition
                          
                          $
                          4,831,278
                          
                          
                          $
                          3,865,007
                          
                          
                          $
                          14,064,015
                          
                          
                          $
                          9,552,365Hog
      production - United States
                          
                          
                          508,045
                          
                          
                          
                          -
                          
                          
                          
                          508,045
                          
                          
                          
                          -Hog
      production - China
                          
                          
                          (1,017,674
                          )
                          
                          
                          3,696,157
                          
                          
                          
                          (1,371,851
                          )
                          
                          
                          9,033,863Western
      style hog farms
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Holding
      Company
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -$
                          4,321,649
                          
                          
                          $
                          7,561,164
                          
                          
                          $
                          13,200,209
                          
                          
                          $
                          18,586,228Income
      (loss) from operationsAnimal
      feed nutrition
                          
                          $
                          2,877,192
                          
                          
                          $
                          2,105,772
                          
                          
                          $
                          8,507,355
                          
                          
                          $
                          5,231,919Hog
      production - United States
                          
                          
                          242,773
                          
                          
                          
                          -
                          
                          
                          
                          242,773
                          
                          
                          
                          -Hog
      production - China
                          
                          
                          (19,550,342
                          )
                          
                          
                          2,265,649
                          
                          
                          
                          (22,840,159
                          )
                          
                          
                          5,452,101Western
      style hog farms
                          
                          
                          (222,957
                          )
                          
                          
                          -
                          
                          
                          
                          (628,463
                          )
                          
                          
                          -Holding
      Company
                          
                          
                          (1,860,725
                          )
                          
                          
                          (659,676
                          )
                          
                          
                          (4,104,026
                          )
                          
                          
                          (1,528,112
                          )$
                          (18,514,059
                          )
                          
                          $
                          3,711,745
                          
                          
                          $
                          (18,822,520
                          )
                          
                          $
                          9,155,908
  20
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)




Three
      Months Ended September 30,
                                                                                                      
                                                                                                      
                                                                                                      Nine
      Months Ended September 30,2010
                                                                                                      
                                                                                                      
                                                                                                      2009
                                                                                                      
                                                                                                      
                                                                                                      2010
                                                                                                      
                                                                                                      
                                                                                                      2009Interest
      incomeAnimal
      feed nutrition
                                                                                                      
                                                                                                      $
                                                                                                      29,364
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      19,911
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      85,545
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      68,770Hog
      production - United States
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Hog
      production - China
                                                                                                      
                                                                                                      
                                                                                                      18,110
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      8,780
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      35,380
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      19,093Western
      style hog farms
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Holding
      Company
                                                                                                      
                                                                                                      
                                                                                                      7,429
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      46,653
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      20,051
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100,597$
                                                                                                      54,903
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      75,344
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      140,976
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      188,460Interest
      and financing costsAnimal
      feed nutrition
                                                                                                      
                                                                                                      $
                                                                                                      110,249
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      85,632
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      289,860
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      100,991Hog
      production - United States
                                                                                                      
                                                                                                      
                                                                                                      102,291
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      102,291
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Hog
      production - China
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      64,011
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      71,156Western
      style hog farms
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Holding
      Company
                                                                                                      
                                                                                                      
                                                                                                      78,371
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      43,320
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      163,601
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      798,244$
                                                                                                      290,911
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      192,963
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      555,752
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      970,391Income
      tax expense (benefit)Animal
      feed nutrition
                                                                                                      
                                                                                                      $
                                                                                                      443,904
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      292,647
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1,538,623
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      794,155Hog
      production - United States
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Hog
      production - China
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Western
      style hog farms
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Holding
      Company
                                                                                                      
                                                                                                      
                                                                                                      1,314,652
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,314,652
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -$
                                                                                                      1,758,556
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      292,647
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      2,853,275
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      794,155Net
      income (loss)Animal
      feed nutrition
                                                                                                      
                                                                                                      $
                                                                                                      2,633,390
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1,756,494
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      7,071,130
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      4,689,193Hog
      production - United States
                                                                                                      
                                                                                                      
                                                                                                      140,482
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      140,482
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Hog
      production - China
                                                                                                      
                                                                                                      
                                                                                                      (20,070,651
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      1,802,712
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (23,816,237
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      4,677,829Western
      style hog farms
                                                                                                      
                                                                                                      
                                                                                                      (144,922
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (408,501
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -Holding
      Company
                                                                                                      
                                                                                                      
                                                                                                      (3,194,164
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (662,865
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (5,510,073
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (2,225,589
                                                                                                      )$
                                                                                                      (20,635,865
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      2,896,341
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (22,523,199
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      7,141,433Provision
      for depreciationAnimal
      feed nutrition
                                                                                                      
                                                                                                      $
                                                                                                      90,254
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      33,626
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      309,690
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      202,685Hog
      production - United States
                                                                                                      
                                                                                                      
                                                                                                      98,240
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      98,240
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Hog
      production - China
                                                                                                      
                                                                                                      
                                                                                                      545,886
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      635,628
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,902,383
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,749,528$
                                                                                                      734,380
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      669,254
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      2,310,313
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1,952,213
  21
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (unaudited)
  As
      of
                                                                                                        
                                                                                                        
                                                                                                        As
      ofSeptember
      30,
                                                                                                        
                                                                                                        
                                                                                                        December
      31,2010
                                                                                                        
                                                                                                        
                                                                                                        2009Total
      assets
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        (audited)Animal
      feed nutrition
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        41,753,390
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        38,142,821Hog
      production - United States
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        92,916,878
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Hog
      production - China
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        98,446,811
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        110,718,199Western
      style hog farms
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        125,605
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Holding
      Company
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        7,582,754
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        14,087,000$
                                                                                                        240,825,438
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        162,948,020Intangible
      assetsAnimal
      feed nutrition
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        3,384,947
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        3,419,141Hog
      production - United States
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        5,400,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Hog
      production - China
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        24,466,884
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        40,389,358Western
      style hog farms
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Holding
      Company
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        117,854
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -$
                                                                                                        33,369,685
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        43,808,499




Net
Income





Net
income for the nine months ended September 30, 2010 was reduced by $2,764,133
for one-time non-recurring charges.  These include professional fees
and expenses associated with the proposed “carve-out” of the animal nutrition
business of $393,638 and a PRC tax payment associated with the corporate
reorganization necessary to facilitate the animal nutrition “carve-out” of
$1,314,652.  In addition the Company incurred one-time professional
fees and expenses of $1,055,833 in connection with the acquisition of
M2P2.





Note
14 – Commitments





At
September 30, 2010, the Company had commitments to expend approximately
$1,285,000 for construction in process and growing breeder hogs.





Note
15 – Acquisition and Dispositions





During
the nine months ended September 30, 2010, the Company purchased the
non-controlling interest of 10% and 20% in two hog farms for $230,063 and
$176,040, respectively.  As a result of the purchase of the
non-controlling interest, the excess of the purchase price over the carrying
value of the non-controlling interest of $219,158 and $146,144, respectively,
was recorded against additional paid in capital.  In addition during
the nine months ended September 30, 2010, in connection with the Company’s
purchase of M2P2, the Company indirectly acquired an additional 20% ownership in
a joint venture that had negative equity.  As a result the Company has
recorded $246,559 against additional paid in capital.








Note
16 – Subsequent Events





On
October 8, 2010, AgFeed Animal Nutrition Holdings, Inc. (“AANI”) filed a
registration statement on Form F-1 with the Securities and Exchange Commission
in connection with the initial public offering of its Class A ordinary
shares.  AANI is the Company’s wholly-owned subsidiary formed to
operate the Company’s animal nutrition business in the PRC.









22








CAUTIONARY
STATEMENT FOR FORWARD-LOOKING STATEMENTS





This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).  We have based these forward-looking
statements on our current expectations and projections about future events, and
they are applicable on as of the dates of such statement.  These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements.  In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” anticipate,” believe,” estimate,” continue,”
or the negative of such terms or other similar expressions.  Factors
that might cause or contribute to such a discrepancy include, but are not
limited to, those listed under the heading “Risk Factors” and those
listed in our other SEC filings. You should not put undue reliance on
any forward-looking statements.  These statements speak only as of the
date of this Quarterly Report on Form 10-Q, even if subsequently made available
on our website or otherwise, and we undertake no obligation to update or revise
these statements to reflect events or circumstances occurring after the date of
this Quarterly Report on Form 10-Q.  The following discussion should be
read in conjunction with our Financial Statements and related Notes thereto
included elsewhere in this report. Throughout this Quarterly Report on Form 10-Q
we will refer to AgFeed Industries, Inc., together with its subsidiaries, as
“AgFeed,” the “Company,” “we,” “us,” and “our.”





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





Overview




We are
engaged in the animal nutrition premix, concentrate and complete feeds business
and commercial hog production business in the United States and China through
our operating subsidiaries.




Our
animal nutrition business consists of the manufacture, marketing and sale of
premix, concentrate and complete feed for use in the Chinese animal husbandry
markets almost exclusively for hog production. Premix is an animal feed additive
that is used in commercial animal production worldwide. We have been almost
exclusively in the premix feed business since 1995 and now operate five premix,
concentrate and complete feed manufacturing facilities located in the cities of
Nanchang, Shandong, Shanghai, Nanning, and Hainan. We are expanding our
concentrate and complete feed lines to meet the growing demand of commercial
producers as they modernize their production technology and focus on the
requirements of the food safety laws.




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




We
entered the hog breeding and production business in the United States in
September 2010 with the acquisition of M2P2. The purchase of M2P2 allowed the
Company to establish hog farm operations in the United States and obtain a
breadth and depth of human capital that we expect to be instrumental in the
development of our western-style hog farms in China as well as our future
harvest strategy.  Furthermore, we believe that M2P2 provides the
Company with a platform from which growth opportunities in the U.S. can be
pursued.  M2P2 operates hog farms and facilities in Colorado,
Oklahoma, North Carolina and Iowa. The operating results of M2P2 are included in
the accompanying consolidated statements of operations from the acquisition
date.





We had
revenues of $144.1 million for the nine months ended September 30, 2010 compared
to revenues of $117.1 million for the nine months ended September 30, 2009. The
increase (23.1%) was the result of expanding market share in our feed business
and the acquisition of M2P2.




23




Animal
Nutrition Business




We
manufacture, distribute, market and sell three main product lines - premix,
concentrate and complete feeds for use in all stages of a pig’s life. We conduct
these operations through our subsidiaries.  We also provide
educational, technical and veterinary support to our customer base




Our feed
operating companies operate manufacturing facilities in Nanchang, Nanning,
Shandong, and Hainan provinces and the municipality of Shanghai, primarily
serving the hog industry. Each subsidiary independently conducts local marketing
and sales efforts under the direction of a central executive management team.
Our operations in Jiangxi and Nanning provinces  are primarily
responsible for our ongoing research and development efforts.




During
the first nine months of 2010, we added 15 independent owned feed distribution
chain stores now totaling 1,317 that sell our products exclusively. During the
same period, we added 18 commercial farms now totaling 799. Backyard and small
farms that raise less than 100 hogs per year per family supply 75% of China’s
total annual hog production. Through our network of distributors and direct
sales, we are able to market our premix feed to the producers of more than 65%
of China’s annual hog production.





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





During
the third quarter of 2010, revenue in the feed division increased to $27.3
million from $17.2 million in the third quarter of 2009, or
59%.   During the third quarter of 2010 income from operations in
our animal nutrition segment increased to $2.9 million from $2.1 million during
the third quarter of 2009, or 38%.





The
Chinese hog feed market is a 50 million metric ton market where the average
producer’s annual production is less than 10,000 metric tons, according to China
Research and Intelligence’s research report on the Chinese feed industry
2009-2010.  During the first nine months of 2010, we sold a total of
127,605 metric tons as compared to the first nine months of 2009, when we sold
76,800 metric tons, representing an increase of 66%.  Our plans for
2010 call for us sell 180,000 metric tons without considering the impact of any
acquisitions.





We are in
the process of reorganizing our operations pursuant to which our animal
nutrition business in the PRC will be operated by AgFeed Animal Nutrition
Holdings, Inc., our wholly-owned subsidiary.  We expect to complete
this reorganization in November 2010.




Hog
Production Business





We own
two breeder hog farms and 29 meat producing hog farms located in Jiangxi,
Shanghai, Hainan, Guangxi, and Fujian provinces, which are strategically located
in or near the largest pork consumption areas in the PRC.  In the
United States we own 10 sow farms in Colorado, Oklahoma and North
Carolina.  We also operate a contract finishing system in Iowa of over
200 farms.




We
entered the hog farming business on November 9, 2007. Our meat hog producing
farms generate revenue primarily from the sale of meat hogs to processors. In
China, our meat hogs are sold primarily in Jiangxi, Shanghai, Hainan, Guangxi,
Fujian, Guangdong and other neighboring provinces. In the United States almost
all of our hogs are sold under contract to a major U.S. packer.  In
November 2009, we broke ground on our first "Western-model" farm in the city of
Da Hua, Guangxi Province. We also completed the construction of a nucleus farm
in the city of Wuning, Jiangxi Province in November 2009. This farm will be
operated by Hypor AgFeed Breeding Company.




24




In
February 2010, we entered into negotiations to participate in a hog production
project in conjunction with Xinyu City in Jiangxi Province.  The
proposed project is a plan to build 5 western model hog farms with the initial
phase of the project to encompass an investment of $18 million for the
construction of  two 5,000 head sow farms, one 200 head boar stud farm
and one 2,600 head multiplier facility.  Upon completion the initial
phase, the project is expected to have an annual production capacity of 230,000
hogs.  In April of 2010 these negotiations were successfully completed
and construction began in May 2010.




Our
breeder farms generate revenue primarily from the sale of breeder hogs to
commercial hog farms and, to a lesser extent, the sale of meat hogs to hog
slaughterhouses. Our customers include large-scale hog farms, mid-scale hog
farms and small-scale farms. Our breeder hogs are sold throughout the PRC,
primarily in southeastern China.  In the United States our breeder
hogs are used exclusively for our own production system.





During
the first nine months of 2010, our capital spending consisted of $15.1 million
for property, plant and equipment purchases, environmental and other
expenditures and intangible assets.





During
the first nine months of 2010, we sold 388,000 head with an average selling
price of $151 per head at an average weight of 84.1kg (185 lbs.)  as
compared to the first nine months  of 2009 when we sold 409,000 head
with an average selling price of $166 per head at an average weight of 85.0kg
(187 lbs.).





As a
result of our strategic direction to introduce modern western hog production
technologies to our existing farm base, we have begun to realize improved
operating efficiencies and have reduced our operating costs on a per head
basis.  However, during the first nine months of 2010, the benefit of
these operating efficiencies have not fully offset the high cost of corn and soy
and weak market prices for hogs.  Furthermore, during the third
quarter of 2010 in response to a disease outbreak in Jiangxi Province, pigs were
sold at lighter weights than our corporate standards would
dictate.  Production has also been impacted by severe weather events,
flooding during the second quarter and extreme heat during the third quarter of
2010.  The extreme operating conditions that we have experienced
during 2010 has lead to a full review of our established Chinese production
system (the 31 farms acquired during 2007 and 2008).  This review has
resulted in a change in the management of this farm system and an assessment
that while the system can be operated profitably it can not sustain a high
enough level of profitability to support the original acquisition values and
resulting goodwill.  As such $16,752,000 of goodwill has been written
down.





Our
strategic alliance with Hypor, announced in April of 2009, has four phases: (1)
upgrading the genetic base of our existing herds; (2) creating a sow
farrow-to-finish nucleus facility (Wuning Farms) to supply superior breeding
stock to be utilized in our production systems and for sale to outside
commercial hog farms; (3) establishing high health, top quality genetics to the
farms being developed by AgFeed International Protein; and (4) developing gene
transfer centers to maximize the use of the top performing boars in China across
AgFeed's production system. On December 17, 2009, we formed Hypor AgFeed
Breeding Company with Hypor to develop, operate and market a genetic nucleus
farm in Wuning, China. Hypor AgFeed Breeding Company is owned 85% by us and 15%
by Hypor.




On
September 13, 2010, pursuant to a Membership Purchase Agreement
(the “Purchase Agreement”), the Company acquired all of the outstanding
equity interests of M2P2 from AF Sellco, LLC.  In connection with
closing, the Company delivered to AF Sellco, LLC (i) an amount in cash
equal to approximately $11.3 million, (ii) 1,194,641 shares of
common stock, and (iii) a promissory note in the amount of approximately
$8.9 million.  Concurrently, the Company deposited in an escrow
account (i) an amount in cash equal to approximately $1.3 million,
(ii) 137,737 shares of common stock, and (iii) a promissory note
in the amount of approximately $986,000.  Consideration equal to
approximately $1.8 million will be released from the escrow account to AF
Sellco, LLC.




25




Through
its 10 sow farms and its contract finishing system M2P2 produces 1,300,000
market hogs annually.




Our
current strategic plan for our Chinese operations calls for us to develop,
during 2009-2012, a production platform capable of producing 2 million hogs per
year by 2015. The key element to this future growth is modern hog production
technologies and science based genetics, which is underscored by our joint
ventures with Hypor and our acquisition of M2P2.  Our Lushan and
Gangda Breeding Farm are now fully stocked with the Hypor Large White Pureline
Sows, the Hypor Landrace Pureline Boars and the Duroc Terminal Sire.





The
demand for safe food is the key driver in our strategy “AgFeed, Government and
Farmer”. The local governments have partnered with AgFeed in the cities of Dahua
and Xinyu to build agricultural industrial parks that will produce top health
and safe pork meat for the Chinese consumer.





Chinese
Vice Premier Li Keqiang said, "Food is essential, and safety should be a top
priority. Food safety is closely related to people's lives and health and
economic development and social harmony," at a State Council meeting in Beijing.
In June 2009, food safety laws were passed in China and passed down to the local
governments for implementation.





According
to the China Feed Industry Association, China has the world's largest market for
hog production, which processed 625 million hogs in 2009, compared to
approximately 100 million in the U.S. More than 1.2 billion Chinese consume pork
as their primary source of meat. 62% of all meat consumed in China is pork.
Chinese consumers consume more pork each year than the rest of the world
combined. China’s pork consumption is forecast to increase to 47.0 million
metric tons in 2010 up from 44.9 million metric tons in 2008, or about 5%.
Projected pork demand by 2015 is estimated to approach 68.0 million metric tons,
an increase of 51% from 2008.




The
Chinese government supports hog producers with favorable tax status and
subsidies, insurance, vaccines, caps on feed costs and land use grants. Hog
production is exempt from all taxes and sow owners receive government grants and
subsidies.







Critical
Accounting Policies




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




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




26




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




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





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





Long-Lived
Assets. We periodically assess potential impairments to our long-lived
assets  We perform an impairment review whenever events or changes in
circumstances indicate that the carrying value may not be fully recoverable.
Factors we considered include, but are not limited to: significant
underperformance relative to expected historical or projected future operating
results; significant changes in the manner of use of the acquired assets or the
strategy for our overall business; and significant negative industry or economic
trends. When we determine that the carrying value of a long-lived asset may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we estimate the future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future undiscounted cash flows and eventual disposition is less than
the carrying amount of the asset, we recognize an impairment loss. An impairment
loss is reflected as the amount by which the carrying amount of the asset
exceeds the fair market value of the asset, based on the fair market value if
available, or discounted cash flows.  We assess goodwill for
impairment annually, or more frequently if circumstances warrant a
review.  An impairment loss is recognized when the carrying amount of
the reporting unit exceeds the fair value of the reporting unit, with the fair
value of the reporting unit determined using a discounted cash flow (DCF)
analysis.  The extreme operating conditions that we have experienced
during 2010 has lead to a full review of our established Chinese production
system (the farms acquired during 2007 and 2008).  This review has
resulted in a change in the management of this farm system and an assessment
that while the system can be operated profitably it cannot sustain a high enough
level of profitability to support the original acquisition values and resulting
goodwill.   As a result of this review, management determined
that a write down of intangible assets of $16,752,201 was
necessary.




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




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




27




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




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





Recent
Accounting Pronouncements




On July
1, 2009, we adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic
105 - Generally Accepted Accounting Principles - amendments based on Statement
of Financial Accounting Standards No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles”
(“ASU No. 2009-01”).  ASU No. 2009-01 re-defines authoritative GAAP
for nongovernmental entities to be only comprised of the FASB Accounting
Standards CodificationTM (“Codification”) and, for SEC registrants, guidance
issued by the SEC.  The Codification is a reorganization and
compilation of all then-existing authoritative GAAP for nongovernmental
entities, except for guidance issued by the SEC.  The Codification is
amended to effect non-SEC changes to authoritative GAAP.  Adoption of
ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to
the Consolidated Financial Statements.





On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on our consolidated financial statements.





On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU will not
have a material impact on our consolidated financial statements.





In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU
No. 2010-17 provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. FASB ASU No. 2010-17 is
effective for fiscal years beginning on or after June 15, 2010, and is
effective on a prospective basis for milestones achieved after the adoption
date. We do not expect this ASU will have a material impact on our
financial position or results of operations when we adopt this update on
January 1, 2011.




28


Results
of Operations




Comparison
of three months ended September 30, 2010 and September 30, 2009





Three
      Months Ended September 30,2010
                
                
                2009
                
                
                $
      Change
                
                
                %
      Change(in
      thousands)Revenues
                
                $
                53,606
                
                
                $
                45,115
                
                
                $
                8,491
                
                
                
                18.8
                %Cost
      of goods sold
                
                $
                49,284
                
                
                $
                37,554
                
                
                $
                11,730
                
                
                
                31.2
                %Gross
      profit
                
                $
                4,322
                
                
                $
                7,561
                
                
                $
                (3,240
                )
                
                
                -42.8
                %Operating
      expenses
                
                $
                22,836
                
                
                $
                3,849
                
                
                $
                18,986
                
                
                
                493.2
                %Interest
      and financing costs
                
                $
                291
                
                
                $
                193
                
                
                $
                98
                
                
                
                50.8
                %Net
      income
                
                $
                (20,636
                )
                
                $
                2,896
                
                
                $
                (23,532
                )
                
                
                -812.5Price/Volume
      Analysis:
                
                2010
                
                
                2009
                
                
                $
      Change
                
                
                Price
                
                
                VolumeBusiness
      segment:Animal
      feed nutritionVolume
      (metric tons)
                
                
                43,948
                
                
                
                30,178
                
                
                
                13,770Revenue
      (in 000s)
                
                $
                30,026
                
                
                $
                20,494
                
                
                $
                9,532
                
                
                $
                124
                
                
                $
                9,408Cost
      of goods sold (in 000s)
                
                $
                25,194
                
                
                $
                16,629
                
                
                $
                8,565
                
                
                $
                671
                
                
                $
                7,894Gross
      profit (in 000s)
                
                $
                4,831
                
                
                $
                3,865
                
                
                $
                966
                
                
                $
                (548
                )
                
                $
                1,514Gross
      profit margin
                
                
                16.1
                
                
                
                18.9Revenue/MT
                
                $
                683
                
                
                $
                679
                
                
                $
                4Cost
      of goods sold/MT
                
                $
                573
                
                
                $
                551
                
                
                $
                22Gross
      profit/MT
                
                $
                110
                
                
                $
                128
                
                
                $
                (189
                )Hog
      productionVolume
      (hogs)
                
                
                117,792
                
                
                
                182,906
                
                
                
                (65,114
                )Revenue
      (in 000s)
                
                $
                16,800
                
                
                $
                28,197
                
                
                $
                (11,397
                )
                
                $
                (2,110
                )
                
                $
                (9,287
                )Cost
      of goods sold (in 000s)
                
                $
                17,817
                
                
                $
                24,501
                
                
                $
                (6,684
                )
                
                $
                3,165
                
                
                $
                (9,849
                )Gross
      profit (in 000s)
                
                $
                (1,018
                )
                
                $
                3,696
                
                
                $
                (4,714
                )
                
                $
                (5,276
                )
                
                $
                562Gross
      profit margin
                
                
                (6.1
                %)
                
                
                13.1Revenue/hog
                
                $
                143
                
                
                $
                154
                
                
                $
                (11
                )Cost
      of goods sold/hog
                
                $
                151
                
                
                $
                134
                
                
                $
                17Gross
      profit/hog
                
                $
                (8
                )
                
                $
                20
                
                
                $
                (28
                )





The
above table of price/volume variance is based on pre-consolidated
data.




29




Revenues. For the three
months ended September 30, 2010, revenues increased $8.5 million benefitting
from the acquisition of M2P2 ($10.3 million from the date of its acquisition),
an increase of $10.1 million from our animal feed nutrition business offset by
the decline in revenues from our China hogs production business of $11.9
million.  Since M2P2 was newly acquired, no revenues existed for the
2009 comparative period.





For the
three months ended September 30, 2010, animal feed nutrition volumes exceeded
43,000 metric tons on a pre-consolidated basis representing a 14,000 metric ton
or 46% increase over the 2009 period and accounting for almost 99% of the
revenue increase of this business unit.  Underlying the growth in
volumes is the continuing market shift of our customers to complete
feeds.  This feed category contributed 26,154 metric tons of the
43,948 combined metric tons sold representing a 70% increase over
2009.  Condensed feeds contributed 8,434 metric tons representing a
58% increase over 2009, while premix showed a modest decline of 126 metric tons
and our fine feeds increased 18 metric tons.





Chinese
hog sales of 118,000 for the three months ended September 30, 2010 represented a
decrease of 36% or 65,000 total hogs sold compared to the three months ended
September 30, 2009.  The challenges of the Chinese hog market are
evident in the results produced by our hog segment.  Hog production
shows a revenue decline of $11.4 million reflecting a decline of $2.1 million
attributable to market prices for hogs and $9.3 million due primarily to our
marketing 65,000 less hogs in 2010 versus 2009.  Also impacting the
volume-driven impact was the aftermath of the spring flooding combined with
excessive heat causing a higher incidence of disease and leading to the
marketing of our hogs at lower average weights (11.6kgs per hog less in 2010
compared to 2009).   As a result, the revenue per hog declined to
$143 versus $154 in 2009.  During the three months ended September 30,
2009, we followed a program of purchasing hogs from outside our system for
finishing to market weights to take advantage of profitable market
prices.  In 2010, we did not purchase hogs under this
program.




Cost of Goods Sold. We
experienced increases in cost of goods sold for our two business lines during
the three months ended September 30, 2010 driven primarily by a 13.0% increase
in corn prices over the same period in 2009.   For our feed
nutrition segment, the increased tonnage produced an increase in our costs of
$7.9 million while ingredient costs reflecting increased costs of corn in the
comparative periods, produced cost increases of $0.7 million.  Hog
production on the other hand provided a reduction to our cost of goods sold of
$6.7 million as a result of our reduced volume of hogs sold unfavorably offset
by increased costs incurred for feed ingredients, veterinary care and
vaccinations.





Gross Profit. On a
consolidated basis, gross margins decreased to 8.1% from 16.8% during the three
months ended September 30, 2010 as compared to the same period in 2009. Using
our pre-consolidated business unit data for analysis, our gross profit (loss)
margin for the feed and hog segments were 16.1% and (6.1%), respectively for the
three months ended September 30, 2010 as compared to 18.9% and 13.1% for three
months ended September 30 2009.  The decrease in gross margin is
attributed to the 13.0% increase in corn cost and a reduction in the selling
price for our hogs over the same period in 2009, reflecting the sale of animals
at an average weight of 11.6 kg (25.6 lbs) less than during the same period in
2009.





Selling, General and Administrative
Expenses. Selling, general and administrative expense includes overhead
expenses such as rent, management and staff salaries, general insurance,
marketing, accounting, legal and offices expenses. Our selling expenses for the
three months ended September 30, 2010 increased by approximately $102,000
compared to the corresponding period in 2009. General and administrative
expenses for our feed segment increased by approximately $93,000 or 11% from the
corresponding period in 2009 principally due to the overall expansion of the
feed segment that included increased salary and utility costs. Our corporate
general and administrative expenses also increased by approximately $1.2 million
due to higher professional fees, stock incentive compensation, and fees paid in
connection with the acquisition of M2P2 and for professional fees incurred in
connection with the preparation for the “carve-out” of our animal nutrition
business, all of which are non-recurring expenses.  General and
administrative expenses for our hog farms for the three months ended September
30, 2010 decreased by approximately $56,000 or 4% over the corresponding period
in 2009.  The decrease was not significant.  General and
administrative expenses for our western model hog farm increase by
$223,000.




30




Impairment of Intangible
asset. The extreme operating conditions that we have experienced during
2010 has lead to a full review of our established Chinese hog production system
(the farms acquired during 2007 and 2008).  This review has resulted
in a change in the management of this farm system and an assessment that while
the system can be operated profitably it cannot sustain a high enough level of
profitability to support the original acquisition values and resulting goodwill.
As a result of this review, management determined that a write down of
intangible assets (specifically Chinese hog production goodwill) of $16,752,201
was necessary.  No such impairment was taken in the corresponding
period in 2009.





Interest and Financing Costs.
We incurred interest and financing costs of approximately $291,000 and $193,000
during the three months ended September 30, 2010 and 2009, respectively.
 The increase is due to the interest on the debt assumed in the acquisition
of M2P2.




Income Taxes. Hog production
is an income tax exempt sector in China and sow owners receive government grants
and subsidies. All of our feed manufacturing companies benefit from exemption
from value-added tax.  We incurred PRC taxes associated with the
corporate reorganization necessary to facilitate the animal nutrition
“carve-out” of $1,300,000.




Net Loss. The decrease in our
net income was due to the increase in cost of goods sold and higher operating
expenses and the impairment of intangible asset. We continued to benefit from
the tax-exempt status for our hog production business. The higher sales and the
benefits from economies of scale in our business resulting in a modest increase
in operating efficiency was offset by higher cost of sales. We continued to
benefit from the tax-exempt status for our hog production business.





Comparison
of Nine months ended September 30, 2010 and September 30, 2009





Nine
      Months Ended September 30,2010
                
                
                2009
                
                
                $
      Change
                
                
                %
      Change(in
      thousands)Revenues
                
                $
                144,127
                
                
                $
                117,072
                
                
                $
                27,055
                
                
                
                23.1
                %Cost
      of goods sold
                
                $
                130,927
                
                
                $
                98,486
                
                
                $
                32,441
                
                
                
                32.9
                %Gross
      profit
                
                $
                13,200
                
                
                $
                18,586
                
                
                $
                (5,386
                )
                
                
                -29.0
                %Operating
      expenses
                
                $
                32,023
                
                
                $
                9,430
                
                
                $
                22,592
                
                
                
                239.6
                %Interest
      and financing costs
                
                $
                556
                
                
                $
                970
                
                
                $
                (415
                )
                
                
                -42.7
                %Net
      income
                
                $
                (22,523
                )
                
                $
                7,141
                
                
                $
                (29,665
                )
                
                
                -415.4
                %Price/Volume
      Analysis:
                
                2010
                
                
                2009
                
                
                $
      Change
                
                
                Price
                
                
                VolumeBusiness
      segment:Animal
      feed nutritionVolume
      (metric tons)
                
                
                127,605
                
                
                
                73,720
                
                
                
                53,885Revenue
      (in 000s)
                
                $
                86,175
                
                
                $
                48,190
                
                
                $
                37,985
                
                
                $
                1,595
                
                
                $
                36,390Cost
      of goods sold (in 000s)
                
                $
                72,111
                
                
                $
                38,637
                
                
                $
                33,474
                
                
                $
                3,023
                
                
                $
                30,451Gross
      profit (in 000s)
                
                $
                14,064
                
                
                $
                9,553
                
                
                $
                4,511
                
                
                $
                (1,427
                )
                
                $
                5,938Gross
      profit margin
                
                
                16.3
                %
                
                
                19.8
                %Revenue/MT
                
                $
                675
                
                
                $
                654
                
                
                $
                21Cost
      of goods sold/MT`
                
                $
                565
                
                
                $
                524
                
                
                $
                41Gross
      profit/MT
                
                $
                110
                
                
                $
                130
                
                
                $
                (20
                )Hog
      productionVolume
      (hogs)
                
                
                387,842
                
                
                
                500,521
                
                
                
                112,679Revenue
      (in 000s)
                
                $
                58,446
                
                
                $
                79,223
                
                
                $
                (20,777
                )
                
                $
                (3,797
                )
                
                $
                (16,980
                )Cost
      of goods sold (in 000s)
                
                $
                59,818
                
                
                $
                70,189
                
                
                $
                (10,371
                )
                
                $
                7,007
                
                
                $
                (17,378
                )Gross
      profit (in 000s)
                
                $
                (1,372
                )
                
                $
                9,034
                
                
                $
                (10,406
                )
                
                $
                (10,805
                )
                
                $
                399Gross
      profit margin
                
                
                (2.4
                %)
                
                
                11.4
                %Revenue/hog
                
                $
                151
                
                
                $
                158
                
                
                $
                (7
                )Cost
      of goods sold/hog
                
                $
                154
                
                
                $
                140
                
                
                $
                14Gross
      profit/hog
                
                $
                (3
                )
                
                $
                18
                
                
                $
                (21
                )





The
above table of price/volume analysis is based on pre-consolidated
data.




31




Revenues. The increase was
due to a 103.0% increase in animal feed and the inclusion of M2P2 from the
acquisition date offset by a 28.9% decrease in hog production revenue. Hog sales
of 388,000 for nine months ended September 30, 2010 as compared to total hog
sales of 501,000 hogs for the nine months ended September 30,
2009.  Animal feed sales volume for nine months ended September 30,
2010 exceeded 127,000 metric tons representing a 73% increase in volume over the
comparative period of 2009. However, the increase in revenue described above was
offset by lower hog sales prices and increases in ingredient costs. Revenue
generated from M2P2 from the date of acquisition was $10.7
million.  There was no such revenue for the three months ended
September 30, 2010.





Our
animal nutrition segment contributed increased revenues of $38.0 million from
increased volumes of complete feed (77,900 metric tons in 2010 as compared to
35,700 metric tons in 2009), condensed feed (22,200 metric tons as compared to
11,400 metric tons in 2009) and premix feed (24,100 metric tons as compared to
22,900 metric tons in 2009) slightly offset by a decline in fine feed (3,400
metric tons in 2010 as compared to 3,600 metric tons in 2009).  The
referenced volume increases are primarily indicative of the ongoing shift of our
customers to complete feeds and to a lesser degree, but of note, to our
condensed feed.   The pricing component yielded $1.6 million of
the revenue increase more than offset by increases to our ingredient costs
aggregating at $3.0 million.  Our volumes increased our cost of sales
by $30.5 million.  Overall, animal feed contributed $14.1 million to
the Company’s gross profit.





The
decline in our hog segment brought the revenue for the nine months ended
September 30, 2010 down by $22.7 million to $58.0 million from $79.0 million
reflecting the fact that we did not purchase hogs outside of our internal
production capabilities for the purpose of finishing them.  Declining
market prices ($151 per hog in 2010 versus $158 per hog in 2009) drove an
unfavorable impact to revenue of $3.8 million. Hog production was adversely
affected during the second and third quarters of 2010 due to severe weather
conditions, flooding during the second quarter and extreme heat during the third
quarter.  The aftermath of these environmental conditions created
serious operating challenges including a higher incidence of animal
disease.




Cost of Goods Sold. We
experienced increases in cost of goods sold for our two business lines in China
during the nine months ended September 30, 2010 driven primarily by a 16.0%
increase in corn prices over the same period in 2009.  Our cost of
goods sold for the hog segment for the nine months ended September 30, 2010
showed a decline of $10.4 million. Consistent with reduced sales of hogs,
(112,000) the net decline was brought about by an overall unfavorable price
variance of $7.0 million while volume brought about a favorable decrease in
costs of goods sold of $17.4 million.




32




Gross Profit. On a
consolidated basis, gross margins decreased to 9.2% during the nine months ended
September 30, 2010, from 15.9% during the same period in 2009. Using our
pre-consolidated business unit data for analysis, our gross profit (loss) margin
for the feed and hog segments 16.3% and (2.4%), respectively for the nine months
ended September 30, 2010 as compared to 19.8% and 11.4% for nine months ended
September 30 2009.  The decrease in gross margin is primarily
attributed to the 16.0% increase in corn cost, a reduction in the selling price
for our hogs over the same period in 2009 and the volume benefit in animal
nutrition. The increase in the cost of corn was offset somewhat by actions taken
in the first half of 2010 including our entry into short-term contracts for key
product ingredients which locked in favorable pricing.




Selling, General and Administrative
Expenses. Our selling expenses for the nine months ended September 30,
2010 increased by approximately $274,000 compared to the corresponding period in
2009. General and administrative expenses for our feed segment increased by
approximately $1.0 million or 61% from the corresponding period in 2009
principally due to the overall expansion of the feed segment that included
increased salary and utility costs. Our corporate general and administrative
expenses also increased by approximately $2.6 million or 169% due to higher
professional fees, stock incentive compensation, and fees paid in connection
with the acquisition of M2P2 and for professional fees incurred in connection
with the preparation for the “carve-out” of our animal nutrition
business.  Professional fees and expenses of $1.4 million incurred in
connection with the animal nutrition “carve-out” and the acquisition of M2P2 are
non-recurring expenses.  General and administrative expenses for our
hog farms for the nine months ended September 30, 2010 increased by
approximately $1.1 million or 33% over the corresponding period in 2009 to due
to an overall increase in expenses associated with expansion of our hog segment
and consulting fees paid in connection with establishing our first large western
model hog farm. General and administrative expenses for our western model hog
farm increase by $628,000.





Impairment of Intangible
asset. The extreme operating conditions that we have experienced during
2010 has lead to a full review of our established Chinese hog production system
(the farms acquired during 2007 and 2008).  This review has resulted
in a change in the management of this farm system and an assessment that while
the system can be operated profitably it cannot sustain a high enough level of
profitability to support the original acquisition values and resulting goodwill.
As a result of this review, management determined that a write down of
intangible assets of $16,752,201 was necessary.  No such impairment
was taken in the corresponding period in 2009.




Interest and Financing Costs.
We incurred interest and financing costs of approximately $556,000 and $970,000
during the nine months ended September 30, 2010 and 2009, respectively.
 The decrease is due to the amortization of debt discounts during the nine
months ended September 30, 2009 as a result of debt conversion during that
period.




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





We
incurred PRC taxes associated with the corporate reorganization necessary to
facilitate the animal nutrition “carve-out” of $1,314,652.




Net Loss. The decrease in our
net income was due to the increase in cost of goods sold and higher operating
expenses and the impairment of intangible asset. We continued to benefit from
the tax-exempt status for our hog production business. The higher sales and the
benefits from economies of scale in our business resulting in a modest increase
in operating efficiency was offset by higher cost of sales. We continued to
benefit from the tax-exempt status for our hog production business.




33




Off-Balance
Sheet Arrangements




There
were no off-balance sheet arrangements during the nine months ended September
30, 2010 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
September 30, 2010, we had $19.1 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% and convertible into common stock at $10 per share.  These notes
mature on February 25, 2011. In connection with the convertible notes, we issued
380,000 warrants that are exercisable immediately and have a $10 strike
price.  The exercise price on the warrants was subsequently reduced to
$5 per share.  We paid offering costs of $3.4 million related to the
sale of shares and $1.7 million 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 million.  We
paid $703,000 in costs related to this offering.




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 our common stock at
$19.05 per share for aggregate gross proceeds of $25.2 million.  We
paid $1.8 million in costs 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 costs related to this
offering of $1,227,616.




On May 8,
2009, we closed a private placement 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 on May 8, 2014. We paid costs
related to this offering of $1.1 million.





On
September 9, 2009, we entered into an Equity Credit Agreement with an
institutional investor, which was amended and restated as of November 9, 2009,
providing for, among other things, the issuance of shares of its common stock at
any time and from time to time during the next two years for gross proceeds of
up to $50 million. In connection with the closing of the transaction, we also
issued warrants to purchase an additional 400,000 shares of its common stock
during a five-year period at an exercise price of $5.75 per
share.  This transaction closed on September 9,
2009.  During the quarter ended September 30, 2010, we issued
5,029,762 shares of our common stock in connection with this Equity Credit
Agreement for gross proceeds of $13 million to finance the cash component of the
consideration paid in connection with the acquisition of M2P2.





During
2009, certain warrant holders exercised 3,225,004 warrants that resulted in
gross proceeds of $8.1 million.




34




As of
September 30, 2010, we had short-term loans outstanding of $4.5 million. The
loan was entered into during the second quarter of 2009.  The note was
renewed in May 2010 and is due on May 4, 2011.  As a result or our
acquisition of M2P2, we assumed a line of credit and long-term notes with
outstanding balances at September 30, 2010 of $36,008,000 and $17,150,000,
respectively




During
the nine months ended September 30, 2010, we used $4.5 million of cash from our
operating activities. The cash used was primarily a result of the net loss
including non-controlling interest, an increase in accounts receivable and
inventory offset by an increase in accounts payable and other
payables.




We used
approximately $26.5 million in investing activities during the nine months ended
September 30, 2010 of which $11.3 was for the purchase of M2P2 and $15.2 was for
the acquisition/deposits of property and equipment primarily in connection with
the development of our western-style farms in both Dahua and Xinyu.




At
September 30, 2010, our accounts receivable balance was approximately $20.0
million, an increase of $5.5 million from December 31, 2009 of which $3.2
million is attributable to accounts receivable due to M2P2.




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 may seek
additional funds from the capital markets to further support our genetics
program to increase hog production and profitability.





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





The
majority of our revenues and expenses were denominated in RMB for the period
reported however, will not necessarily be so in the future due to the
acquisition of M2P2. There is no assurance that exchange rates between the
RMB and the USD will remain stable.  The PRC has recently commenced a
program of controlling appreciation of the RMB.




Contractual
Obligations




No
contractual obligation occurred during the nine months ended September 30, 2010
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.




35





Currency
Fluctuations and Foreign Currency Risk




Substantially
all of our operations outside the United States are conducted in the PRC, with
the exception of our limited export business and overseas purchases of raw
materials.  Our sales and purchases conducted within the PRC are 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.




All of
our revenues and expenses from our PRC subsidiaries are denominated in
RMB.  However, we use U.S. 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; 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.




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




Before making an investment decision,
investors should carefully consider the risks described below and in our Annual
Report on Form 10-K for the year ended December 31, 2009 in conjunction
with the other information in this report, including our consolidated financial
statements and related notes.  If any of the following risks or other
risks, which have not been identified or which we may believe are immaterial or
unlikely, actually occurs, our business, financial condition and results of
operations could be harmed.  In such a case, the trading price of our
common stock could decline, and investors may lose all or part of their
investment.
  Weather,
natural disasters and accidents may significantly affect our results of
operations and financial condition.
  Natural disasters, fire, bioterrorism,
pandemic or extreme weather, including droughts, floods, excessive cold or heat,
hurricanes or other storms, can impair the health and growth of our hogs,
interfere with our operations and distribution channels, and affect the demand
of our products, as well as the cost and supply of raw materials, such as
corn.  In turn, the quality, cost and volumes of the hogs and feed
that we are able to produce and sell will be affected, which will affect our
sales and profitability.  Such extreme factors or industrial accidents
could also affect our manufacturing facilities, or those of our suppliers or
major customers, which could affect our costs and our ability to meet
supply.
  The
loss of the Company’s largest U.S. customers may have a negative impact on our
profitability and financial condition.
  In the United States, almost all of our
hogs are sold under contract to a major U.S. packer.  The Company
expects that a significant portion of its revenues in the U.S. will continue to
be derived from this customer.  The customer may face financial or
other difficulties that may impact their operations and their purchases from the
Company, which could adversely affect results of
operations.  Customers also may respond to price increases by reducing
sales of the Company’s hogs.  If sales of hogs to this customer is
reduced, this reduction may have a material adverse effect on the Company’s
business, financial condition, and results of operations.
  Item 2.  Unregistered Sales of Equity
Securities and Use of Proceeds





Purchases of Equity
Securities




36




The table
below provides certain information with respect to our purchases of shares of
our common stock during the third quarter of 2010:





Period
                Total
      Number of Shares Purchased
                  (#)
                Average
      Price Paid per Share
                  ($)
                Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                  (#)
                Approximate
      Dollar Value of Shares that May Yet Be Purchased Under the Plans or
      Programs
                  ($)July 1,
      2010 – July 30, 2010
                19,400
                $2.38
                19,400
                $4,953,806.00August 1, 2010 –
      August 31, 2010
                -
                -
                19,400
                $4,953,806.00September 1, 2010 –
      September 30, 2010
                -
                -
                19,400
                $4,953,806.00Total
                19,400
                $2.38
                19,400
                $4,953,806.00











Item
3.  Defaults Upon Senior Securities





None.





Item
4.  (Removed and Reserved)





Item
5.  Other Information





None.





Item
6.   Exhibits




37


(a) Exhibits





Exhibit
      Number
                          Description
      of Exhibit2.1
                          Member
      Membership Purchase Agreement, dated as of September 13, 2010, by and
      between AF Sellco, LLC and AgFeed Industries, Inc. (incorporated
      by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K
      (File No. 001-33674) filed on September 17, 2010).10.1
                          Form
      of Note, dated September 13, 2010, of AgFeed Industries, Inc.
      (incorporated by reference to Exhibit 2.1 to the Company’s Current Report
      on Form 8-K (File No. 001-33674) filed on September 17,
    2010).10.2
                          Form
      of Pledge Agreement, dated September 13, 2010, by and between AF
      Sellco, LLC and AgFeed Industries, Inc. (incorporated by
      reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File
      No. 001-33674) filed on September 17, 2010).31.1
                          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 (Acting Chief Financial
      Officer).




38








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.November
      9, 2010
                          By:
                          /s/ Xiong
      JunhongXiong
      JunhongChief
      Executive Officer (Principal
                            Executive
      Officer)November
      9, 2010
                          By:
                          /s/ Edward PazdroEdward
      Pazdro
                            Acting
      Chief Financial Officer
                            (Principal
      Financial and Accounting
                            Officer)




39